Eurozone crisis - Turning the screw

Eurozone crisis - Turning the screwStockmarkets rose and the euro strengthened after Evangelos Venizelos, then Greek finance minister, announced on 9 March that 85.8% of private creditors, holding some €177bn in Greek bonds, had reluctantly agreed to take heavy losses on their investments in a bond swap deal that would allow the second Greek bailout package of €130bn to go ahead. A further 10% were forced to comply once collective action clauses were invoked, bringing the participation rate to more than 95% and reaching the target set by the EU and the IMF for the release of the rescue funds. For the Greek people this signals years and years of devastating poverty ahead. David Yaffe reports.

The deal aims to cut the country’s national debt by €107bn, with private bondholders accepting a face-value loss of 53.5% in exchange for new long-term bonds with lower interest rates, giving an overall value-loss of around 74%.  €206bn out of Greece’s €368bn national debt is in private hands. The overall rescue package is designed to get Greece’s national debt down to 120.5% of GDP by 2020. The agreement to the new deal by private investors was necessary to avoid an immediate and disorderly debt default, which would have threatened both the stability of the eurozone and with it the EU, and significantly deepened the international financial crisis. Nevertheless, the use of collective action clauses forcing resistant bondholders to accept the deal led it to be officially declared a ‘credit event’ (technically, an official default), which will trigger payouts of around $2.5bn from default insurance held by the bondholders. This deal was the biggest sovereign-debt restructuring in history.

The bailout package assumes that the Greek economy, now in its fifth year of recession, will return to growth in 2014. GDP declined by 6.9% last year, is forecast to decline by 4.5% this year, stop shrinking in 2013 and grow by more than 2% in 2014. On this optimistic outlook Greece’s financing needs will reach €170bn over the next three years. On a more realistic growth path they will be a great deal higher. A ‘strictly confidential’ 110-page report on Greece’s debt projections, prepared for eurozone finance ministers and seen by the Financial Times (21 February 2012), reveals that the rescue programme is way off course. The report found that, even using the most optimistic projections for growth, the austerity measures imposed on Greece, as a condition for the rescue package, risk a recession so deep that Greece will not be able to escape from the growing debt burden over the course of the three-year package.

Turning the screw

The rescue fund had to be in place by 20 March 2012 so that Greece could repay €14.4bn in debt and avoid a full-scale default. February and early March saw negotiations between the Greek government and the EU/IMF go to the wire, as the dominant European imperialist countries relentlessly turned the screw on the Greek people as a condition for releasing the €130bn bailout package. Not only was more austerity demanded but strict conditions were placed on the Greek government to ensure they would implement it.

At the end of January the Greek finance minister angrily dismissed a German plan for Greece to cede sovereignty over tax and spending plans to a eurozone  ‘budget commissioner’ as  condition for the bailout package, saying it would force his country to choose between ‘financial assistance’ and ‘national dignity’. As events soon made clear, although the German plan was not implemented, the Greek government was given very little room for manoeuvre over its budget plans. EU and IMF fund officials had already given the government a 10-page list of actions it must take if ‘financial assistance’ were to be delivered. Final agreement over budget plans was delayed by disagreements over filling a remaining budget shortfall.

At an EU summit on 30 January, 25 of the EU’s 27 countries signed up to the new fiscal pact designed to enforce budgetary discipline in the EU and underpin the eurozone.1 The Czech Republic joined Britain in refusing to endorse the pact. Senior EU officials met Lucas Papademos, the Greek Prime Minister, after the summit to discuss new conditions for the delivery of the bailout package with talks continuing well into the night. All three party leaders 2 in Greece’s unstable national unity government said they were opposed to the new austerity measures. Giorgios Karatzaferis, leader of the populist Laos party, said in early February: ‘I’m not going to contribute to the explosion of a revolution [by backing] a wretchedness that will then spread across Europe’ (The Guardian 7 February 2012).

Soon after, a meeting of eurozone finance ministers rejected as incomplete a package of cuts of around €3.3bn put to them by the Greek finance minister for this year’s budget. They demanded further cuts of €325m, parliamentary approval of a sweeping reform package and a pledge from the political leaders to continue with the agreement after the April general election in Greece. In addition they warned of future intervention in the Greek economy to ensure improved tax collection and an accelerated privatisation of state assets. As Jean-Claude Juncker, the prime minister of Luxembourg and head of the eurogroup, brusquely put it: ‘In short, there is no disbursement before implementation’ (Financial Times 10 February 2012). The Greek finance minister was sent back to Athens to get agreement on the package.

The Laos party said it would not support the bailout. Ministers resigned from the government, including four from the Laos party. Mass demonstrations erupted in running battles with riot police and a 48-hour general strike shut down the country for the second time in a week. Greece’s 11 million population is confronting the worst recession since the Second World War; manufacturing has almost collapsed and unemployment has risen above 1 million, a record 20.9%. Wages have fallen by 30% since 2009, and are set to fall a further 15% over the next three years. 20,000 Greeks are homeless with more than 10,000 thrown out on the streets of Athens. The Greek Orthodox Church is feeding 250,000 people a day (The Guardian 11 February 2012). Yet more austerity is being demanded! Nevertheless, after a 10-hour debate on 12 February, the Greek parliament passed the bailout package by 199-74. 43 deputies were later expelled from the three parties in the government for voting against the measures or abstaining.

The demands continued with the EU/IMF requiring 38 specific changes to Greek spending and tax policy by the end of February, together with extra reforms that amount to micromanaging the country’s government for two years (Financial Times 24 February 2012). At the end of February the governing coalition complied and pushed through parliament an extra round of wage and pension cuts by a two-thirds majority. In addition, a day later it approved more than €1bn health cuts by an even larger majority. So much for ‘national dignity’.

Once private creditors had agreed to the terms of the bond swap and the Greek parliament had capitulated to the demands of the EU/IMF, on 14 March the first instalment of €39.4bn from the second €130bn bailout package was authorised to be released by the European Financial Stability Facility. On the 15 March the IMF agreed to release its contribution of €28bn to the bailout of Greece. The immediate threat to the eurozone has been alleviated for the present at the expense of the vast majority of Greek people, and European imperialism can now give more of its attention to the other heavily-indebted eurozone countries.

Trouble ahead

The fiscal pact designed to enforce budget discipline and debt control throughout the eurozone is already having a destructive impact. Spain’s government had a budget deficit of 8.5% of GDP last year well above the fiscal pact ceiling of 3%. There is no chance of the new conservative People’s Party government of Mariano Rajoy achieving the target of 4.4% of GDP this year agreed with the European Commission. So Rajoy set a new target of 5.8% of GDP affirming national sovereignty over and above new EU rules. This was rejected by eurozone finance ministers on 12 March and they cut Rajoy’s target by half a percentage point to 5.3% of GDP. Rajoy claimed victory but it will be at the Spanish population’s expense. It will necessitate spending cuts or tax rises of €5bn, on top of the €15bn expected in the budget and another €15bn announced previously. Growth is already predicted to fall by 1.7% in 2012.

Portugal is on schedule to meet its deficit targets agreed with the European Commission but only at the cost of a deeper recession. Its economy declined by 2.8% in the last quarter of 2011. It is expected to contract a further 3.3% in 2012. Italy is back in recession, with industrial output in January 5% down on a year earlier and unemployment levels the highest for a decade. Public debt rose by €37.9bn reaching a record €1,936bn in January. GDP is predicted to fall by 1.5% in 2012.

Even in the Netherlands, ever ready to demand fiscal responsibility from other eurozone countries, there are calls for the fiscal pact to be ignored, particularly the 3% budget deficit ceiling. This is of little surprise given predicted deficits of 4.5%, 4.1% and 3.3% over the coming years, all in breach of the fiscal pact. A confrontation with the European Commission is inevitable with the likely outcome that the Dutch people will be forced to accept lower living standards.

After contracting 0.3% in last three months of 2011, eurozone growth is expected to decline in 2012, with the region falling into recession in the first quarter of 2012. As the destructive impact of the fiscal pact hits home and the barbarity of European imperialism is exposed, resistance is inevitable. The financial crisis of capitalism that began in 2008 is sowing the seeds of its own destruction. The resistance that is building up in many of the southern eurozone countries can hasten that day.

1.  See David Yaffe ‘Imperialists manoeuvre as eurocrisis deepens’, FRFI 225 February/March 2012 for lead up to this situation, on our website at Imperialists manoeuvre as eurocrisis deepens / FRFI 225 February/March 2012

2.  Greece has one social democratic party (Pasok) and two right-wing parties (New Democracy and Laos) in the national unity government led by the unelected Prime Minister Lucas Papademos.

Fight Racism! Fight Imperialism 226 April/May 2012

 

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