By Monte Pearson
The heavy-handed efforts of European banks, with the support of French President Nicholas Sarkozy and German Prime Minister Angela Merkel, to squeeze debt payments from the Greek people have now backfired, putting the entire continent in danger of financial panic and recession. Political events in Greece have triggered intense speculation about whether Italy, a far larger economy with much greater debts, can avoid a calamitous default.
The banking giants of Europe have been demanding, in the wake of the world financial meltdown in 2008, that their loans be repaid first, before other social needs in Greece are met.
The meltdown, triggered by reckless banking activities in the United States, plunged Greece into a deep recession; the country’s gross domestic product (GDP) fell by more than 3% in 2009 and another 4% in 2010. Unemployment rose to more than 12% in 2010 and government tax revenues fell dramatically. Temporarily unable to meet its debt payments, the Greek nation is essentially being foreclosed upon by the European banking system.
Since a nation in foreclosure can’t be taken away from its citizens like a house or car, banks try to force an indebted nation’s government to impose austerity measures on its citizens. Consumption of food, energy, health care, and other domestic needs must be slashed and national income shifted toward making loan payments.
Accordingly, the Greek government has raised taxes, laid off government employees, cut benefits, and raised the retirement age. The result has been a disaster – the economy shrank at a rate of 8% in the first three months of 2011 and unemployment has soared to more than 16%.
Outraged, protesters in Athens and other cities have used a variety of tactics to oppose these policies. For more than a year the country has seen a growing number of crippling strikes and massive demonstrations against the Greek government because of its obedience to the financial giants.
The Socialist Party government, led by Prime Minister George Papandreou, has become more and more unpopular as party deputies voted for several rounds of budget cuts and tax increases while the conservative opposition party made a big show of voting no each time.
Two weeks ago, the leaders of Germany and France decided that the balance of sacrifice was weighing too heavily on the Greek people and made the startling decision that German, French, and other European banks will be forced to accept a 50% “haircut” on their loans to Greece. The “haircut”, short hand for a debt write-off, means that more than $135 billion of Greece’s foreign debts will be forgiven by these lenders.
However, even as the Greek opposition began to celebrate this victory, Germany and France revealed the terms of their next loan to the Greek government: another round of cuts and tax increases, plus acceptance of permanent monitoring of Greece’s finances by representatives of the European Union.
Rather than force his party to commit political suicide by giving in to these demands, Prime Minister Papandreou announced he would let the Greek people decide the issue in a referendum. The certainty that Greek voters would soundly defeat such a referendum – thus leading to a default by the Greek government on its debt payments and eventually to Greece leaving the euro zone – rocked the financial world.
The conservative New Democratic party denounced Papandreou as a reckless gambler and Greek bankers objected strenuously. The next day, Papandreou canceled the referendum and announced he was entering into coalition talks with the New Democratic party for the purpose of jointly pushing through the unpopular measures and then holding a new national election.
On November 3rd, the Christian Science Monitor wrote that there is speculation that Papandreou deliberately initiated the crisis: “There is speculation that Papandreou was expecting, and indeed hoping for this reaction,’ says Sappho Xenakis, fellow at St. Anthony’s College in Oxford. ‘We can’t be sure, but it is possible that in a daring game of brinkmanship, Papandreou used the referendum to push the opposition party New Democracy but also critics within his own camp into a position of open support. Today in [the Greek] parliament, everyone came out saying, ‘Of course we want to stay in the euro zone.’”
However, the shock wave from the idea of letting the people vote in a referendum still rebounded through the world’s bond markets. Wealthy investors, hedge funds, multi-national banks, and financial speculators of all types who dominate the sale and purchase of government bonds were deeply disturbed by the prospect of a nation defaulting on its bond obligations because of popular pressure.
These finance-sector members began looking around Europe for other potential danger spots and found a country with more than $2.5 trillion in debt and a shaky political system – Italy. Through the bond markets, they have demanded extra money to protect them from the possibility of Italy’s public being unwilling to adopt severe austerity measures in order to repay the national debt. Italians experienced some of the worst violence during the worldwide Occupy protests of October 15th, leaving 70 injured, according to a number of reports.
On Tuesday, November 8th and Wednesday the 9th, interest rates on Italian bonds rose to more than 7%, a rate that is widely considered unsustainable because of the huge increase in monthly payments they would create. It is equivalent to the financial devastation caused in the United States when the low “teaser” rates on home mortgages suddenly rose after the introduction period was over. Homeowners couldn’t afford those new payments and neither can Italy.
Italy’s debt – five times the size of Greece’s – is too large to be backed up by a similar rescue fund, and Europe hangs on the edge of panic. Instead of searching for an equitable solution to a problem triggered by the world-wide recession, European banks insisted on being first in line at the payment window.
Now resistance by the Greek people has led to political turmoil, worried traders in the bond markets, and to new pressures on Italy, a country whose default will lead to enormous losses for French, German, and other European banks – much greater losses than a few concessions to Greece would have cost just a few weeks ago.