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The financial crisis has once again erupted in Greece. The PASOK government has announced that a joint IMF-EU €45bn rescue package can be expected soon, in an effort to prevent the economy defaulting on its debts.

Financial markets have sniffed blood, rounding on the beleaguered southern European state to drive up the cost of its borrowing still further. As of this morning, the effective interest rate on Greek debt, paid back over two years, stands at 38% - compared to 1.3% last November.

There are credit cards cheaper than this.

Panicked investors are demanding higher interest rates to lend to Greece, fearful of a default. US bank Brown Brothers Harriman claims Greek government borrowing is now the highest of any country in the world.

Credit rating agencies, which assess the ability of borrowers to repay their loans, yesterday downgraded Greek debt to ‘junk bond’ status. The cost of insuring loans to Greece against default has risen to an all-time high.

There is now a substantial risk that, within weeks, the Greek government will no longer be able to borrow on the international capital markets. Creditors will simply treat the country as too big a risk to be worth lending to at any plausible interest rate.

If that happens, the Greek government will have no option but to default on its loans.

The planned IMF loan is intended to provide sufficient finance to stave off that prospect.

Default

‘Default’ can in practice mean many different things. The Greek government, and the major Euro economies, will be desperate to avoid a complete cessation of debt repayments. The damage to the credibility of the Euro itself would be immense.

Preferable for them will be some attempt to ‘restructure’ the debt, perhaps suspending repayments of some of it for a period of time.

But this is a tricky path to take. Markets may believe that the suspension could become indefinite. Or they may suspect that other heavily-indebted Euro economies will try and follow suit.

And it may not be enough to stave off further crises.

Much of the Greek national debt is held by banks in Greece. Even a suspension of repayments could spark a banking crisis within the country, provoking a run on the banks. Foreign banks with major Greek debt holdings have already seen their share prices drop.

The critical issue for the markets is the credibility of the Greek government to meet its debt obligations. They are demanding massive public spending cuts to pay for them.

The EU-supervised austerity package, announced earlier this year, was supposed to convince capital markets of the PASOK government’s determination to repay its debt.

That effort has failed. The IMF is being called in as a result.

Austerity

But IMF cash is no gift. It will be strictly conditional on the Greek applying exceptionally harsh austerity measures, like further wage reductions and redundancies, public spending cuts, and privatisation.

The aim of an IMF loan, as always, is to pummel an economy for international investors. It steps up the international pressure already applied to Greece.

Measures already promised, under EU supervision, include cuts of up to 30 per cent in public sector wages and pensions, and swingeing tax increases for ordinary people.

Even this has not been enough for some EU states. Angela Merkel’s conservative government in Germany are demanding still greater sacrifices from Greek workers before supporting any bailout.

Many in her CDU/CSU party are unhappy at supposedly ‘profligate’ Greeks.

They are pushing for guarantees on implementing a three-year ‘reform program’, including the closure of 3,000 state organisations and significant reductions in staffing numbers.

Other EU countries are increasingly disgruntled with German dithering. France has been pushing for a substantial bailout for months.

They fear that unless the Greek crisis is contained, it will spread across the Eurozone.

Contagion

This is phenomenon known as contagion, where crisis in one economy can, through the tightly-linked international markets, spread elsewhere.

Angela Gurria, director-general of the Organisation of Economic Co-operation and Development, has said the current crisis is spreading ‘like ebola’.

Portugal had its own credit rating downgraded yesterday, reflecting perceptions of its economic weakness. Its total debt is not as large as Greece, but it is deep in recession and has significant borrowings from abroad. Ireland, Spain and Italy are also potentially in the speculators line of sight, with substantial borrowings and weak economies.

The UK is a much larger economy, with a major financial centre at its heart. So far, New Labour’s debt repayment plan seems to have been given the benefit of the doubt by the markets.

That situation could easily change very rapidly once the election is out of the way. Events in Greece may force a shift in market attitudes beforehand.

And it is looking increasingly unlikely that even €45bn will be enough to hold the line in Greece. The IMF was this morning suggesting another €10bn would be needed immediately. €90-100bn has been floated by investors as the minimum needed to contain the situation.

No government, or group of governments, will be keen on forking out that much. If further bailouts are needed, the strains will become unbearable.

Causes

The roots of this Eurozone crisis lie in the collapse of the world financial system in November 2008. With banks literally days from simply running out of cash for their customers, governments across the globe bailed out stricken institutions, with direct injections of cash and promises of support totalling billions upon billions of pounds.

The recession itself also pushed up government borrowing requirements. Smaller economies found themselves facing steep increases in their total debts.

For countries in the Euro, the situation was further compounded by long-standing imbalances across the European economy.

For years, Germany’s relatively weak economic performance had been masked by its substantial export earnings. The Euro fixed all economies effective exchange rates.

This made German exports cheap to buy for other economies in the Eurozone, bringing cash into Germany. This spending was then recycled as cheap loans back to those same Euro members.

For over a decade, Germany ran a huge current account surplus, and loaned heavily to countries like Greece, Spain and Portugal. Those same countries had massive account deficits, but could borrow cheaply to finance their economies. In 2008, the total claims of major Euro economies on southern Europe and Ireland totalled €1.5trillion.

This European imbalance could not also bear the strain of the financial crisis and ensuing recession. Financial speculators realised that weaker economies would struggle to meet their debt burden. Betting against the Greek economy began in earnest in late 2009.

The financial crisis has turned into a crisis of national states - and of the whole Euro project.

Consequences

The future of the Euro itself is now in question. Senior politicians in Germany are already talking about removing Greece from the Eurozone. Hans-Peter Friedrich, head of the Bavarian section of Angela Merkel’s ruling party, has said Greece should ‘seriously consider leaving the eurozone’.

A much-reduced Euro could be in the offing, with weaker economies removed from the currency. The German finance minister has recently proposed a scheme whereby this could happen.

At present, however, ruling classes across Europe are in panic mode. There is little evidence of any long-term plan.

The one point of agreement is the need to force ordinary people to pay for the bankers’ crisis. The disagreements centre only on by how much and for how long.

We must show our solidarity with the resistance against the cuts. Greek dockworkers struck on Monday against further privatisation and liberalisation. Further protests and strikes are planned this week.

The prescriptions offered by the EU and the IMF offer nothing to workers. They are written for the benefit of speculators and the major financial institutions.

So at the same time as supporting the resistance, in Greece and elsewhere, we must begin to offer a credible political alternative to their proposals.

That will mean campaigning for controls on speculation. Of cancelling and restructuring the national debt. Of seriously taxing the rich to pay for public services. It will mean raising the possibility of an alternative to the chaotic rule of finance, and ultimately of capitalism itself.

Send support to the Greek workers fighting IMF cuts.

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James Meadway

James Meadway

Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).

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