The return of the Greek crisis and its revelations
They want you to believe it’s all about public debt.
Reckless spending by governments has caused a ballooning of debt, which can
only be addressed, painful though it is, by years of austerity, and the drive
to be more ‘competitive’. So the mainstream debate is confined to arguing
whether national debt and deficits are being shrunk sufficiently. And if it
turns out they aren’t, the logical conclusion is that austerity is not being
applied with enough vigour. The condensed version of this argument is ‘this
doesn’t work, so let’s have more of it’.
But the return of the Greek debt crisis has punctured a
giant hole in this masochistic ideological construct. Because, contrary to the
official narrative, Greece wasn’t bailed out at all; its creditors were. Analysis reveals that around 89% of the
bailout money has gone to creditors:
This is
masked by the fact that, as a result of the 2012 restructure, Greek debt was
transferred from the private sector to the EU/IMF/ECB Troika. So the debt
crisis can now be presented as a generous bail-out by prudent, efficient
Northern European countries to profligate, lazy Southern Europeans. This
picture, eagerly lapped up by the mainstream media, such as the BBC,
conspicuously omits the most important players.
So, in the
interests of accuracy, they should be reinstated. Europe has followed the path
trodden by the US, in that the private debt of highly leveraged (in plain
language indebted), financial institutions has been transformed into the public
debt of states. With the caveat that the indebtedness of European banks - and
that includes the UK - is actually much higher.
According to Mark Blyth, author of Austerity:
The History of a Dangerous Idea, in 2008 the combined assets of the top six
US banks came to 61% of US GDP. That’s about 10% of GDP per bank. When they
fail you have a huge problem.
But in
Europe, the situation was way more extreme. “In the same year,” he
writes, “the top three French banks had a combined asset footprint of 316% of
French GDP. “The top two German banks had assets equal to 114% of German GDP.
In 2011, these figures were 245% and 117% respectively. Deutsche Bank alone had
an asset footprint of over 80% of German GDP and runs an operational leverage
of around 40 to 1. This means a mere 3% turn against its assets impairs its
whole balance sheet and potentially imperils the German sovereign. One Dutch
bank, ING, has an asset footprint that is 211% of its sovereign’s GDP … The top
four UK banks have a combined asset footprint of 394% of UK GDP”.
If you’re seeking an example of profligacy and rash
borrowing, here it is. And it’s not Greek coloured.
What happened, in a nutshell, was that these supposedly more
conservative European banks borrowed like crazy to profit from the government
debt of countries such as Greece, Spain and Portugal. Chronically overleveraged,
when their investments in US mortgage-backed securities turned ugly in 2008,
they swiftly became insolvent. In the words of Stephanie Kretz, private banking
investment strategist with Swiss bank Lombard Odier, in 2012, “Germany, by
lending money to the peripheral countries, is trying to prevent its fragile and
leveraged banks from getting hit, effectively orchestrating a back-door
recapitalisation of its own banking system.”
The result has been what I have described as a peculiarly one-eyed
version of austerity. The penance of paying back debt is only applied to
states, and states that have become indebted as a direct consequence of taking
on private sector debt. Banks are not permitted to fail, or take responsibility
for their bad debts. In contrast to the liquidationism
of 1930s’ austerity, in which the insolvent firms were allowed to go to the wall,
we have now the mirror opposite: preservationism. None of the rottenness
has been purged from the system, as early 1930s US Treasury secretary Andrew
Mellon, advocated. Instead, it has become someone else’s problem. Namely, ours.
The official attitude towards state and private debt
diverges wildly. The EU’s newly minted fiscal
compact requires that the government’s deficit not exceed 3% of GDP. Basel III, meanwhile, the rules governing
banks’ capital reserve requirements, rewritten after the financial crisis
because Basel II was retrospectively considered too lax, insists on a leverage ratio
of 33:1. Lehman Brothers, whose collapse triggered the financial crisis,
had a leverage ratio of 31:1. One law for public debt, quite another if it
happens to be private.
It has fallen to faint and isolated voices to point out the
real story of what happened; how the nationalisation of private debt led to
huge problems for public finances. “A crisis of private finance, emerging in the financial system itself, was not
ended but transformed into a burden for public
finance,” says James Meadway, senior economist with the New Economics
Foundation, “and through austerity, the immense cost of the transformation is
now imposing itself on society.”
But the underlying problem is not solved by pointing out the
evasiveness of the official account. However well-camouflaged, the crisis of
private finance has clearly not been ended. The transformation of austerity, in
this sense, hasn’t worked. It hasn’t erased private debts. “After the 2008
financial crisis and the longest and deepest global recession since World War
II, it was widely expected that the world’s economies would deleverage,” says a
February 2015 report by the consultants McKinsey. “It has not happened.
Instead, debt continues to grow in nearly all countries, in both absolute terms
and relative to GDP.” In Britain, total debt (of which government debt is a
relatively small part) was 484% of GDP at the end of 2013, down from 507% in
2011, but still way above the 310% level it stood at in 2000.
The question is, does it matter? Austerity-mongers like
George Osborne obsess endlessly about the evils of public debt, even as it
continually rises, whilst managing not to mention private debt at all. If you
reverse that attitude, do you not become an equally warped private sector
austerian? However, there are sound reasons why private debt is a genuinely
pressing issue. For a start it’s much larger than public debt. Secondly, many
economists believe that beyond a certain level, which we’ve certainly exceeded,
private debt makes a new financial crisis all but inevitable. Thirdly, it constrains
economic growth and causes stagnating or declining real wages; problems that
only exacerbate the original problem. Lastly, even without the assistance of
austerity, private debt causes public debt to rise.
It is said that the overhang of private debt will cause a Japanese
style ‘lost decade’, in which economic growth remains low, people are
starved of economic opportunities and real wages fall. But, in truth, Japan, the
most privately indebted country on earth, has suffered a ‘lost two decades’,
and the Japanese government’s recent return to massive Quantitative Easing in
an attempt to stimulate the economy indicates that, a quarter of a century on,
the so-called lost decade is still not over.
One country, famously, did let its banks take responsibility
for their bad debts and collapse. In 2008, Iceland decided to let its three
biggest banks, with combined assets ten times the country’s GDP, fail. It is now
thriving, advocates say. But the banks in question had almost exclusively “off
border” debt, and Iceland’s domestic banking largely went on uninterrupted. In
the monetary union of the Eurozone, bank debt is decidedly domestic, and much
larger. Moreover, it is not just financial institutions who are indebted.
Non-financial corporations, which pioneered the process of ‘disintermediation’
– lending between themselves and bypassing the banks, are also hugely indebted.
Consumers may have paid down some of their debts in the aftermath of the
financial crisis, but they are now rising
again.
Recognising that austerity is, in the words of Mark Blyth,
‘the greatest bait and switch operation in modern history’, does not change the
fact that we have an economy that exists on private debt. Writing down that
debt will not be a painless process. Indeed it could cause a deep depression.
But not dealing with the problem is far from painless either, and the pain that
results seems to have no end in sight.
