For Greece default is the only option

27 January 2012 by Costas Lapavitsas

Negotiations to reduce Greek debt have been suspended after no agreement could be reached last week. At some point in the near future Greece seems certain to default on its obligations. But the drama surrounding the talks in Athens, Berlin and Paris shows that there will be nothing co-operative about Greek default. It is a ruthless contest dominated by the so-called troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

: the European Union, the European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

, and the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

At every turn the interests and rights of people across Europe have been disregarded. Negotiations have proceeded in secrecy. Greece, whose government is led by an unelected central banker, is represented by a team of politicians and technocrats who have performed lamentably during the crisis. They have hired bankers Lazard Freres and lawyers Cleary Gottlieb, renowned sovereign default specialists, although the benefits remain to be seen. Those who are owed money by Greece have been represented by the International Institute of Finance, a self-styled mouthpiece for bankers. Other lenders, including hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. , have no collective representative.

The troika has accepted that Greek debt must be reduced to sustainable levels; but it also wants the reduction to appear voluntary because, if the lenders were coerced, Greece would be declared in formal default, and banks and financial markets would be thrown into crisis. The troika would also like the reduction to be on terms that would allow immediate fresh loans to Greece – an urgent step if the country is not to stop repayments altogether – and wants Greek debt held by official bodies, including the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
, to remain intact. Not surprisingly, the circle is proving hard to square.

The debt in question is €200bn. About half belongs to Greeks – banks, social security funds and others – who are first in line to bear the costs of reduction (the “haircut”). Less than a quarter belongs to international banks, and a good part of the rest to hedge funds.

The deal proposed by the troika is geared to the interests of lenders, particularly international banks. The face value of the debt would be reduced by 50%, and the remaining debt would be replaced by new long-term bonds bearing a low interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate, perhaps less than 4%. The new bonds would be subject to British law, which favours lenders.

The losses for international banks would be modest. Even so, they are angling for a higher interest rate, although their bargaining power is weakened by reliance on the state for liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. and capital. The real blow would fall on Greek banks, which would effectively go bankrupt. The Greek state is thus desperately seeking fresh loans to replenish its banks’ capital. Much of the expected reduction of its debt would, therefore, be immediately voided. A cruel blow would also fall on Greek social security funds and small bondholders, with losses probably passing on to pensions and savings.

Meanwhile, hedge funds have been buying Greek debt at low prices in the hope of being paid at, or near, full value. Since Greece has to make debt repayments of almost €15bn in March, huge amounts of European taxpayers’ money could potentially be transferred to these vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
. The speculators could possibly be coerced into the deal by applying Greek law, but if the reduction were not voluntary, there could be a chain reaction across financial markets.

The worst aspect of the deal is that it is unlikely to benefit Greece long term. The original plan was to bring debt down to 120% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
by 2020, but the “rescue” programmes of the past two years have forced the country into a real depression. The IMF now thinks that Greek debt will be on a much higher level by 2020 – clearly unsustainable. It is seeking deeper reductions, but the price would be even harsher cuts in wages, pensions, and public spending. The social repercussions on an already weakened country would be horrendous, quite apart from the political difficulties of introducing further severe austerity.

It is clear that Greece has little to expect from a debt-reduction process led by the troika. It should take charge of its own predicament, abandoning the charade of voluntary haircuts. For that, it needs to default in a sovereign and democratic way by immediately declaring a cessation of payments.

Greece should then publicly audit its debts to decide what should be paid and how. The objective should be to restart economic growth and to avoid disruption of basic social services. Debt would inevitably be cancelled, including official debt held by the troika, and there should be negotiations with the lenders under full public scrutiny. Only then could this dreadful saga come to a close, allowing Greek society to take the first steps on the long path to recovery.

Other articles in English by Costas Lapavitsas (9)



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