In the eye of the storm: the debt crisis in the European Union (1/7)
12 September 2011 by Eric Toussaint
In July-September 2011 the stock markets were again shaken at international level. The crisis has become deeper in the EU, particularly with respect to debts. The CADTM interviewed Eric Toussaint about various facets of this new stage in the crisis.
CADTM: Is it true that Greece has to commit to paying about 15% interest rates
When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…
The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. to be allowed to contract ten year loans?
Eric Toussaint: Yes, it is; markets are only ready to buy the ten-year bonds Greece wishes to issue on condition it commits to paying such extravagant rates.
CADTM: Will Greece contract ten-year loans on such conditions?
Eric Toussaint: No, Greece cannot afford to pay such high 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. rates. It would cost the country far too much. Yet almost every day we can read in both mainstream and alternative media (the latter being essential to develop a critical opinion) that Greece must borrow at 15% or more.
In fact, since the crisis broke out in spring 2010, Greece has borrowed on the markets for 3 months, 6 months or 1 year, no more, at interest rates ranging between 4 and 5%. |1| Note that before speculative attacks against Greece started, it could borrow at very low rates since bankers and institutional investors
Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities.
Pension Funds Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets. , insurance companies) were eager to lend.
For instance, on 13 October 2009, it issued three month Treasury bonds, also called T-Bills, with a very low yield
The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.
of 0.35%. On the same day it issued six month bonds at a 0.59% rate. Seven days later, on 20 October 2009, it issued one year bonds at 0.94%. |2| This was less than six months before the Greek crisis broke out. Rating agencies
Rating agencies Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).
Moody’s : https://www.fitchratings.com/ had given a very high rating to Greece and the banks that were granting one loan after another. Ten months later, it had to issue six month bonds at a 4.65% yield - in other words, 8 times more. This denotes a fundamental change in circumstances.
Another significant fact points to the banks’ responsibility: in 2008 banks demanded a higher yield from Greece than in 2009. For instance in June-July-August 2008, before the crash produced by the Lehman Brothers bankruptcy, rates were four times higher than in October 2009. They were at their lowest (below 1%) in the fourth term of 2009. |3| This may seem irrational, since a private bank is certainly not supposed to lower its interest rates in a context of major international crisis, least of all with a country such as Greece, which is prompt to borrow; but it was perfectly logical from the point of view of bankers out to maximize profits while relying on public rescue in case of trouble. After the Lehman Brothers bankruptcy, the governments of the US and European countries poured huge amounts of cash to bail out banks, restore confidence and boost economic recovery. Banks used this money to lend to countries such as Greece, Portugal, Spain and Italy, convinced as they (rightly) were that if there were any problem, the 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.
https://www.ecb.europa.eu/ecb/html/index.en.html and the European Commission would help them out.
CADTM: You mean that private banks deliberately pushed Greece into the trap of an unsustainable debt by offering low interest rates, then demanded much higher rates that made it impossible for Greece to borrow beyond a one year term?
Eric Toussaint: Yes, exactly. I don’t mean that there was some sort of plot but it is obvious that banks literally threw capital into the arms of countries such as Greece (notably by lowering the interest rates they demanded) since they considered that the money they so generously received from public authorities had to be turned into loans to Eurozone countries. We have to bear in mind that only three years ago States appeared to be the more reliable actors while the capacity of private companies to repay their debts was questionable.
To go back to the concrete example mentioned above, on 20 October 2009 the Greek government sold its three-month T-Bills with a 0.35% yield in an attempt to raise EUR 1,500 million. Bankers and other institutional investors proposed about five times this amount, i.e. 7,040 million. Eventually the government decided to borrow 2,400 million. It is no exaggeration to claim that bankers literally threw money at Greece.
Let us also go back to the time sequences in the increase of loans granted by West European banks to Greece between 2005 and 2009. Bankers of Western European countries increased their loans to Greece (to both public and private sectors) in several stages. Between December 2005 and March 2007, the amount of loans increased by 50%, from just under USD 80 billion to 120 billion. Although the subprime crisis had broken out in the US, loans increased again, this time by 33%, between June 2007 and summer 2008 (from 120 to 160 billion), then they stayed at a very high level (about 120 billion). This means that Western European private banks used the money they received at very low rates from the ECB, the Bank of England, the US Federal Reserve
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.
FED – decentralized central bank : http://www.federalreserve.gov/ and the US money market funds MMF
Money Market Funds Mutual investment funds that invest in securities, including money funds. (see below) in order to increase their loans to countries such as Greece |4| without taking risk into consideration. Private banks thus bear a heavy responsibility for the crushing debts of Greece. Greek private banks also loaned huge amounts to public authorities and to the private sector. They too have a significant responsibility in the present situation. Consequently the debts claimed from Greece by foreign and Greek banks as a result of their irresponsible policy should be considered illegitimate.
End of the first part
Translated by Christine Pagnoulle and Vicki Briault in collaboration with Judith Harris
Éric Toussaint, doctor in political sciences (University of Liège and University of Paris 8), president of CADTM Belgium, member of the president’s commission for auditing the debt in Ecuador (CAIC), member of the scientific council of ATTAC France, coauthor of “La Dette ou la Vie”, Aden-CADTM, 2011, contributor to ATTAC’s book “Le piège de la dette publique. Comment s’en sortir”, published by Les liens qui libèrent, Paris, 2011.
|2| Hellenic Republic Public Debt Bulletin, n° 56, December 2009.
|4| The same can be observed in the same period with Portugal, Spain, and CEE countries.
is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.
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