In the eye of the storm: the debt crisis in the European Union (6/7)

Has the crisis peaked yet

24 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.

Part 6: Has the crisis peaked yet [1]

CADTM: Has the crisis peaked yet?

Eric Toussaint: The crisis is far from over. Even if we only consider the financial aspects, we must be aware that private banks have continued to play an extremely dangerous game which profits them as long as nothing goes wrong, but which is prejudicial to the majority of the population. The amount of bad assets on their balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. -sheets is enormous. If we look at only the top 90 European banks, the fact is that over the coming two years, they will have to refinance debts to the tune of an astronomical EUR 5,400 billion. That represents 45% of the wealth produced annually in the EU. The risks are colossal and the policies adopted by 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.
, the EC and the member States of the EU will not solve anything – indeed quite the contrary.

A central aspect of the risks taken by the European banks needs to be emphasized. They finance a significant part of their operations by making short-term loans in dollars from the North-American lenders known as “US money market funds MMF
Money Market Funds
Mutual investment funds that invest in securities, including money funds.
” at a lower rate than the ECB’s. Furthermore, to return to the case of Greece, how could the European banks possibly settle for 0.35% over 3 months if they had to borrow from the ECB at 1%? They have always financed their loans to European States and companies using loans they themselves took out from the US money market Money market A short-term market where banks, insurance companies, corporations and States (via the central banks and Treasuries) lend and borrow funds according to their needs. funds – and they continue to do so. Now those money market funds were scared by what was happening in Europe and also by the dispute over the US public debt between Republicans and Democrats. So by June 2011, that source of 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. finance had just about dried up, which has hurt major French banks most. This was what precipitated the tumble they took on the Stock Exchange and led to the increase of pressure on the ECB to buy back their bonds and thus provide them with new money. In short, this demonstrates the extent of the knock-on effect between the economies of the USA and the EU. It further explains the continual contact between Barack Obama, Angela Merkel, Nicolas Sarkozy, the ECB, the IMF 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.
… and the major banks from Goldman Sachs to BNP Paribas and the Deutsche Bank. A breakdown in the flow of dollar-loans to European banks could cause a very serious crisis in the Old World, just as difficulties encountered by European banks in repaying their US lenders could trigger off a new crisis on Wall Street.

Since 2007-2008, banks and other institutional investors 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. have displaced their speculation activities from the property market (where they had created a bubble which burst in nearly a dozen countries,including the USA) to the public debt market, the currency market (where the equivalent of USD 4,000 billion changes hands every day, 99% purely for speculative purposes) and the primary resources market (petroleum, gas, minerals, food commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. ). These new bubbles can burst at any moment. A possible trigger could be if the US Federal Reserve FED
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 :
decided to raise interest rates 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.
(followed by the ECB, the Bank of England, etc.). In this respect, in August 2011 the Fed announced its intention to maintain its base rate near zero until 2013. However other events could trigger off a new bank crisis or a crash on the Stock Exchange. The events of July-August 2011 show us it is time to muster our energy in order to prevent the private financial institutions from doing any further damage.

The extent of the crisis is also determined by the volume of the US public debt and the way it is financed in Europe. European bankers hold more than 80% of the total debt of an array of European Union countries in difficulty such as Greece, Ireland, Portugal, the Eastern European countries, Spain and Italy. In volume, Italian public debt paper amounts to EUR 1,500 billion, more than twice the combined public debt of Greece, Ireland and Portugal. Spain’s public debt comes up to EUR 700 billion, i.e. about half of Italy’s. The arithmetic is simple: the public debts of Spain and Italy added together represent three times the sum of those of Greece, Ireland and Portugal. As we saw in July-August 2011, while each country continued to pay off its debts, several banks almost collapsed. The ECB had to intervene to save the day. The financial scaffolding of the European banks is so fragile that an attack through the Stock Exchange is enough to bring them down... Not to mention what would happen if the Stock Exchange crashed, which cannot be ruled out.

So far, with the exception of Greece, Ireland and Portugal, the States have managed to refinance their debts by taking out new loans as and when the borrowed capital fell due. The situation has worsened significantly over the last few months. By July/early August 2011, the interest rates demanded by the institutional investors to enable Italy and Spain to refinance their public debt as it fell due with 10-year loans had literally exploded to reach 6%. Once again, the ECB had to intervene, buying up massive amounts of Spanish and Italian debt paper to satisfy the bankers and other institutional investors and bring down interest rates. For how long, though? Italy will have to borrow about EUR 300 billion between August 2011 and July 2012 as that is how much they will require to honour bonds that fall due over that short period. Spain’s needs will be considerably lower, at about EUR 80 billion, but that is still a hefty sum. How will the institutional investors behave over the coming twelve months and what will happen if their borrowing conditions on the North-American money market funds become stiffer? Many other events could aggravate the international crisis. One thing is certain: the present policies of the EC, the ECB and the IMF cannot result in a favourable outcome.

CADTM: On several occasions you have written that the private debt was far greater than the public debt. So far you’ve been talking about public debt.

Eric Toussaint: There is not a shadow of a doubt that the private debts are much higher than the public debts. According to the last report by the McKinsey Global Institute, the sum total of private debt worldwide comes to USD 17,000 billion, i.e. about three times the sum of all public debts, which is USD 41,000 billion. There is a great risk that private companies, including banks along with the other institutional investors, will not be able to repay their debts.

Bankers, chief executives of other companies, the traditional media and governments only discuss public debt and use its increase as a pretext to justify new attacks on the social and economic rights of the majority of the population. Austerity and the reduction of public deficits by axing social budgets and civil service jobs have become the only way of raising funds, along with privatizations and more consumer taxes. For appearances’ sake in Europe, some governments have added a tiny tax for the rich and talk of taxing financial transactions.

Obviously the increase of public debt is the direct result of 30 years of neoliberal policies. They have used loans to finance fiscal reforms in favour of the wealthy and of large private companies. They have rescued banks and large companies by getting the State budget to take on part of their debt or other losses. Due to the recession, there have been new falls in tax revenues and an increase in some public spending to help victims of the crisis. The combined effect of these different factors has been to increase the public debt. It all comes down to deliberately unjust social policies which aim systematically to favour one social class only. A few crumbs are tossed to the middle classes to keep them quiet. On the other hand, the great majority of the population have been hit by these policies and seen their rights trampled underfoot. That is why the public debt has to be seen as globally illegitimate. And that is why I have been focusing on the public debt in this interview, because we absolutely must find a positive solution to this problem.

End of the sixth 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.


[1See the first part “Greece”, the second part “The great Greek bond bazaar” the third part “The ECB, ever loyal to private interests”, the fourth part “A European Brady deal: austerity for life” and the fifth part “CDS and rating agencies: factor(ie)s of risk and destabilization

Eric Toussaint

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 Debt System (Haymarket books, Chicago, 2019), 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:
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. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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