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In the Eye of the Storm

Greece and the Debt Crisis in Europe

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 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 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 (pension funds, 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 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 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 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 and the US money market 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.

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.

Translated by Christine Pagnoulle and Vicki Briault in collaboration with Judith Harris

Notes.

|1| Hellenic Republic Public Debt Bulletin, n° 62, June 2011. Available at www.bankofgreece.gr

|2| Hellenic Republic Public Debt Bulletin, n° 56, December 2009.

|3| Bank of Greece, Economic Research Department – Secretariat, Statistics Department – Secretariat, Bulletin of Conjunctural Indicators, Number 124, October 2009. Available at www.bankofgreece.gr

|4| The same can be observed in the same period with Portugal, Spain, and CEE countries.