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Barack Obama must have been very frightened, indeed. Otherwise he never would have inserted himself so forcefully into Greece’s debt crisis. The truth is, there’s much more at stake then people seem to realize. A Greek default would be a major blow to the banking system and the damage would not be limited just to Europe. It could easily spread to the United States and trigger another meltdown. That’s why Obama spent most of his weekend on the phone, exhorting EU finance ministers to take swift action to put out the brushfire. Not surprisingly, the details were omitted in the US media. Here’s an excerpt from the UK Independent explaining what happened behind the scenes last weekend:
“As the dust settles and the markets cool, details are beginning to emerge of the frantic background negotiations which generated the €750bn plan to save the euro in the early hours of Monday…..the most startling – and most pivotal role – may have been played by Barack Obama, according to both American and French officials. He convinced the Europeans that it was time not just to Do Something, but to Do Something Very Big, to rescue the euro and prevent the world from plunging into another financial crisis and recession…..
“It was after these calls that the headline figure for the EU rescue plan inflated rapidly to €500bn, plus another €250bn from the IMF.” (“Was the euro saved by a call from Barack Obama?”, John Lichfield, Independent)
The Telegraph’s Ambrose Evans-Pritchard tells a similar tale, but with a twist. In this incident, Obama spoke directly to Spanish Premier Jose Luis Zapatero. Here’s an excerpt from the Telegraph:
“Premier Jose Luis Zapatero told a stunned nation that public sector pay will be reduced by 5 percent this year and frozen in 2011…Pension rises will be shelved. The country’s €2,500 baby bonus will be canceled. Aid to the regions will be slashed and infrastructure projects will be put on ice….
“US President Barack Obama played a key role behind the scenes, pleading with Mr Zapatero for ‘resolute action’. The telephone call from the White House is a clear indication that contagion from Greece and Portugal to the much larger debt markets of Spain had become a global systemic threat by late last week.
“The markets were going in for the kill: the eurozone itself was on the brink of collapse,” said Jose Garcia Zarate from 4Cast.” (“EU imposes wage cuts on Spanish ‘Protectorate”, Ambrose Evans-Pritchard, Telegraph)
Is that why Obama was twisting arms all Saturday and Sunday, because he thought the EU might collapse? Does that explain why the Federal Reserve reopened its controversial swap lines with European central banks, providing unlimited short-term loans in dollars for collateral to prop up the euro and exposing the US to tens of billions in potential losses without congressional approval? And is that why ECB chief Jean Claude Trichet reversed his position on monetization and agreed to initiate an EU quantitative easing (QE) program to would buy up government and corporate bonds?
What’s clear, is that very little of last weekend’s behind-the-scenes maneuvering had anything to do with the problems facing ordinary Greeks, who are merely the victims in this latest bank bailout fiasco.
Greece will not escape default, so it’s not in its long-term interests to stick with the euro. That just ensures years of high unemployment, severe cuts to public spending, and neverending recession. A return to the drachma would provide an opportunity to restructure debt and regain fiscal equilibrium via devaluation. It would give Greek exports and tourism a boost by making them instantly cheaper. The fact that the Greek “rescue” and kindred efforts in Spain, Portugal and other tottering economies is designed to bail out bankers and the rich and sock it to ordinary people was well explained on this site last week by Michael Hudson, and also by T.P. Wilkinson on this site this weekend.
No country large or small has managed to close a fiscal gap as large as 10.9 per cent of GDP (which is what Greece is being asked to do.) It’s cruel, especially in an environment where deflation is gradually tightening its grip. Greece needs counter-cyclical fiscal stimulus to get out of the hole its in and to grow its way out of recession. The EU plan implements an anti-Keynesian regimen that is the exact opposite of Obama’s American Recovery and Reinvestment Act (ARRA) the $787 billion fiscal stimulus package to build aggregate demand and lower unemployment. The EU has no funding mechanism to implement such a plan, so it is prescribing extreme austerity measures instead. It’s stupid, cruel and won’t work, except as a short-term shot for the banks.
Greece didn’t create this crisis by itself anyway. It had help from Germany. Germany dictates monetary policy in the EU, which means that it bears much of the responsibility for the deficit-mess in the south. Of course, now that the countries that enriched Berlin (by gobbling up their exports) are flailing about in red ink, German politicians have started lecturing them about the evils of profligate spending. Here’s how Michael Pettis sums it up:
“The strong euro and burgeoning liquidity it brought on meant that much of Germany’s trade surplus had to be absorbed within the eurozone, forcing especially southern Europe into high trade deficits. These deficits were dismissed, very foolishly it turns out, and against all historical precedents, as being easily managed as long as the sanctity of the euro was maintained…..
“As I see it, domestic German policies, perhaps aimed at absorbing East German unemployment, forced a structural trade surplus. The strong euro, along with the automatic recycling of Germany’s large trade surplus within Europe, ensured the corresponding trade deficits in the rest of Europe – unless Europeans were willing to enact policies that raised unemployment in order to counter the deficits. As long as the ECB refused to raise interest rates, southern Europe had to accept asset bubbles and rapidly rising debt-fueled consumption.
“This couldn’t go on forever, or even for very long. Now southern Europe is paying the inevitable price, and of course the moralists are accusing the south of being shiftless and lazy, confusing the automatic balancing mechanisms in the balance of payments with moral weakness.” (“Are you ready for the united States of Germany?”, Michael Pettis, China Financial Markets)
Only a small portion of the nearly-$1 trillion bailout will go to Greece. And, even that pittance comes with strict “belt-tightening” conditions. The bulk of the funds will be held in an structured investment vehicle (SIV) as a way to ward off speculators who smell blood in the water and think they can make a killing by toppling sovereign bond markets in Portugal, Spain and Italy.
Obama’s concern is that a Greek default will put pressure on French and German banks (which have 110 billion-euro exposure) that will start the dominoes tumbling again. According to Dow Jones, “JP Morgan’s holdings of non-U.S. government bonds increased by $36.5 billion in 2009, while Citigroup’s increased by almost $40 B.” (“The European Bailout”, James Hamilton, Econbrowser)
So, despite the news this week that all four of the nation’s biggest banks (Bank of America, Goldman Sachs, JP Morgan, and Citigroup) racked up perfect quarters off their trading desks, (showing that the Fed’s liquidity and zero-rates has restored profitability) the banking system is still so weak that the President of the United States has to spend his whole weekend hectoring heads-of-state throughout Euroland to beef up their bailout or the whole financial system will come crashing down.
What does that tell us? It tells us that the whole “recovery” meme is a fraud. It tells us that the banks (where lending is down 20 per cent, and foreclosures are running at 300,000 per month) are once again engaged in the riskiest type of speculation; that they’re using complex financial assets and repo to maximize leverage to goose profits in the middle of a slump. And, it tells us that Obama is Wall Street’s biggest champion, a real “enabler” in chief.
Greece should walk away from this farce and start fresh. “Thumbs down” on the EU bailout.
MIKE WHITNEY lives in Washington state. He can be reached at firstname.lastname@example.org