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The Reoccurring Financial Woes of Greece

SHARMINI PERIES, EXEC. PRODUCER, TRNN: The Euro is slipping against the dollar, and the European financial markets are in flux, expecting Greece to fail on its 1.6 billion Euro repayment due to the International Monetary Fund on the 5th of June. Joining me now to discuss Greece and the financial [wars] it’s posing to the European markets is Michael Hudson. Michael is joining us from New York, and as you know he’s a distinguished research professor of economics at the University of Missouri, Kansas City. His two newest books are The Bubble and Beyond, and Finance Capitalism and Its Discontents. His upcoming book from CounterPunch Books is titled Killing the Host: How Financial Parasites and Debt Bondage Destroyed the Global Economy. Michael, what is the response of the European financial markets to Greece?

MICHAEL HUDSON: The financial markets have the same response that they had over five years ago. All of the problems today came up in 2010 when it was obvious that even at that time Greece could not pay its debts. The International Monetary Fund had its economists make a series of projections to analyze its ability to pay. What happened a few years earlier was that a Wall Street bank, Goldman Sachs, helped the Greek Central Bank conceal the amount of debt that it owed. When Pasok, the ostensibly socialist party, came to power, Papandreou revealed how much money Greece actually owed to its bondholders. And the IMF said wait a minute, the bondholders have lent much too much money for Greece. We’ve got to write down its debts to the ability to pay. There’s no way that Greece can pay the debts without imposing an economic collapse and making it even harder to pay the debts.

So there was a big series of meetings, one in 2010 and then a Group of Eight meeting in 2012. Basically, the European Central Bank and the European Union told the IMF that there’s nothing in the laws that they had written up in Europe to write down debts owed to the Central Bank. They said, in effect: “If you, the IMF, want to be a part of all of this debt restructuring, we want to pay off all the private bond holders so that they don’t lose money. We want to let the speculators gain because that’s our constituency.” But the IMF economists pressured the head of the IMF at that time, Dominique Strauss-Kahn, to write down Greece’s debt.

The problem is that Strauss-Kahn wanted the IMF to be a player in the European Central Bank and the European Union, the main financial interests. He also wanted to run for the presidency of France, and most of Greece’s debts were owed to French banks. So Strauss-Kahn had to essentially operate in the interest of France, and his own political fortunes rather than what IMF economists recommended. Basically, he agreed to have the Central Bank and IMF lend Greece enough money to pay the bondholders.

It turned out that the IMF economists were quite right, and Greece couldn’t pay. The result is that the leading economists in the IMF’s European division resigned in anger. They’ve written a series of reports. They talked to reporters and said look, the IMF is thoroughly
bubblehudsoncorrupt. It’s captured by the bondholders. Its ability-to-pay models are junk economics. That left basically the only people remaining in the IMF as bank lobbyists. The IMF leadership saw the Greek crisis and the other European debt crises as finally a chance to get the IMF back as a world player. So basically they made a huge refinancing of Greek debt in 2012.

The terms were highly creditor-oriented. Instead of Greeks owing money in their own currency, they would owe it in a currency they couldn’t create, the Euro, and they’d owe this money not to private bondholders, to whom it’s easy to write down debts because private bond holders are willing to renegotiate as already we saw them do in Argentina. But you can’t renegotiate with the European Central Bank.

So now we can fast-forward to earlier this year when Syriza came to power in Greece. The European Central Bank said, we central banks may be independent from government, but we’re not independent from the financial interests. We’re not independent from Wall Street. As a matter of fact, Tim Geithner and Obama, in 2012, went to the G8 meeting and said Europe, you have to bail out the Greek private bond holders, because the American banks have made huge guarantees on credit default swaps, and we’ll go broke if we have to pay and made the wrong bet. So you have to save Wall Street and screw Greece. Naturally, Greece got screwed. Well, at the autumn 2012 meetings the IMF people spilled the beans about how Greece has been left in debt.

When the elections happened this January and February, the Central Bank came right out and said to the Greek people, don’t vote for Syriza. If you vote for a party that is opposing writing down the pensions, if you elect a party that’s supporting the working class, if you vote for a real socialist party that wants to stop the sell-offs, then we’re going to treat you with sanctions very much like what America treated Cuba or America treated Iraq.

What we’ve seen erupting in Europe in the last three months is the old class war. But it’s not really the old class war. It’s the war of finance against not only the Greek pensioners, not only the Greek economy, but Greek industry, Greek exporters and Greek banks. There’s a war to treat Greece as an object lesson, because the financial interests of Europe worry that if the Syriza party is able to write down the debts to save the economy from depression, then Podemos in Spain and the Portuguese popular parties are going to write down their debts. We’ve got to make an object lesson of Greece. We’ve got to absolutely crush socialism in the cradle so that it won’t grow into a European-wide movement to avoid depression.

When Syriza came to power, the belief by the negotiators, Yanis Varoufakis and his colleagues, was that well, we can be reasonable with Europe. We can say, “Look, there’s no money to pay. We can’t cut back pensions more, because they’ve already been cut back, and we’d be voted out of power just like the old party. We’re not willing to privatize the Greek economy and sell it off to foreigners just because bondholders made a bad bet and the European government has made a bad bet.”

But the European Central Bank is saying, “You have to cut your wages even lower. You have to make even more unemployment–30 percent unemployment isn’t enough, 50 percent unemployment in new graduates isn’t enough. You only have ten percent of your population emigrating. You have to have more of your population emigrate.”

Naturally, Varoufakis and the Syriza party say that this is crazy. It’s junk economics. “We’re not going to commit suicide, and no national government has to commit financial and economic suicide simply to pay bondholders.” That’s what it means to be a sovereign government. But then the Europeans say, “Ah, but you’re not a sovereign government. Because a sovereign government, according to the textbooks, has the right to print its own money. But you don’t have the right to print your own money. Only we, the Central Bank, have the right to print money, and we’re not going to do it. We’re not going to print the money to help your economy because we don’t like your political party. You didn’t vote for the right party.”

That’s basically what Angela Merkel told them five years ago, that’s what other European representatives of the financial interests have told them. So essentially the Greeks are told either you vote in a right-wing party or we’re going to make you wish that you did.

That’s the politics, now. Everyone’s trying to figure out, what on earth can the Greeks do? Either there’s total surrender, which is being demanded by the European Central Bank of Syriza; or, Greece says it won’t pay. And if it doesn’t pay, then it really doesn’t have a problem anymore.

The arguments that are being used are exactly the same that were used 90 years ago in the German reparations debate. The Greek government is told to pay the bond holders, meaning the European Central Bank and the IMF, essentially by increasing taxes. But if you increase taxes, you shrink the market. There will be even more unemployment and even more emigration. And the Greeks – and any economist who’s studied economic history – knows that this is suicide.

So we’re in a condition where the European Central Banks are basically making a demand that no country could meet. They are trying to force a crisis, and nobody can see any way out of it.

PERIES: It appears that if rumor is correct, the murmurs coming out of Europe is that there will be no resolve by Thursday, which was a deadline to come to some agreement, as June 5th is the deadline for the first repayment to the IMF. If Greece doesn’t come to an agreement in terms of its repayment it will obviously be in default. What options does Greece have?

HUDSON: Well, this is not just a rumor. Varoufakis has written in the last few days that there is no way that Greece is going to stop paying pensions, and there is no way that Greece is going to privatize the economy. He said, we’re willing to make all sorts of compromises. The usual, it’s called extend and pretend, you lend us the money and we’ll pay you. You pretend to lend us the money, that it’s a good debt, we’ll pretend to pay. But there’s no way that they’re going to commit suicide. And the Central Bank’s saying, “Yes, you have to commit suicide or else have the anarchy of withdrawing from the Euro. What are you going to do?”

So they’re trying to figure that out. “We’re not going to be able to pay, so what is the point of trying to pay a debt that can’t be paid? If there’s no money there we can’t pay, so there’s no way that we can meet their conditions.”

There’s obviously going to be a break. Greece is going to use its money to continue to pay pensions. It’s not going to privatize more of the public domain, it’s not going to sell off its mineral holdings and its gas rights in the Aegean.

Apparently President Obama, who originally had told Europe, wait a minute, you’ve got to stop Greece from withdrawing because otherwise it’ll have to make a deal with Russia for gas. It’s going to be anarchy. And that’s the intended result by Europe. I know the Greek negotiators. I’ve spoken to them. I could not do anywhere near as good a job as they’re doing. I’m in full agreement with everything they’re doing. They’re being reasonable. But they’re up against a wall – the intention to have economic warfare and force Greece to continue the privatization program and to continue the war against labor.

There’s no way of knowing what’s going to come out. Some kind of script currency, some kind of artificial currency maybe used as an interim. But that’s only an interim transition.

PERIES: Why is it beneficial for the European banks and European financial might to allow Greece to default in this way? After all, this might also be another example for the other countries, you mentioned, to default as well, and leave the Euro and establish their own currencies. And at the end of the day, beneficial for them to do that.

HUDSON: You’re right in pointing out that the issue really isn’t Greece itself. Greece’s debt is only about 2 percent of the overall European debt. So in itself, it’s not in the interest to create a break. And if economic rationality were all that there was, of course the Central Bank and IMF would write down the debt. The IMF says, “We’re not going to lend Greece any money, we’re going to stop the pretense, unless the European Central Bank writes down the debt.” And the European Central Bank says, “We’re not going to.”

But the point is precisely what you just raised. Italy, Spain, Portugal, and other countries. They want to make an example, saying if any of you countries have the idea that you’re going to put your own workers, your own economy first before the creditors, then we’re going to treat you like we’re treating Greece. We’re going to make Greece an object lesson, just as America made Iraq and Iran an object lesson and made Cuba an object lesson. They think that somehow they can demonstrate that Greece is going to suffer. But Greece has pretty smart leaders, and the object lesson may backfire.

That’s what class war is. The oppressed group always is in a weaker position, but very often it’s able to recover. That’s what’s at issue right now, who’s going to win: The left wing, or the right wing?

This an edited transcript of an interview on The Real News Network in Baltimore.

Sharmini Peries is executive producer of The Real News Network.

Michael Hudson’s book summarizing his economic theories, “The Bubble and Beyond,” is now available in a new edition with two bonus chapters on Amazon. His latest book is Finance Capitalism and Its Discontents.  He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. Hudson’s new book, Killing the Host, will be published this summer by CounterPunch Books. He can be reached via his website, mh@michael-hudson.com

 

 

 

 

More articles by:

Michael Hudson is the author of Killing the Host (published in e-format by CounterPunch Books and in print by Islet). His new book is J is For Junk Economics.  He can be reached at mh@michael-hudson.com

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