Trapped on the European Fringe
First to receive emergency financing in April 2010, Greece was also first into insolvency a year later. At an emergency summit in Brussels this past July, the Troika recognized, finally, that Greece’s 350 billion euro debt was not payable, and cobbled together a so-called soft default procedure designed to minimize losses to its external creditors, mainly German and French banks. Ireland and Portugal looked sure to follow, despite the summit’s insistence that they had “solemnly” promised to meet their obligations. All three had received Troika support when their interest rates broached 7 percent and debt service costs soared out of control. By midsummer, as bond vigilantes and hedge funds geared up for a gargantuan test of nerves with the ECB, the interest rates on the bonds of Spain and Italy were both above 6.5 percent and rising. In one apocalyptic week in August, even France seemed to have been targeted, and analysts began to ask where the eurozone periphery began and where the center ended.
While bond purchases by the ECB held off the markets in August, the central bank insisted that it could not continue buying peripheral debt and that the new European Financial Stabilization Fund—a eurozone IMF—should take on that role. Most economists agreed that this would require at least a tripling of the fund’s 440 billion euro resources, a daunting prospect given public opposition to support for the periphery in the core countries, especially Germany.
There was also a growing consensus in the eurozone center left that in the medium term, only the conversion of members’ sovereign debt into euro bonds, backed by an embryonic United States of Europe, would placate the markets and avoid the breakup of the union. A European New Deal based on euro bonds and public investment financed by the European Investment bank is now supported by several social democratic leaders, even in Germany. “The model should be Treasury bonds like those issued under Roosevelt to finance public works; this was federal debt and did not require the backing of individual states,” says Stuart Holland, a veteran of the European left who was an adviser to former European Commission president Jacques Delors, who has garnered support in parts of the European establishment for a Euro-Keynesian response to the debt trap.
But this is all anathema to the German government, which shares the US Tea Party’s abhorrence of expansionary policies to boost growth and employment. Finance minister Wolfgang Schauble called euro bonds the road to “inflation union.” At a meeting in August, a statement by German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected an expansion of the fund, and even an initial small issue of euro bonds.
Meanwhile, center-left governments on the periphery are terrified of worsening the risk premiums on their debt, and express support for the Euro-Keynesian alternative only in comments made strictly off the record. In any case, their tardy support for austerity has alienated their own supporters. Spanish Prime Minister José Luis Rodríguez Zapatero will almost certainly follow his Portuguese counterpart, José Sócrates, who lost the spring election to the fiercely neoliberal Pedro Passos Coelho. Greek socialist George Papandreou’s support has also plummeted against the right-wing New Democracy leader, Antonis Samaras. And, despite encouraging results in elections earlier this year, the Irish Labour Party also risks losing its base support after joining a coalition government whose twin policy of bank bailout and social spending cuts is now parodied in Dublin’s pubs as “No bondholder left behind.”
A second multibillion euro rescue package of EU and IMF loans for Greece did receive the green light in August. But it was made conditional on the privatization of up to 50 billion euros’ worth of state assets—from utilities and mining companies to the state lottery. The most enticing were 70,000 plots of publicly owned real estate on the mainland coast and islands, some of it pristine beaches on Samos and Prasonisi (Rhodes), owned by KED, the public real estate holding. Imaginative Dutch ministers ventured that state assets might also be used as collateral for the second installation of the Troika credits, an idea Rolando Jimenez would have understood perfectly.
During a visit to Athens in May, I met the dapper real estate broker Miltos Kambourides in the offices of his fund Dolphin Capital Partners, which specializes in luxury tourist development and buzzes with moneymaking acumen. He seemed unfazed by the Spanish experience of boom and bust in the vacation-home business. “There is huge scope for developing the privatized land for tourism here; in comparison to Spain, Greece is virgin,” he told me. The assets were to be packaged in special-purpose vehicles and sold at huge discounts. Who would buy? Elias Karakitsos, who manages Greek ship owners’ fortunes at Guildhall hedge fund in London, answered candidly: “This is the ideal environment for vulture funds.”
Portugal and Ireland have also announced fire-sale privatization programs. With little else left to auction, Spain put its century-old state lottery on the block; and when Italy became the midsummer target of the bond vigilantes, Silvio Berlusconi rushed through plans to privatize state utilities. Public beaches on the Italian Riviera had already been leased, while heavily indebted medieval cities, downgraded by S&P and Moody’s, resorted to selling Renaissance palaces such as the Palazzo Diedo and San Casciano in Venice. “The best way to explain what is happening is that episode of The Sopranos when they lend money to the deadbeat because his wife has a shop they would like to own,” says Michael Burke, a former Citibank economist in London.
But with opposition to austerity and forced privatization growing in Athens, Madrid and beyond, the question for the future is whether the eurozone periphery will continue to obediently make its mortgage payments—even as the Troika embargoes its most prized assets—or return the keys and move on. This is the great default debate now engaging the European left, just as it did in Latin America in the ’80s and ’90s.
In Greece, a growing indignaki movement defends immediate default and, if necessary, withdrawal from the euro. An unofficial debt audit commission has been set up by activists, following precedents in Latin America, to study the legitimacy of Greece’s 350 billion euro debt. In May, I observed delegates of the new commission at one of the first meetings held at Athens Polytechnic behind the buckled Iron Gate, crushed by tanks during the student uprisings against the military junta in 1973. One committee discussed the legitimacy of debt securitized by Goldman Sachs in the late ’90s to help Greece meet entry requirements to the monetary union. JPMorgan Chase’s role in overselling 280 million euros’ worth of government debt to pension funds in 2007 was also discussed. Another group asked whether debt dating from the Athens Olympics in 2004, whose 9 billion euro bill to taxpayers was four times initial estimates, should be paid. “The truth is, none of it is legitimate; it’s a political vehicle more than just an audit,” said commission member Alissi Vegiri, a physicist at a government research institute, whose 30,000 euro salary has been cut by 23 percent in the past year. Debtocracy, a documentary film distributed for free online that calls for default on odious debt run up by corrupt administrations, was seen by a million people in Greece within a month of its release in April. That’s one in every ten Greeks. Parts of the Irish and Portuguese left have followed suit and set up their own audit commissions.
These groups are looking closely at the experiences of Ecuador and Argentina. After taking power in January 2007, Ecuadorean President Rafael Correa formed an audit commission to assess the legitimacy of $3.2 billion in external debt. Then, to the astonishment of banks, bond holders and the world media, Ecuador unilaterally defaulted. Wall Street and the IMF warned that the small Andean economy would suffer permanent ostracism. Yet within two years, Correa’s government had negotiated a buyback of the defaulted bonds for just 30 cents on the dollar, and was back again selling bonds on international markets. Rating agencies now value Ecuador’s debt on more or less the same terms as before the default.
Argentina, meanwhile, broke Latin American growth records after its own massive debt restructuring in 2001. But default was not enough. A massive devaluation of the peso was also needed to boost exports and provide space for expansionary macroeconomic policies to generate growth and employment. “We’re following the example of Argentina both on default and devaluation, which means exiting the euro,” said Costas Lapavitsas, an economist at the University of London’s School of Oriental and African Studies, who is involved in the campaigns in Greece, Portugal and Ireland. However traumatic withdrawal from the euro would prove for the periphery, unless Berlin and Frankfurt agree to assume their debt, it may be the only escape from the trap.