Part of Mouvement Communiste Letter Number 32
The Greek fiscal crisis, a consequence of the global crisis of credit
Should we have expected such a strong fiscal crisis in Greece? This question is widely discussed among bosses’ circles around the world. The answer is more complex than it seems. The state financial crisis is linked to the specific configuration of social democracy, the specific characteristics of the general command of the state on civil society. Articulation of this command is mainly based on three instruments:
- a generalised tax avoidance by companies, the very condition of survival of a productive network which is little concentrated, insufficiently capitalised and often badly managed according to the standards of the world market
- a system of social protection which doesn’t protect very much but has a sufficiently broad mesh that there are plenty of preferential treatments and “abuses” to secure social peace
- an imposing public sector, not very efficient and not rationalised but omnipresent in the innumerable folds and layers of civil society
Based on these assessments, OECD economists1 recommended, just before the explosion of the public debt affair, “budget structural reforms”. “Their [i.e. the state’s] room for policy manoeuvre is tightly restricted by the high public debt, repeated fiscal slippages and the large external and internal imbalances, which have been reflected in high sovereign interest-rate spreads since the end of 2008 as risk aversion rose.”
And more: “As activity slows, budgetary deterioration is inevitable. There is virtually no room for budgetary manoeuvre, and the poor state of public finances justifies the immediate structural consolidation already put in place”. The international organisation’s recipe is easy on paper: “Apart from simplifying and widening tax bases, the fight against tax and social security contribution evasion should be stepped up, and tax collection improved. This needs to be accompanied with tighter control over spending, including a cut in administrative costs, rationalisation and limitation of the wage bill, and reforms in loss-making state enterprises. Longer term viability also calls for further pension reforms, including revision of the parameters for pension calculations and new measures to further reduce incentives to early retirement”.
Easier said than done because the financial markets love easy prey, especially when it’s in difficulty. “Unlike many other OECD countries, Greece has virtually no room for budgetary manoeuvre to cushion the weakening of activity. Public debt is now close to 100% of GDP, and the fiscal deficit rose from 3.1% to 5% of GDP between 2006 and 2008 despite a buoyant economy. Against the background of the general rise in risk-aversion and declining market liquidity triggered by the financial crisis, repeated fiscal slippages together with the impact of ageing on the long-term budget outlook, largely explain the sharp widening of interest rate spreads with Germany.”
These considerations have not escaped the market operators specialising in profits from taking bets on the fall of financial assets. This was even easier as they did not have to mobilise much money to inflame the interest rates of the Greek state bonds. Still convalescent, the credit markets over-reacted to the slightest signal of a fall. In this case, the signal was sent by the CDS (Credit Default Swaps) market. These are financial tools which are supposed to protect from the defects of debt repayment. In fact, in the Marxist interpretation, it is one more instance of the duplication of the instruments of credit2 . Those leaning on Greek debt amplified in tremendous proportions the gap in output (the interest rate paid) between German government bonds, considered among the safest, and those of the Greek State. In their movement of relative autonomisation from their underlying asset, the Greek debt itself, the CDS of the obligations of Greek state bonds have become more important than the debt itself, even though it’s their raison d’être. James Rickards, a former advisor from LTCM, whose funds triggered the financial crisis of 1998, asked himself in the Financial Times (12 February 2010) what happens when CDS products lose any link with the underlying risk they should estimate. This question says a lot about the real nature of those financial products. Actors on the financial markets frankly played for the fall of Greek bonds by acting on the herd-following market of the CDS. Short sales of CDS of Greek debt multiplied3 . The markedly lower “depth” of the CDS market in Greek sovereign debt relative to the debt itself explains both the speed and amplitude of this typical consequence of the exit from the so-called “sub-prime” financial crisis. The CDS markets of the Greek debt reached roughly $80 billion, while the size of the debt itself was some $385 billion.
Because of the growing influence of the predicate (CDS) on the subject (debt), it was decidedly easier and less risky with regard to the terms of the wager – in terms of the amount of committed capital - to play the first downwards to force the second to go in the same direction “It's easier to buy protection and transact a 'short' position, that's half the reason CDS were developed, so people can hedge risk”, says Tim Backshall, chief strategist at Credit Derivatives Research, an independent research firm in New York.
“You can move [other markets] with those trades” by playing with CDS, he adds. “It has always been possible to sell short—or bet against—government bonds directly. But investors say buying CDS can be an easier way for them to quickly enter a wager”, continues Gregory Zuckerman, in the same Wall Street Journal article4 .
But who sold Greek debt CDS? Let’s hear James Rickards again: “Sellers are generally pension funds which seek to gain a bonus for insurance and buyers are often speculative funds which seek to realize a quick blow. In the middle, you get Goldman Sachs or another bank that gives a great amplification to the movement.” (idem). On 12 February 2010, Richard Barley, from the Wall Street Journal, confirmed it: “The real shift higher in costs is likely to have come as traditional investors with exposure to Greek or other southern European assets—including equities and corporate debt as well as government bonds—became concerned about possible contagion and spill-over effects due to the very real crisis in Greek public finances. They will have been using the CDS market to hedge exposure. Bank risk-management desks will also have been forced to buy protection as liquidity in the underlying bonds declined and their price dropped, adding to the pressure.” The effect of the credit markets boom is more than classical.
“The guilty people” are thus not, according to these bourgeois experts, the speculators par excellence, the famous hedge funds, but rather the most stable institutional investors, those which every listed company dreams of having as shareholders. The Greek debt crisis is thus not an isolated tempest but a seasonal storm. It translates and anticipates an upheaval that sees the states with the most fragile balance sheets treated the same as any other individual capital. This is in no way a surprise for revolutionaries who consider the state both as the supreme representative of the ruling classes but also as a very specific individual capital, because it is, at the same time, a monopoly on its internal market and the bearer of the ability to place the weight of its balance sheet on the whole of civil society. States do not go bankrupt, the supporters of the system repeat continuously.
Yes, with two exceptions: the French monarchy buried by the Revolution of 1789 and the Russian Empire, swept away by proletarian revolution in October 1917. With these two exceptions, the dialectical contradictions between these two realities of modern states are thus solved always in favour of its function as first active guarantor of the operation of the capitalist system in its area of competence. When its nature as an individual capital enters into deep and continuous conflict with this function, the state plunges into fiscal crisis, a revenue crisis. Contrary to the classical financial and/or productive crisis in a competitive environment, the state fiscal crisis never comes to end by its pure and simple destruction to the benefit of other states without going through war – either civil war against the proletarian masses in order to reduce their power and increase their exploitation, or regular war against other states to restore the balance through plunder. In the past, in the case of both world wars, the military victory of the state against the working class allowed the launching of permanent wars for the plunder of other states. Conversely, when it is too weak to begin hostilities against the exploited, it has however the means from its status of surviving for a long time despite the chronic crisis of revenues.
This is the case for Greece but also for a great number of capitalist States. The markets attacked Greece with high priority because the fiscal margin for manoeuvre of the new government is very narrow, in particular after the aggravation of the public deficits because of the measures taken in support of the national economy following the outbreak of the global credit crisis. The high combativity of wage earners of this country (compared to other countries of the euro zone), the inefficiency of the state administration everywhere and an insufficiently concentrated and centralised productive network make the difference in the eyes of the players of finance capital. The crisis of Greek sovereign debt can lead to others in countries like Spain, Portugal, Ireland but also Italy and, why not, the United Kingdom? There are so many countries whose state balances have been strongly undermined by the credit crisis. But the most probable route of contagion is once again the banks. According to the Public Debt Management Agency of the Greek Finance Ministry, Greek debt bonds are owned roughly 45% by banks and at 5% by other states’ central banks.
If we add the insurance and pension funds, we arrive at two thirds of the total. The traditional “speculators” (hedge funds and similar) count for the remaining third.
It is thus the great financial establishments that will have to manage the first risks associated with financial bets against the Greek debt. We can understand better why many actors of those categories made attempts to reduce potential losses on the Greek sovereign debt market by investing in the CDS market to seek protection. But this rush produced, as we saw, a contrary effect by worsening the fall of the prices of government bonds, a fall that went on even after the Greek state had easily succeeded in issuing 8 billion euros of its debt titles. This issuance attracted a request for government bonds for 25 billion euros thanks to an enticing interest rate of 6.1% (290 basis points more than the rate of 10-year German bonds).
Finally, it is worth noting that the Greek debt is largely internationalised (see the graphic below) because only €40 billion from a total of 385 billion are owned by local banks, according to Crédit Suisse. More generally, again according to the Public Debt Management Agency of the Greek Finance Ministry, local people own 29% of the Greek state obligations. The investors and the banks of the British Isles (Ireland included), the Germanic area (Germany, Austria, Switzerland) and the French area (France and the Benelux countries) are very exposed. They are followed by Italy and, further behind, Scandinavia and the United States.
The eagerness with which the German and French governments reacted to the threats which hover over the Greek debt is thus not surprising. As for the effectiveness of the defence systems being developed (state bond issues coupled with or guaranteed from other states than Greece), they highlight all the limits of the creation of a single currency, the euro, without the parallel formation of a unified capital market and in the absence of a single management of the public purses of Euroland. But this is a problem for the bosses and the states. From the side of the working class, a resolution of the fiscal crisis by quickly cleaning up the Greek state balance sheet through attacks on wages and employment is just not acceptable.
This is a true declaration of war from the Greek state and its peers in Euroland that proletarians must not ignore. They must take up the challenge and fight on the only ground that is worthwhile: the one of defence of the wage by means of a generalised political struggle against every boss and the most powerful and dangerous of them all, the state. Capital’s plan to make the exploited pay for its latest crisis is a political one. The Greek example is paradigm of what will happen in the coming decade under different forms for the life of civil society and for the working class in particular. Only a general political offensive plan from the working class is able to counter it. A plan that will not be elaborated in the closed rooms of revolutionary groups but on the contrary will be conceived in the heat of the struggle by autonomous political committees coming from the most determined and conscious ranks of the proletariat. A plan that will attack head-on the state reformism and agent of the capitalist offensive which already rules in Athens.
- 1See “OECD Policy Brief July 2009”
- 2CDS are contracts that serve as insurance on all kinds of debt. “With sovereign debt, if a nation defaults the CDS buyer would get paid by the seller of the CDS insurance. Though government defaults are rare, the value of CDS contracts rise and fall to reflect investors' outlook on the bonds they are designed to insure.
The market for CDS has boomed in recent years. Seven years ago, there was less than $3 trillion of CDS contracts outstanding; today there are more than $25 trillion of these contracts, according to the International Swaps and Derivatives Association. When prices for CDS on the debt of firms like American International Group Inc. and Lehman Brothers Holdings Inc. soared in 2008, investors interpreted the moves as signals of trouble ahead.
Now the same is happening with CDS prices rise for a variety of nations, marking one of the first potential government-debt crises in which CDS contracts are helping to spread unease. That is creating another real-time measure of investor worries—a barometer that itself can generate more anxiety”. (The Wall Street Journal; 5 February 2010)
“Credit default swaps have many characteristics similar to other over-the-counter derivatives. They are used to hedge risk, and their value is based on a reference entity. They also have characteristics that distinguish them from other derivatives. While the value of interest rate or commodity derivatives generally adjusts continuously based on the price of a referenced asset or rate, credit default swaps operate more like binary options. A seller of CDS could one month collect its regular premium with little expectation that the insured company may default and in the next month be on the hook for billions if the insured company goes bankrupt. A credit default swap can quickly turn from a consistent revenue generator into ruinous costs for the seller of protection. This “jump-to-default” payout structure makes it more difficult to manage the risk of credit default swaps. Credit default swaps also have characteristics similar to bond insurance issued by mono-line insurance providers. … Credit default swaps also can play a significant role once a company has defaulted or gone into bankruptcy. Bondholders and creditors who have CDS protection that exceeds their actual credit exposure may thus benefit more from the underlying company’s bankruptcy than if the underlying company succeeds. These parties, sometimes called “empty creditors,” might have an incentive to force a company into default or bankruptcy. These so-called empty creditors also have different economic interests once a company defaults than other creditors who are not CDS holders.” – Address by Gary Gensler, president of the Commodity Futures Trading Commission on 9 March 2010
- 3The short sale consists in borrowing a financial title against the payment of interest, to sell it then to await the effective fall to repurchase it and return it to its lender while having thus made a profit. This thus consists in betting that the price of a title will drop.
- 4 “For one thing, CDS can be purchased by investors who don't own the underlying debt but want to wager that it is likely to weaken, meaning they can be bought not only by people hedging other bets but also by investors making straight wagers. And a CDS buyer usually doesn't have to produce as much collateral to make a bearish trade as the investor would to make a similar wager in the government-bond market. For example, some dealers allow an investor to bet against $10 million of Greece's debt by putting up as little as $2 million and then make quarterly payments of about $105,000. If the same investor wanted to short Greece's government debt, or borrow and sell it hoping for a drop in price, the investor might have to place as much as $10 million into an account with a brokerage firm” – Gregory Zuckerman, The Wall Street Journal, 5 February 2010