(This will likely remain the most important story in the news this week. So here’s a bit of a primer for anyone feeling a bit lost, and hopefully people can leave interesting links and insights below the line. Over the course of the week, I’ll try to start a few threads examining different aspects of the problem: the limits of austerity, bailouts and moral hazard, and ideas for future wholesale reform.)
This week, we may finally see the beginning of an epochal economic catastrophe, beginning in the Eurozone and spreading rapidly. World leaders stopped a banking meltdown in 2008, but left the global, apparently intractable problems of colossal private and public indebtedness more or less unresolved. A stream of expensive, piecemeal measures in the US and Europe have simply ‘kicked the can down the road.’ Populations and markets are losing faith in the ability of leaders, officials and institutions to end an underlying, authentic crisis of global commerce. Moreover, the solutions these actors advocate increasingly clash with popular expectation and democratic norms. We can clearly see the can is being kicked, albeit with less and less enthusiasm, down the path to Beachy Head.
That’s the general picture. In the Eurozone, Greece is essentially insolvent. To avoid default, it requires regular funds from previously agreed bailout packages, just to keep its state functional. The evidence suggests the conditions attached to these releases are making Greece more, not less insolvent. Little progress is being made in tackling mass tax evasion. Drastic austerity measures have deepened the Greek recession, depressing tax receipts, increasing welfare payments and destroying any possibility of a quick return to balanced budgets or new borrowing from private investors. The bailouts are only supposed to tide countries over until structural reforms enable them to balance budgets and return to much lower, solely private borrowing. It’s now obvious this isn’t working as intended.
Inspectors appointed by Greece’s bailout creditors now say they have not satisfied their borrowing conditions. New austerity measures announced by Greece are expected to do very little to change this. If Greece fails to meet the conditions (almost certain at this stage) by next month, only two scenarios can play out. Either the funds are released anyway (in which case Ireland and Portugal will feel their imposed austerity is senseless), or there is a default. A default could be ‘orderly’, or ‘disorderly’.
The intervention of several large central banks last week has been interpreted as ‘stocking up’ ahead of a Greek default. European, particularly Greek, French and German banks, have lent large amounts to the Greek state. The fear is that even an orderly default could create a crisis of confidence among the banks. In 2008, when banks couldn’t trust the health of other banks, inter-bank lending (vital for day-to-day cashflow) dried up and the system came close to collapse. The central banks’ decision to provide large amounts of liquidity for European banks has eased fears of such a problem. This scenario, however, presumes a Greek default that is slow, efficiently managed, and immune from markets’ long-proven tendency to panic. Official talk of an orderly default seems eerily reminiscent of the hoped-for ‘soft landing’ in the Irish property market before the bust.
The greater fear is that default, or a sudden and final collapse of confidence in the bond markets, would precipitate a disorderly default. In this case, investors would lose everything they’ve loaned to Greece, and a much greater shock would ripple through the murky worlds of casino banking. The impact of enormous, compromised hedge fund bets and derivative trades on Greek debt can only be guessed at. Markets, seeing the culmination of the Greek fiasco, would likely dump Irish and Portuguese bonds, having lost faith in the bailout/austerity mix promoted by the powers-that-be. At this point, the markets would be expected to turn on Spain and Italy, also burdened with budget problems and suffering from the structural maladies of the Eurozone periphery. If Spain and Italy fell, the general European bailout mechanisms would be overwhelmed, and the entire Eurozone would enter into entirely unknowable depths.
(I apologise to Pete Baker for encroaching on one of his favoured topics. I’d begun by describing the Eurozone reaching a ‘confidence event horizon’, but I thought that would look like deliberate provocation. I’ll post some articles I’ve found useful below.)