(EUROITALIA – ROMA, 07 NOVEMBRE 2011, di Alessandro Politi – www.europeancommongoods.org )
What does this crisis mean?
In times of emergency clarity of analysis and purpose is of paramount importance, especially when public leadership is so mediocre. In this first piece we will look first at the analysis framework at global level.
Forget about the markets. This is just a misleading shorthand expression that obscures a simple fact. The OECD has observed that, after decades of M&A, during this year 9 major economic actors control beyond 90% of the derivatives market (i.e. CDS, CDO, exchange rate swaps). They are:
- J.P Morgan, Bank of America-Merrill Lynch, Citibank, Goldman Sachs, HSBC USA;
- Deutsche Bank, UBS, Credit Suisse, BNP-Paribas.
This is an oligopolistic market where small stakeholders are just cannon fodder and governments have generally no sufficient financial muscle. These are the entities that make the market and break national financial reputations, economic fundamentals notwithstanding.
As everybody knows there are just three international rating agencies and one national:
- Moody’s, Standard&Poor’s, Fitch;
- and the Chinese Dagong.
Only a fool can imagine that these agencies and these nine global financial actors do not have significant interactions according to interests that are neither neutral nor transparent. The three Western rating agencies are called also the three sisters and they manage 85% of the market in what analysts like Frank Partnoy has called it a shared monopoly. The remaining 15% is the purview of Canadian, Cypriot and Japanese rating agencies.
Objective reporting and evaluating may happen for minor issues, but for the important ones it is well-nigh impossible, because the controlled companies are paying the controlling rating agencies. This is why the Chinese government has decided to create its own rating agency and has started fortifying its reputation by downgrading the US AAA credit rating.
This pseudo-market is far from rational: several analysts of all these entities, plus the ones of other institutional investors (hedge funds, pension funds etc.) are now so nervous that the main thing that they are watching is the quarterly national bond issues. They do not want to make errors, they do not want to be fired on the spot (hire and fire has perverse effects) and they are as short-sighted as their supervisors and managers. When the collective voting on a country rating in the board room starts from the juniors and the juniors signal thumbs down do you thing that along the line there is some senior with enough guts overturning the vote? Far too seldom.
On the other hand there is a fatal combination between the aforementioned behaviour and the fact that major investors have to use and to extract value from the massive liquidity injected by governments. This means that while a downgrading has a negative effect on minor investors who want to avoid the risk, it has a positive one for big ones who expect major short and long term gains from the failure or default of a country and withhold the money, increasing the pressure on the
country and facilitating the crisis.
Look at the countries. If you go back at the names we named you will see a predominance of US firms, two Swiss companies, one German and one French for the financial entities and two US and one half French for the rating houses (Fitch, which is also half UK plus the Chinese rating agencies. Put this simple question: “Why should they care about the tears-and-blood-cuts inflicted to European minor countries?”. They don’t in fact.
A sensible geoeconomic interpretation of this Euro mess is that the US-based financial interests, who are in a country of net importers and net borrowers, want more money after the 2006 crisis losses because they fear to lose the convenient platform of a rather dominant country whose dollar seigniorage is a force multiplier for their interests. The do not want an excessive depreciation of the dollar, but they definitely like the actual pressure on the Euro.
No matter if the banks colluded, misled investors and defrauded customers and governments, the real money will come from the cuts in the welfare of European countries, our welfare for which we paid with real money, not toxic papers. And the Swiss banks are in Europe, but not in the Euro zone. To make a long story short, the non-Euro actors are shorting the Euro, with China conveniently waiting on the river’s bank.
The first objection that could be put forward is that negative ratings have hit also the USA, but a rating is not the end of the world, especially if US-based actors can hugely profit and it is a convenient warning for Obama to stop trying to regulate the financial sector.
The second objection should be that also French and German banks are involved, but this is not relevant. France and Germany are the first big countries that violated the Stability Pact and are the two countries that now try to enforce new austerity and lending rules. They are leading the dances in Europe.
Follow the money. One would think that this economic and social massacre will in the end also damage France and Germany and this should bring to the senses also the respective élites. This is unlikely to happen. Both Sarkozy and Merkel are so myopic that, until it will be too late, they will be convinced that their countries will remain prominent, if not dominant, in a devastated continent, mirroring Britain’s special relationship folly.
Some more nuanced interpretation of the Franco-German position is that the governments are quite worried by what is happening but that they are incapable on one hand to break the dominant economic ideology, which is also widespread among their own electorates and on the other that they fear, like Obama, to lose the support of the financial élites. If this would be true, it would confirm that we are living with a generation of weak and indecisive politicians, who are even unable to tap into the support of their populations, because they are hostage of economic mechanisms that outstrip them.
But the most important thing is that their banks will firmly believe that they will prosper even without the Euro, because patriotic banks do not exist since their genetic map does not flag this sequence. As one small petty entrepreneur used to say “First come profits, then come wages”.
What are the proposals?
In the previous chapter we arrived at the conclusion that this crisis takes place in an oligopolistic pseudo-market where nine financial majors, colluding with the rating agencies, have decided to short the Euro for the prevalent advantage of US interests, while China takes an opportunistic position. These actors are banks and financial brokerage firms who are everything but patriotic, French and German banks included.
Today we will look at the proposed remedies, trying to comment them in their political essence and main effects.
- Cuts and austerity
- Budget balance in the constitution
- Collateral guarantee
- Selling gold reserves
- European Treasury
- Leave the Eurozone
- Smaller Eurozone
- Disband the Eurozone
- Not paying the debt
- Odious debt
1-4 Cuts, blood and tears
The first four measures revolve all around the basic concept that the countries that are heavily indebted have eventually to pay with the money of their citizens the sums they owe to the markets. The crudest form is to start repaying without borrowing other money, EFSF/EFSM (European Financial Stability Facility/ Mechanism) and Eurobonds are softer variants: you get money to repay part of the debt and interests, so that your national payments and cuts can be relatively more gradual.
EFSF/EFSM are limited liability and solidarity mechanisms where the money lent through the bonds sold by these bodies is backed by the European Central Bank and the European Commission, also using the EU budget as a collateral guarantee.
It means that the nine financial major actors we mentioned previously (banks and brokerage houses) and that are the exclusive movers of the CDS, CDO, ERS markets know that eventually the money they want back is secured by the whole EU but up to a certain amount and indirectly by the 17 Eurozone governments. If the EFSF may be leveraged by a Special Investment Vehicle without an explicit lender-of-last-resort guarantee by the European Central Bank and/or Eurobonds is still an open question. Moreover resorting to leverage to avoid the effects of excessive leverage may not be an easy proposition to sell to the public.
Eurobonds instead imply an unlimited support and liability by all the partners of the Euro, especially Germany, the strongest country within this zone and also within the smaller group that enjoys a AAA debt rating (just five countries: Austria, Finland, France, Germany, Netherlands).
It is true that the devil is in the details, many of them are feverishly negotiated in these days, but in any case we are moving in a purely financial dimension, where real people, societies, politics and cultures are at a discount. Is this a serious perspective?
Political bottom line: the EU is trebly split by the fault lines of Euro ins and outs; countries under debt pressure (PIIGS); triple AAA countries and the others. Enlarging the area of the Euro is out of question for the next five years at the very best and keeping the area together is problematic. This group of measures, as they are presently carried out, will have two possible outcomes. The first is that five Euro countries will be bled white, ceasing to be relevant markets for Austro-German exports and depressing the EU growth rates. Five other countries (or four if France will be downgraded) will keep their AAA and grow economically, while the remaining seven countries will orbit more heavily around this nucleus. To put it bluntly: the EU will stay together like Bosnia-Herzegovina today. And if you look at this PIGS debt chart, the dismembering along debt lines pulled by the strongest creditors appears very clearly.
The second outcome is that the Eurozone wil split and political Europe with it. There will be an Asterix-like Siegfried village, an enclave in a partitioned Europe, the BRIC being among the more credible candidates in taking slices. It will not be the Berlin Wall, everything will be done softly, but countries will lose sovereignty even if retaining their political systems under a Hong Kong rule. True, in the next decade the BRIC will be unable to take global leadership, but in the meantime they are perfectly capable to take advantage of the Western folly.
In a rational world it would be unthinkable to see Northern Europe renouncing to a vilified, but useful Southern Europe (a precious market and a useful wage compressing factor, just to mention two important aspects), the “turbocapitalist” ideology of financial markets is as rational as First World War generals imbued with Napoleonic doctrines.
They launched wave after wave of infantry against barbed wire, machine guns and artilleries exactly as today masses of savings and small savers are thrown into the furnace of austerity: a bloody, inglorious and useless massacre. In fact the Italian Finance minister, Mr. Tremonti, wants to erect a monument to the Italian saver, similar to those dedicated to the unfortunate soldiers butchered in the trenches. Woe to us!
5-7 Guarantees and Eurotreasury
Since one of the real causes of the crisis has also been the lack of budget, fiscal and economic convergence among the partner of the Euro, this group of measures tries to get out of the purely financial dimension. The first two (collaterals and selling gold reserves) are stopgaps. In the first instance it means that the trust in debtor countries is so low that European loans are equivalent to a pawnshop. Practical for the creditor and disastrous for global confidence, even if collaterals are invoked as necessary to contain the spreads between bonds. The second case is a desperate measure: Qadhafi tried to sell Libyan gold reserves still in his possession to finance his guerrilla, but Portugal or Greece are not in these dire straits. Moreover massive sales of gold are likely to depress the price of this metal and could cover only a small part of the debt.
Setting up a body, pro tempore called European Treasury, to co-ordinate fiscal and budget policies is a sensible move and an inevitable one if one wants to act on some root causes of the crisis. It is not impossible that, under duress, European governments might agree on this measure, but past experience is in general very disappointing regarding the effective power these bodies have.
8-10 Playing with the Eurozone
Leaving, downsizing or disbanding the Eurozone seem all sensible propositions in view of the crisis that Europe is undergoing. If five members are sea-sick and useless, why not throwing them over board? If the mast risks to crack, why not cutting the sails? If the ship has a huge leak, why not sinking it altogether? The three answers that mirror the respective proposals point all in the same direction and to the same logic: short-sightedness and lack in planning for the future.
Where will be growth and for whom will it be if the Eurozone loses one third of its partners? What will be the strategic impact of a smaller Eurozone? And what our individual and collective destiny if the Euro founders? If people are unable to provide convincing answers to these simple questions it means that these proposals are less good than they appear.
Who will really profit from all this? Not the Europeans, nor the governments, but speculators and foreigners, who do not give a fig for our interests yes, they will indeed.
11-12 This debt stinks
The last two ideas have in common the idea that the way the debt has been created and the methods used to pay back are deeply unjust and that the situation needs drastic measures. The most seductive is to follow the example of Argentina. In the late ’Nineties Argentina was submerged by debts and, after having tried the usual disastrous IMF austerity measures, the country decided to default at the beginning of 2002, that is not to pay $93 billion.
In the end 76% of the old bonds were re-negotiated into new ones for a nominal value that was 25-35% of the original one and with longer repayment terms, but until Buenos Aires did not start repaying these bonds in 2006, the country was shut out of international financial markets. Many bond holders (possessing 25% of the debt) did not accept these terms, but they were not considered.
Is it a practical proposition for the group of countries actually under pressure? No. because they would damage also their strongest Euro partners, further eroding an already shaky European solidarity, and they could not in the end devalue their own currency. It would be a waste of time, money and effort.
By the way, if Argentina continues its deficit spending, it risks to face a financial community that has learnt the lesson from the last, and perhaps unique successful default.
The idea of classifying these debts as odious debt is more complex, because odious debts are those contracted against the interest of the country and its citizens, without their consent and without full knowledge by the debtors. In practice who lends money to a country without transparency and strengthening its debt bond, with the complicity of the debtor government, is a loan shark and should be treated as such.
If the concept is applied indiscriminately or arbitrarily it will dent the reputation of countries and the confidence of the loaners, which is self defeating and less useful than directly nationalizing the holdings of these banks and brokers.
But a serious debt auditing in order to enforce political and financial transparency is useful for the indebted countries and for the best practices of lenders, in order to clean the market from unscrupulous operations, although it cannot be a stand-alone measure. In the next chapter we shall see how to combine different approaches for a solution benefiting the European general interest.
It is easy of course to criticise the ideas coming from other quarters, but sooner or later one must bite the bullet and do the homework: here are our proposals and their underlying logic.
First the rationale. We simply do not accept solutions that pretend to solve the issue by purely financial or economic means, we honestly believe that the future of our Europe (i.e. of women, man, children) is not a matter of numbers. It is instead a political choice, that is a choice about how to think one’s own life and hence a range of ways of life.
We want solutions that take into account the following aspects and can resumed in the WHOLE acronym:
- World, that is being locally responsible for the wider impact, because there is global common good;
- Humanity One-to-One, developing individuals and their collective relationships
- Liberation, a continuous process to reach new liberties, starting from the emancipation from commodified work, the obligation to consumption and unrestrained growth, all consequences of the idolatry of the market
- Equilibrium, a comprehensive human condition that allows for balanced growth, beyond just economic indicators.
Following this underpinning logic we propose the combined and joint use of the following instruments:
- debt auditing
- weeding out bad banks
- transforming banks
- international debt swapping
- debtors’ club
- European Common Goods Agency
- controlled default
- pop economy (share & swap)
These means are listed as a sequence but can be employed synergistically and, if necessary, in overlapping time phases.
The first thing is to conduct a transparent and impartial debt auditing because it is the essential precondition to understand who owes what to whom and, most important, why. At the end of the process, a number of debts may be classified as odious in form and/or substance, meaning that the reasons and modalities that lead to their formation was fraudulent and with no real advantage to the state and the communities.
This audit can be carried out at national, European and/or IMF level, but it must be thorough, transparent, ruthless and quick. It is a powerful signal to speculators that grey zones will not be tolerated, will be exposed and shall not be repaid.
The normal objection is that there are no established rules covering the structure of national budgets, so that it is difficult to establish criteria for the debt auditing. But we are in exceptional times and if this means that politics have to work in a de jure condendo area, where new rules have to be set, let it be. Financial capitalism has established de facto, without any democratic consent or control, lots of rules for its exclusive advantage, so political and social bodies should have no legalistic qualms. We want our money back.
Weeding out bad banks
Step two, bad banks have to fail in a more or less controlled way, safeguarding in first instance collective and public interests. Pumping money into companies that have already wasted a lot of resources simply does not make sense, even more because a University of Michigan study has shown that bailed out banks have continued to make risky investments. It is of course a scalpel that must be used with wisdom, but bad banks are cancer and bad managers are economy polluters. Full stop.
There are instances where other techniques can be more cost/effective than letting fail. Banks that are in critical conditions could be either nationalised (if the sunk costs are acceptable at political and budgetary level) or recapitalised but following conditionality clauses that induce the bank in investing for 10 years in real economy projects and not in financial speculations. Another area that could be considered transforming regards shadow finance, that acts today in a grey zone out of any reasonable control and safeguard.
International debt swapping
This measure is, from a practical point of view, of limited usefulness, but it may have a further psychological effect on the “markets” and on sovereign creditors. These creditors, for the sake of their own self-interest (the preservation of a consumer base in stabilised markets), may agree to swap bonds or other forms of debt with their debtors.
It amounts to waiving off a certain amount of debts that are already de facto irrecoverable and with an irrelevant interest rate, but, once again, it allows a transparent and orderly definition of debts, neutralising the obvious market manipulations that we are witnessing against the Euro today – and other economies tomorrow. This is something that is already practiced.
Debtors’ club a.k.a intelligent solidarity
It is unbelievable, but it is true: European solidarity is sorely missing from the debate. One could imagine that, when money is at stake we revert at the homo homini lupus stage between have and have nots. Yet it is even more incredible that common sense literally is missing even among actors that have everything to gain from teaming up. The PIIGS, instead of being weak divided and insulted, could create a debtors’ club in order to negotiate better credit terms just because together they are too big to fail.
European Common Goods Agency
This is the central part of our proposal. Why on Earth European countries should sell around their assets to make money to repay dubious financial debt recovery schemes? Why some European countries like Finland should be alone in asking collaterals for their contribution to the stabilisation of weaker economies?
The essential political point is simple: united we stand, divided we fall.
If we foolishly play with European solidarity and integration, we are playing with our mutual assured destruction, partition and subjugation. A soft one, but nonetheless a real one. And frankly a master is a master, no matter his birth or skin colour.
We are proposing to create a European Common Goods Agency where the assets of indebted countries are transparently, efficiently and equitably managed until the countries in distress can reclaim them.
This agency shall be public or predominantly public and must take decisions that couple industrial policy choices, good management and the public interest of European people, not just countries. It will be the collective guarantee for the support that only Europeans can realistically have the interest to give each other.
The political credibility of the public nature of this agency should be reinforced by popular shareholding in the form of Euroshares with specific provisions safeguarding against any form of raid undermining its European and public character.
Purely financial solutions will not solve a problem that consists in the lack of political direction and social vision at continental level. This is a choice of political economy, it is consistent with the WHOLE logic and ideology we have exposed before and it is the best guarantee that we can offer to international “markets” because it shows our common resolve in pulling us out by our combined effort.
It is a heavy political challenge, but freedom needs that we Europeans face this battle for Europe’s political and social integration and win it. If we win we will establish an example for the freedom of all the world, if we defeat ourselves we will just anticipate the catastrophe of the rest of the globe.
We believe that is important that debts are honoured, because this is one of the basic measures of trust in any global system, but we disagree strongly with any old or new version of debt bondage.
Since, until 2006, the classic economic consensus was that debts had not to be repaid, but just rolled with new and more sophisticated ways, we draw the consequence that debts are not an absolute entity, but they can be negotiated. Today controlled defaults are not considered an unlikely event.
If some country wants to play hard, there is no problem, but just a prisoner’s dilemma: shall we co-operate and bargain or shall we die together? When a continent is faced with debt bondage, it has not much to lose.
The important thing is that we do not allow single countries to default, but we negotiate the default as the whole Euro zone, and this is something with evident advantages precisely for the AAA countries. By the way these countries, instead of dreaming about a suicidal NEURO (New Euro), could already work to create a common fiscal area that would re-start the enlargement process on a new basis.
Economies do not fall from the sky, they are the product of concrete social, cultural and political interactions. This turbo-capitalist economy is ending its cycle after 30 years and it is time to imagine a new world, where brute property is overcome by the concepts and practices of sharing and swapping, called also Access Economy.
It is not the immediate solution to this crisis, the Thermopylae of our times, but it is the perspective of a new, WHOLE society and way of life.
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