Greece will default soon

Greece will Default soon either under the coercion of the European Union; involuntary or through the will of the people argues Ralph Blake.

It is clear to both financial experts and lay people –that the punishment being inflicted on Greece is not sustainable. Only the Greek government, the European Union (EU) leaders, the International Monetary Fund (IMF) and the European Central Bank (ECB) continue to hold their heads in the sand and demand more blood from the Greek people.

At some point soon there will be a default (non-payment of interest on a loan or of a loan itself) on Greece’s debt. The best case scenario is that it is under the control and direction of the Greek people and not the bankers and politicians.

We can see that austerity does not work. The cuts in jobs, wages and services coupled with taxes on the poor sections of society and the goods they must buy has pushed the Greek economy into a spiral of decline. In the 2010 and 2011 the economy will have declined by a combined 10% when most economies are showing a recovery albeit modest. This has the effect of making the deficit wider between what Greece spends and the taxes it collects as unemployment rises leading to tax revenue losses and increased social security payments while spending also declines.

This simply leads to more debt with higher rates of interest and more austerity demanded by the EU, ECB and IMF.  These institutions and membership of the Euro are simply mechanism for extracting money from the Greek people to pay off the loans owed to Europe’s banks. Rather than bailing out the Greek economy and the Greek people they are bailouts of the financial system.

This is because while Greece on its own– it has about $130 billion of loans to European banks and there is some $40 billion of insurance on these loans sold by US and UK banks – cannot bring the world financial system down they fear a domino effect. Ireland, Portugal and Spain have public and private loans of $463 billion, $194 billion and $642 billion respectively to European banks.  And on top of this is hundreds of billions of US dollars of insurance on these loans sold by US and UK banks. All these countries are likely to follow a similar cycle to Greece and defaults across them would bring the world financial system to a halt. The Lehman’s losses were $631 billion in total so that you can see we are looking at something potentially bigger than Lehman’s and the deep recession that followed its collapse.

While the Greek government passed the austerity budget and privatisation bills they are likely to be unable to implement them fully.  The Greek people will not let them make all the cuts and tax rises. Greece too will not be able to raise the Euro 50 billion in privatising its national assets.  Most analysts think this far too optimistic – who would buy a business that operates in an economy in decline.

This means that when the EU/IMF/ECB make their next quarterly visit to  Greece in September to see if Greece has met its “targets” for more loans to be released to pay the banks back they will likely be failed.  Greece will be faced with an involuntary default.

Even before then there is likely to be a hick up as a new loan of up to $175 billion to Greece  must be found to cover its financing till 2014 – for pay all its interest on loans , repay loans and take out new loans.

Some northern countries – Germany, Netherlands and Finland – are demanding that the private bond holders of Greek government debt must take a loss. But this would spark losses across the world from banks that hold Greek government debt and banks who have sold insurance on it.

These countries are demanding Euro 30 billion from the banks and the banks have hatched a plan to do this that they think avoids a loss. But the credit rating agencies think this will qualify as loss making and the plan could spark a reduction of Greece’s credit rating to junk status sparking off insurance and bonds losses to banks. Even then not enough banks are likely to participate in the scheme to reach the Euro 30 billion levels demanded.

If the default happens involuntary it would be a complete disaster for the Greek people – the biggest holders of Greek government debt are the Greek banks and the Greek pension funds.  Their banking system would be frozen with huge losses and their retirement provision decimated. That is why they must take decisive action to avoid this.

A plan to avert this disaster would be:

•         Ring fence the financial system by taking it under public control and ownership

–       Cancel internally held public debt which is the majority of the public debt

•        A debt and wealth audit

•        Default where it is determined after the audit that debt is not sustainable

–       With an order of default least worthy (banks first and pension funds last)

•        Provide alternative retirement through nationalising  the pension system and the free provision of all basis needs after a certain age

•        The last two demands will offset losses from defaults to a country’s banks and pension funds as most public debt is  held by domestically

–       Leaving the smaller proportion of the debt owed to foreign banks, pension & insurance funds

•        A tax on the rich and wealthy and corporations

•        An end to corruption and tax avoidance

•        A sharing of the work equally between all those who want to work

•        Building a sustainable green economy based on meeting people’s needs

•        leaving the Euro :

–       As a means to putting an end to the austerity attacks

–       Restoring competiveness and boosting exports

–       Lifting the burden of debt repayments

–       Allow the economy to recover and develop by orientating demand towards the internal production that meets peoples’ needs in a green sustainable way, this would with the boost in exports offset the inflationary pressure of devaluation.

Just cancelling the debt repayments and clamping down on tax avoidance and corruption would alone eliminate the deficit at a stroke.  This programme if implemented by the Greek people would inspire all of us across Europe who are fighting the same type of austerity attacks. It would be the start of the building of a different type of society – one determined by the people for the people which puts an end to the greed of the bankers and politicians.

 

The views expressed are the author’s own.