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Looming European Debt Wars?
Some
excellent weekend reading from Michael Hudsoon who writes in
counterpunch on the looming
European debt wars:
Government debt in Greece is just
the first in a series of European debt bombs that are set to explode.
The mortgage debts in post-Soviet economies and Iceland are more
explosive. Although these countries are not in the Eurozone, most of
their debts are denominated in euros. Some 87 per cent of Latvia’s
debts are in euros or other foreign currencies, and are owed mainly to
Swedish banks, while Hungary and Romania owe euro-debts mainly to
Austrian banks. So their government borrowing by non-euro members has
been to support exchange rates to pay these private-sector debts to
foreign banks, not to finance a domestic budget deficit as in Greece.
All these debts are unpayably high because most of
these countries are running deepening trade deficits and are sinking
into depression. Now that real estate prices are plunging, trade
deficits are no longer financed by an inflow of foreign-currency
mortgage lending and property buyouts. There is no visible means of
support to stabilize currencies (e.g., healthy economies).
For the past year these
countries have supported their exchange rates by borrowing from the EU
and IMF. The terms of this borrowing are politically unsustainable:
sharp public sector budget cuts, higher tax rates on already over-taxed
labor, and austerity plans that shrink economies and drive more labor
to emigrate.
Bankers in Sweden and Austria,
Germany and Britain are about to discover that extending credit to
nations that can’t (or won’t) pay may be their problem, not that of
their debtors. No one wants to accept the fact that debts that can’t be
paid, won’t be. Someone must bear the cost as debts go into default or
are written down, to be paid in sharply depreciated currencies, but
many legal experts find debt agreements calling for repayment in euros
unenforceable. Every sovereign nation has the right to legislate its
own debt terms, and the coming currency re-alignments and debt
write-downs will be much more than mere “haircuts.”
There is no point in devaluing, unless “to excess” –
that is, by enough to actually change trade and production patterns.
That is why Franklin Roosevelt devalued the US dollar by 41 per cent
against gold in 1933, raising its official price from $20 to $35 an
ounce. And to avoid raising the U.S. debt burden proportionally, he
annulled the “gold clause” indexing payment of bank loans to the price
of gold. This is where the political fight will occur today – over the
payment of debt in currencies that are devalued.
Another byproduct of the Great Depression in the United
States and Canada was to free mortgage debtors from personal liability,
making it possible to recover from bankruptcy. Foreclosing banks can
take possession of collateral real estate, but do not have any further
claim on the mortgagees. This practice – grounded in common law – shows
how North America has freed itself from the legacy of feudal-style
creditor power and the debtors’ prisons that made earlier European debt
laws so harsh.
The
question is, who will bear the loss? Keeping debts denominated in
euros would bankrupt much local business and real estate. Conversely,
re-denominating these debts in local depreciated currency will wipe out
the capital of many euro-based banks. But these banks are foreigners,
after all – and in the end, governments must represent their own home
electorates. Foreign banks do not vote.
Foreign
dollar holders have lost 29/30th of the gold value of their holdings
since the United States stopped settling its balance-of-payments
deficits in gold in 1971. They now receive less than a thirtieth of
this, as the price has risen to $1,100 an ounce. If the world can take
that, why shouldn’t it take the coming European debt write-downs in
stride?
There is growing recognition that the
post-Soviet economies were structured from the start to benefit foreign
interests, not local economies. For example, Latvian labor is taxed at
over 50 per cent (labor, employer, and social tax) – so high as to
make it noncompetitive, while property taxes are less than 1 per cent,
providing an incentive toward rampant speculation. This skewed tax
philosophy made the “Baltic Tigers” and central Europe prime loan
markets for Swedish and Austrian banks, but their labor could not find
well-paying work at home. Nothing like this (or their abysmal workplace
protection laws) is found in the Western European, North American or
Asian economies.
It seems unreasonable and
unrealistic to expect that large sectors of the New European population
can be made subject to salary garnishment throughout their lives,
reducing them to a lifetime of debt peonage. Future relations between
Old and New Europe will depend on the Eurozone’s willingness to
re-design the post-Soviet economies on more solvent lines – with more
productive credit and a less rentier-biased tax system that
promotes employment rather than asset-price inflation that drives labor
to emigrate. In addition to currency realignments to deal with
unaffordable debt, the indicated line of solution for these countries
is a major shift of taxes off labor onto land, making them more like
Western Europe. There is no just alternative. Otherwise, the age-old
conflict-of-interest between creditors and debtors threatens to split
Europe into opposing political camps, with Iceland the dress rehearsal.
Until this debt problem is resolved – and the
only way to resolve it is to negotiate a debt write-off – European
expansion (the absorption of New Europe into Old Europe) seems over.
But the transition to this future solution will not be easy. Financial
interests still wield dominant power over the EU, and will resist the
inevitable. Gordon Brown already has shown his colors in his threats
against Iceland to illegally and improperly use the IMF as a collection
agent for debts that Iceland doesn’t legally owe, and to blackball
Icelandic membership in the EU.
Confronted with Brown’s bullying – and that of Britain’s
Dutch poodles – 97 per cent of Icelandic voters opposed the debt
settlement that Britain and the Netherlands sought to force down the
throat of Allthing members last month. This high a vote has not been
seen in the world since the old Stalinist era.
It
is only a foretaste. The choice that Europe ends up making will likely
drive millions into the streets. Political and economic alliances will
shift, currencies will crumble and governments will fall. The European
Union and indeed, the international financial system will change in
ways yet to be seen. This will be especially the case if nations adopt
the Argentina model and refuse to make payment until steep discounts
are made.
Paying in euros – for real estate and
personal income streams in negative equity, where the debts exceed the
current value of income flows available to pay mortgages or for that
matter, personal debts – is impossible for nations that hope to
maintain a modicum of civil society. IMF and EU-style “austerity plans”
are nothing but technocratic jargon for the life-shortening impact of
gutting income, social services, spending on health on hospitals,
education and other basic needs, and selling off public infrastructure
for buyers to turn nations into “tollbooth economies” where everyone is
obliged to pay access prices for roads, education, medical care and
other costs of living and doing business that have long been subsidized
by progressive taxation in North America and Western Europe.
The battle lines are being drawn regarding how private
and public debts are to be repaid. For nations that balk at repayment
in euros, the creditor nations have their “muscle” waiting in the
wings: the credit rating agencies. At the first sign a nation is
balking in paying in hard currency, or even at the first hint of it
questioning a foreign debt as improper, the agencies will move in to
reduce a nation’s credit rating. This will increase the cost of
borrowing and threaten to paralyze the economy by starving it for
credit.
The most recent shot was fired n April 6
when Moody’s downgraded Iceland’s debt from stable to negative.
“Moody’s acknowledged that Iceland might still achieve a better deal in
renewed negotiations, but said the current uncertainty was hurting the
country’s short-term economic and financial prospects.”
The fight is on. It should be an interesting decade.
The fight is on as debt problems
come home to roost. And this includes the pension deficits which are
exploding everywhere, including in the United States.
Michael Hudson was recently interviewed by Max Keiser.
Below, you can see part 3 & 4 of the show, which include a
discussion on health care reform in the US being a giveaway to private
health insurers and how governments are committing economic suicide by
piling on debt and adopting austerity measures. An absolute must watch.
Part 3:
Part 4:
»
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Thanks Leo, good stuff.
- when Michael Hudson speaks, I listen.
"sharp public sector budget cuts, higher tax rates on already over-taxed labor, and austerity plans that shrink economies and drive more labor to emigrate."
to where?
"Another byproduct of the Great Depression in the United States and Canada was to free mortgage debtors from personal liability, making it possible to recover from bankruptcy. Foreclosing banks can take possession of collateral real estate, but do not have any further claim on the mortgagees. This practice – grounded in common law – shows how North America has freed itself from the legacy of feudal-style creditor power and the debtors’ prisons that made earlier European debt laws so harsh."
This is what I am worried about. If you have a mortgage, it appears that there is already a process in place to allow banks to take your property and not accept any payment you may wish to make (in a devalued currency). I believe this is what we are headed for in the US.
Michael, Michael, Michael, was not this the plan all along? How can anyone examine the 5,000+ year old history of money-credit systems and not conclude that systemic failure is a design feature?
To accept anything other than intent, one would have to embrace "hoocoodanode". Now how can that be seeing that running any series of exponential functions always produces the same result?
Thus, we are left to conclude that the end game (riots, social chaos, war, etc) we see playing out is in fact part of the overall process. A process, by the way, which has played out the exact same way for the aforementioned 5,000 years.
So the real question remains two-fold: (a) will they get away with it? and (b) will they be able to reimpose the same money-credit system after the reset? My interest, and I would hope that other ZHers are waking up to the task at hand, is making sure both a & b are false.
long positions in defense-oriented companies are probably highly favorable right now....
I think when it is reset that they will make themselves out to be heroes and martyrs. They tried to save the world, but failed with their valiant efforts. With new ideas and technology it will be an excellent opportunity to implement a new type of money system with some type of credits in a computer system, so the money elite and their infrastructure(banks and corporations) are not replaced but will be able to continue. The whole system is already a facade of imaginary money being tranferred around so this isn't going to change things. This credit system will be based on your contribution to society basically the same as it is today, but without the physical cash, and credits will take their place. They will be able to be portrayed as champions to both sides - the poor and elderly will be able to have a better existence and the rich will be able to continue their domination. It will be portrayed as a utopian society where in reality they will have greater control. They will be able to control the credits much easier than physical cash because it will be computerized. No slipping through the system.
What would they need to happen in order for this to be implemented? A global financial crisis where the worlds economies are all intertwined.
why cant there be a global barter system where our pay is denominated in units of the products we help to create?
If you work for Crayola, you get paid in crayons.
If you work for the electrical utility you get paid in kWH.
Let individuals buy his good and services directly from the employees of the producer.
Exchange rates would be based on instantaneous demand. The market "a global form of EBAY" would arbitrage all transactions to fair market value.
Then the financial system would be based on value, not debt.
You'd only spend what you made. No bank!!!
Oh yeah, speculators would starve to death. :-)
Hudson mentions that since the 1967 junta wealthy Greeks have not been paying their share of taxes--does anyone have bibliography on this subject?
Anybody actually know where the reset button is on our economy?
All I can see it this big red flashing thing that says "DO NOT PUSH". But it does have this funny way of flashing. I wonder what would...
neah...
or maybe....
RELAX! We still got months before the European system colapses.
That give us another few years to think about a new way out strategy ;)
Only partially true regarding personal liability on mortgages; some states still have recourse against the borrower, some "non-recourse" states do not. You had better know which one your property occupies.
Soon to be: Looming European War Debts
Michael Hudson: good insights.
Leo: liquidity tsunami, "next jobs report will stun to the upside," and Chinese solars. By the way, Leo, employment still dragging here in SE PA, and there are no signs of recovery, only stabilizaztion, for now. As interest rates begin to rise, this will serve the same function as the growing percentage of ethanol in a batch of beer, killing off the yeast once it reaches a certain level, and down we will go again. There is no robust recovery inside the box to absorb interest rates hikes. No way, no how.
Just sayin'
Euro-Subprime time
I think the "reset button" that Secretary Clinton present to Russian President Medvedev was more about resetting the world economy than it was about resetting Russian-American relations. Repudiate all the debt and begin anew!
If you do that, no one will learn anything.
What is there to learn?
How to foment civil unrest?
I think that lesson has been learned several times over.
The system of Sovereign Finance is exponentially failing,
and Sovereign Debts have a tradition of being defaulted on... watch as the rolling snowball becomes a global avalanche.
Although, if you can see some positive outcome to all of this, I would be most interested in reading what that is.
Welcome to WWIII.
Great article.
Part 4 video describes exactlly what happened in Greece for almost 30 years. Socialists stole all the money the EU gave for reconstruction and progress after greece joined EU in 1981. The main moto was "change, right here, right now", "never again right-wing politics"(capitalism is a bad thing), "socialism with a human face", "first the citizen", "money do exist" and they used the same politics as in Latin America. All politicians since 1981 use the same rhetoric. A kind of Europian Peronism. They created no capital at all. Only a few "friends" or members of the socialist party created wealth out of nowhere. Socialist also devaluated profitable corporations of the state and after that sold them. Other companies were used as a vessel for propaganda an also to provide work to thousands of members of the party. Money EU gave were spend for political friends to bailout devaluated companies again and to create mansions busting corruption. Amoralism and nepotism became the main characteristic of life in greece. If someone has to improve his life he must also be connected with politicians and must beg for work so that have a typicall life.
That's what Greece is. And now the socialists that declare compete change in everything, the same time call the IMF using the propaganda that IMF is a charity fund!
Video 4 is a perfect encapsulation, in 4 minutes, of the banking oligarchy's Modus Operandi: put a government face on looting.
So Leo, in Canada if your brother were to have a mysterious lesion on his arm that was not healing after a couple or three weeks; how many days would it take before he could see a dermatologist?
Also, thanks for the link a good interview.
My brother and father are psychiatrists so it wouldn't take them long to see a specialist. Doctors do not make other doctors wait long. The normal population will take anywhere between a month to six months depending on the supply of specialists in the region they live.
Thank you Leo ;
Great Article.
Nice work , Leo.
Very good article.
Before we embarked on the crazy scheme to recapitalie the banks via the "markets" this is exactly what I predicted. although I didn't know the particular countries. Of course it wasn't seen by Bernanke et al. Now he says the financial crisis is largely behind us. I say we are just now at the start of phase two.
Good article, thanks.
If the Greeks default, the euro will assume a long term upward trajectory. That would likely result in defaults in Spain and Italy as the Euro increases in strength. It is reasonable to expect the United States to pull back from the current printing press as domestic politics will follow the German lead.
Everyone is looking for value, be it gold, commodities, or stable wealth holding currency. The Germans understand this. The Greeks et al don't.
No one knows how it will play out for sure or the time frame but my guess is the Euro will be gone by 2014.
Bloomberg reports that Germany is prepared to give Greece loans at below-market interest rates, dropping its opposition to aid subsidies in a compromise over the terms of a lifeline for the debt-stricken nation, a European government official said.
Leo,
great article with somewhat frightening implications.
Any official bailout will be problematic since the EU treaties contain an explicit no-bailout clause. A bailout will be challenged by the German supreme court and will be met with public opposition.
Some developments look to me similar to the time after WW 1 with extremists in parliaments and unstable governments, see Hungary for example.
The first round of the conflict will be who bears the losses of failed economic policy and the second round will be to find a workable system.
What are the Germans going to do Leo, promise to roll over the Greek holdings of its central bank, commercial & landesbanks from their current 3.5-5% at 6%?
Hopefully my fellow citizens are stating their anger in the provincial election on May 9 and voting exclusively for parties not yet in the parliament.
On second thaught that is as likely as Wall Street becoming honest.
Uh, yes.