By Michael Hudson
U.S. and foreign stock
markets continue to zigzag wildly in response to expectations about whether the
euro can survive, in the face of populations suffering under neoliberal
austerity policies being imposed on Ireland, Greece, Spain, Italy, etc. Here’s
the story that I’m being told by Europeans regarding the recent turmoil in
Greece and other European debtor and budget-deficit economies. (The details are
not out, as the negotiations have been handled in utter secrecy. So what
follows is a reconstruction.)
In autumn 2012, it became apparent
that Greece could not roll over its public debt. The EU concluded that debts
had to be written down by 50 percent. The alternative was outright default on
all debt. So basically, the solution for Greece reflected what had happened to
Latin American debt in the 1980s, when governments replaced existing debts and
bank loans with Brady bonds, named for Reagan Treasury Secretary Nicolas F.
Brady. These bonds had a lower principal, but at least their payment was deemed
secure. And indeed, their payments were made.
This write-down seemed radical, but
European banks already had hedged their bets and taken out default insurance.
U.S. banks were the counterparties to much of this insurance.
In December (?) 2011, a quarter
century after Mr. Brady, Mr. Obama’s Secretary Geithner went to Europe met with
EU leaders to demand that Greece make the write-downs voluntary on the part of
banks and creditors. He explained that U.S. banks had bet that Greece would not
default – and their net worth position was so shaky that if they had to pay on
their bad gambles, they would go broke.
As German bankers have described the
situation to me, Mr. Geithner said he would kill the European banks and
economies if they did not agree to take it on the chin and suffer the losses
themselves – so that U.S. banks would not have to pay off on the collateralized
default swaps (CDOs) and other gambles for which they had collected billions of
dollars.
Europeans were enraged. But Mr.
Geithner made a deal. OK, he finally agreed: The White House would indeed
permit Greece to default. But America needed time.
He agreed to open a credit line from
the Federal Reserve Bank to the European Central Bank (ECB). The Fed would
provide the money to lend to banks during the interim when European government
finances faltered. The banks would be given time to unwind their default
guarantees. In the end, the ECB would be the creditor. It – and presumably the
Fed – would bear the losses, “at taxpayer expense.” The U.S. banks (and
probably the European ones too) can avoid taking a loss that would wipe out
their net worth.
What really are the details? What we
do know is that U.S. banks are pulling bank their credit lines to European
banks and other borrowers as the old ones expire. The ECB is stepping in to
fill the gap. This is called ‘providing liquidity,’ but it seems more to be a
case of providing solvency for a basically insolvent situation. A debt that
can’t be paid, won’t be, after all.
Geithner’s idea is that what worked
before will work again. When the Federal Reserve or Treasury picks up a bank
loss, they simply print government debt or open a Federal Reserve bank deposit
for the banks. The public doesn’t view this as being as blatant as simply
handing out money. The government says it is “saving the financial system,”
without spelling out the cost at “taxpayer expense” (not that of the banks!).
It’s a giveaway.
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