Tag Archives: default

Greece could break Austerity – if Tsipras has the courage

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Greek Prime Minister Alexis Tsipras has been meeting German Chancellor Angela Merkel to discuss his country’s economic strategy and debt repayments.

The point of Austerity in Greece was never to help that country pay off its debts; it was to create a permanent debt that Greece would never be able to pay off.

Under a submissive government, this was feasible – as it has been in many countries in what is laughably called the Developing World – but now Syriza has taken control and Alexis Tsipras could have the Troika (European Central Bank, IMF and the European Union – the three organisations that have been lending money to the Greek government) over a barrel.

The plan was to add Greece to the list of nations running a ‘zombie economy’ in the service of neoliberal corporate interests, rather than the well-being of its own citizens.

The Troika’s settlement with Greece was similar to that carved out by the western banks with the Developing World – the creation of a Debt Trap.

Western banks indulged in a lending spree across the Developing World during the latter half of the 20th century but the oil shocks of the 1970s created a domino effect of economic disaster which ended up putting most of Africa and Latin America on the verge of bankruptcy.

They could not be allowed to default on their debts. This would have allowed those countries to recover but would have harmed the western world – both economically and politically, as its influence would have faded.

So the IMF stepped in with ‘bridging loans’, ensuring that the original debts could be serviced – but there was a cost. In return for these loans, the IMF created a mechanism called the Structural Adjustment Programme (SAP – an appropriate acronym as it has sapped away a huge amount of money from every nation where it has been used).

The SAP set conditions under which debtor nations were provided the bridging loans: The sale of nationalised industries and resources – mostly to foreign-owned corporations and governments; the removal of capital controls on money flowing into and out of these nations; allowing the IMF to dictate the level of public spending; prioritising debt repayment and corporate welfare over infrastructure investment and human welfare; and suppression of wages and restrictions on trade unions.*

This is more or less the deal that Greece was offered.

The result has been clear – as Professor Simon Wren-Lewis pointed out in his Mainly Macro blog yesterday: “Austerity… is of course why Greek GDP has fallen by 25 per cent.”

At the moment, the Troika is threatening Tsipras with the loss of further loans, as he has stated that he intends to reverse the privatisations that have been forced on Greece over the last few years, raise the minimum wage, and increase public spending. These are measures designed to reverse the Troika-engineered Greek economic collapse and make it possible to start paying off the huge debt the country has built up.

Tsipras wants that money because he wants his economic recovery to take place in an orderly way, so he has agreed not to roll back the privatisations that have already taken place but to review those that haven’t; to introduce collective wage-bargaining, stopping short of raising the minimum wage but encouraging non-statutory wage rises; and tackling the humanitarian crisis with free medical care for the uninsured unemployed, along with housing guarantees, at no extra cost to the public purse.

But here’s the thing: Greece can manage without that loan money, if it has to. Yes, there will be a great deal of pain, but Tsipras effectively has the Troika over a barrel. The promise of some money is better than no money. All he has to do is hold his nerve and point out that what the Troika is doing is exactly the opposite of what it is supposed to be doing.

By funding Greece during Austerity, the Troika was perpetuating its debt, rather than helping end that debt; now it is actively fighting a plan that will genuinely help end that debt. And the world can see this.

It is an important lesson for the UK, as well. This country didn’t need the Troika to enforce privatisation, wage suppression, public spending restrictions and so on because we have a neoliberal Conservative-led government that is already avid for those things.

Our economy has suffered badly – and our people have suffered brutally – because of these choices by rich Conservatives who have not had to bear any of the pain themselves.

For no reason.

It seems possible that both Greece and the UK could probably take a leaf out of 1920s German chancellor Gustav Streseman’s book – re-industrialisation and (in Greece’s case) renegotiation of loans and an exit from the Euro in order to create a new currency. Whether that is practical is best left to economists who have more expertise than a layman like this writer.

What is clear is that Austerity – and its champions – are bad for everybody’s national interest.

*Austerity – The Demolition of the Welfare State and the Rise of the Zombie Economy, Kerry-Anne Mendoza, published by New Internationalist. Pick up a copy now!

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Debt restructuring: a proposed principle – Mainly Macro

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With Greece under Syriza about to enter negotiations with the Troika, there has been much discussion of what might happen, and what should happen. This post is in the ‘should’ category, writes Professor Simon Wren-Lewis in Mainly Macro.

In the past I have argued that the Troika should welcome the opportunity to put right earlier mistakes. There should be a large amount of guilt, or at least regret, on their side… to show that I’m not living in a dreamland, read this FT piece by Reza Moghadam, the former head of the European Division of the IMF.

In reality debt restructuring is a bargaining game, but I want to suggest a general principle that any agreement should hold to. That principle is that there should be no significant increase in unemployment above its natural rate (let’s call this excess unemployment) as a direct result of having to pay interest on any government debt.

This is why the Troika should feel guilty, because by not allowing Greece to default on all its debt back in 2010 it helped create a situation where over half young people in Greece are unemployed… As I have argued in the past in the context of Latvia, the efficient way to restore competitiveness is to have small but persistent excess unemployment: a ‘short sharp shock’ is much more costly. The Troika imposed much too much austerity on Greece in a futile effort to avoid full and early default.

The process transferred the ownership of the remaining Greek government debt from the private sector to the public sector – other Eurozone governments and the IMF. The transfer to other European governments was wrong in two respects. First, it was another example of governments bailing out their own banks and other financial institutions with no costs to those institutions. Second, it made any subsequent restructuring of Greek debt much more difficult politically. If there had been full and immediate default there would have still been need for additional lending to Greece to give them time to adjust their public finances and avoid a large increase in unemployment, but that is what the IMF is for. If the Troika had not been involved, the IMF may well have gone for early and complete default.

So much for the past and guilt. What about what should happen now? The priority is for Greece to reduce unemployment as quickly as possible.

Read the rest of this article on Mainly Macro.

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‘Barefoot banking’ to support people on the edge

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This is a piece I wrote for the local credit union in my part of Powys, following on from the Archbishop of Canterbury’s vow that the Church of England would fight payday lenders. Quite right – usury is an evil that religious organisations traditionally oppose. I’m publishing it here because the main information is relevant nationwide (and also because today appears to be quite slow for political news).

Credit unions must rise to the challenge created by the Archbishop of Canterbury’s stand against payday lenders, according to a leading figure in a Mid Wales organisation.

Richard Bramhall of Red Kite Credit Union said the main issue facing credit unions was how to bring affordable credit to “people on the edge”.

Last month, the Most Reverend Justin Welby announced that he planned to help community-based credit unions by allowing them to use Church of England premises as bases, to put firms like Wonga.com, which charge huge amounts of interest for their loans, out of business.

“His idea is very constructive,” said Mr Bramhall.

“Instant credit is a difficult sector to service because of high rates of defaulting. Payday lenders, door-step lenders and loan sharks – and to a lesser extent banks and credit card companies – answer the threat of bad debt by charging monstrous interest rates.

The Credit Union approach is responsible lending, careful interviews, getting guarantors where possible and working with the member to develop financial competence.

“The ethos always was to save; build a relationship with the credit union through saving – becoming a shareholder – and borrowing using the shareholding as security. They pay low interest and benefit by keeping and growing their shares.

“We do not want to lend at high rates,” he said. “Our standard rate is 12.68 per cent, or one per cent per month. If you borrowed £100 over a year and paid it back without interruptions, it would cost you £6.60 in interest, with no extra charges and no penalty for early repayment.”

But he warned: “The population density here is so low and the conceivable number of members so small that, even if everyone joined, our income from loan interest would not be enough to pay for bank-type premises or employees.”

The Credit Union’s solution is what Mr Bramhall calls ‘barefoot banking’. He said “The Herb Garden Café, in Llandrindod Wells, is an example. You can access credit union services six days a week, 12 hours a day – not just when we’re open but any time we’re in the building. People can pick up leaflets, ask about the credit union, leave messages, make payments and collect cheques. It costs the café nothing.

“If people want to help, they could develop the sort of access point we have here. Our greatest need is for self-motivating volunteers and casual drop-in service points in shops, churches, cafes and even private homes all over Radnorshire and north Brecknock.”

He added that credit unions also needed to establish themselves in schools, teaching responsible money management to youngsters.