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EU: heading towards the rocks? « Previous | |Next »
July 18, 2011

As is well known the EU dismissed the need for debt restructuring, preferring a bailout for Greece, Ireland and Portugal that piled new debt on top of an already unsustainable burden.

The bailouts were always primarily focused on protecting European banks from the effects of a default by borrowers such as Greece, Ireland and Portugal. The EU bailouts were a “get-out-of-jail” pass for poor lending decisions and they gave time to the weaker entities, be they countries or banks, to reduce their vulnerability.

PennIDebtcrisis.jpeg

There is no way that any of these nations would ever be able to service or repay current and projected levels of borrowing. Gross public debt in the most troubled economies will continue to increase as continued budget deficits will require financing and the service costs continue to increase.The countries have been losing the support of citizens who feel, rightly, that their sacrifices have done little to improve prospects for their country.

However, many Europeans are opposed to the eurozone becoming a “transfer union”.

Italy is now caught up in the politics of austerity, which means tax rises, higher health costs and lower pensions. This austerity package, like the others, is designed to keep the markets at bay. Will Italy be able to make both the sharp tightening and take measures to raise the productivity growth rate? Will Spain in the context of high interest rates?

It doesn't look likely. The regressive effects of the measures taken on the distribution of income and wealth; and the shrinking and weakening of the welfare state, while banks are bailed out at taxpayer expense advertises the clear rightwing agenda of the European authorities including the European Central Bank (ECB).

However, the risks to the banking sector arise from economic slowdown, rising unemployment and falling prices of commercial and residential property. It is the political right's determination to bail out private-sector banks, and to slash public spending to pay for it, that leaves the European Union navigating towards the rocks.

The debt burden for Greece, Ireland and Portugal looks unsustainable, rendering the countries insolvent. Maybe Italy as well. The pressure from the bond markets will build to ultimately restructure debt in some form at some stage. Default or restructuring of European debt, in all probability, will require State involvement in recapitalising these institutions. The political and economic attention will soon switch from bailouts of sovereign nations such as Greece to bailing out affected national banks.

It looks like crunch time is approaching for the EU--moving beyond debt relief to the creation of a Eurobond that will allow Greece, Portugal and Ireland to refinance their debt at low interest rates rather than at the high rates the market is charging (eg., over 17 percent for 10-year bonds for Greece).

| Posted by Gary Sauer-Thompson at 12:19 PM | | Comments (3)
Comments

Comments

Not just crunch time for the EU. There is also a crunch time for the US with its stagnant economy, unemployment remaining at above 9% and huge trade deficit, both because it imports too much and no longer produces enough that the rest of the world wants to buy.

The US government has already reached its $US14.3 trillion debt limit. There is the looming August 2 deadline for raising the US debt ceiling. Democrats and Republicans continue to bicker.

The Republicans demand deep spending cuts--#US 2.4trillion---excluding defence and without any tax increases as the condition for raising the country's borrowing limit and avoiding a debt default. The Republicans won control of the House of Representatives in November's election on a platform of promising no new taxes; and the Tea Party Republicans say that they have been told by God to pursue the holy mission of rolling back the insidious and demoralising advance of the federal government--to bring down Washington.

If the debt ceiling is not raised by August 2 the country could begin to miss payments, including to bondholders and those receiving social security benefits. Obama will be forced to decide which parts of the government to shut down and which to keep going using continuing tax revenues, as well as how much of those revenues to direct to meeting payments to foreign holders of US bonds.

US government bonds play a central role in financial markets, because they are considered the ultimate risk-free asset. If the US were to default on its debt, investors would sell off US bonds, pushing yields higher. Interest rates will shoot up and there will be a flight from the dollar. Banks, uncertain about their expected income from their holdings of US Treasury bonds and bills, will call in their loans.

China, the US's biggest creditor is publicly urging Washington to protect investors' interests.

Wall Street will keep the Republicans in line --ie., they back off.

The signs of visible decay in the US are noticeable. It is in economic decline and its polarised politics and gridlocked political system make it worse.

China is the rising power.