Who will pay the cost of Europe’s defaults?

Photo: apαs
Greek protest against austerity

By Nicky Dempsey

Open disagreements have broken out between the EU Commission and the European Central Bank on the issue of whether Greek government debt should be ‘restructured’  or ‘reprofiled’ in some way.  Debt restructuring would require that the bondholders, mainly European (including British) banks, take some losses on their bonds by having their value written down. ‘Reprofiling’ is a much more modest proposal which may involve little more than extending the life of the bonds, so that interest and capital repayments are drawn out over time.

The public disagreement has seen the Commission and key national governments such as German arguing cautiously in favour of reprofiling while leading ECB officials are vehemently against. ECB President Jean-Claude Trichet is reported to have stormed out of one meeting with European heads of government when this was suggested.

The situation for Greece is urgent. The EU forecasts that the economy will contract by a further 3.5% this year having already contracted by 6.4% in the previous two years. Unemployment has risen to 15% and real wages will have fallen by 11.5% over the same period. The downturn caused by this assault on living standards of workers and the poor means that the government’s debt will top 166% of GDP in 2012,with interest payments accounting for 7.4% of GDP – more than education or health spending.

The debt burden is literally unsustainable and Greece is heading for some type of default.

The open warfare that has broken out amongst EU bodies is not on issues of principle. The Commission, which tends to represent the interests of leading member states, leans towards some adjustment of Greek government debt but is at the same time vociferously opposed to any similar measure in relation to the private, bank debt that has been assumed by the Dublin government. The ECB is more openly the representative of Europe’s major banks.

In politics a key question is always, who benefits? Or, in this case, who loses out from a debt restructuring? And who is willing to accept the inevitable loss, especially if it doesn’t hurt them too much?

This excellent interactive graphic from Reuters provides the answers.

So, the German government and the EU Commission have been willing to accept a modest adjustment to Greek government debt because German banks hold just $26.3bn in Greek government debt and a ‘reprofiling’ would only create a modest loss. By contrast, French and German banks alone hold $74.6bn in Irish banks’ debt, and because they are insolvent some proposals would lead to 100% losses on these bonds. This would be an intolerable loss for European banks and the national governments, EU Commission and ECB are all united in opposing it.

The IMF has been involved in all the ‘bailouts’ to date. But the IMF more directly represents the interests of US capital and its banks are far less exposed to European governments, as the graphic shows. They too face potential losses, but would gain a distinct competitive advantage over their European rivals. The IMF is far more relaxed about a European government debt restructuring as a result.

It is worth noting that Britain has the single biggest exposure in terms of Irish bond debt, amounting to $160bn, of which $37.4bn is exposure to Irish banks. British participation in the Irish ‘bailout’ is just an international extension of the domestic bailout of its own banks, as it is for all the major European powers.

There is likely to be much heated debate in coming weeks and months on the acceptability or otherwise of some type of debt restructuring, let alone outright default. All the countries where ‘austerity’ measures have been imposed are struggling to meet growth and repayment targets as a result. The risks of restructuring or default are rising.

When the debate is being conducted amongst European officials, central bankers and others it is important to remember the question: who benefits? 

By contrast, socialists begin from whatever serves the interest of the working class and its allies, which means reversing the attack on living standards and subordinating the banks to those interests. Debt restructuring would be the first step down that path.