Greece has taken one for the team; for now

by Peter Watt

What a relief, the world has been saved. Again.

In 2008 there was a financial crisis that many have described as being worse than that of the 1930s. Markets collapsed, banks failed and lives were ruined. In essence, and over many years, much of the western world had begun to believe in magic. Somehow we could all have really low taxes and really high spending by governments. We could have relatively low interest rates and unlimited access to borrowing. Individuals and governments indulged themselves as excess cash from the economies of the east poured into a market of gorging consumers. Credit cards, mortgages, car loans, government bonds – it didn’t matter as there was so much money to go around.

But it was all too good to be true and it couldn’t go on forever.

The complexity of the financial instruments used by money markets meant that for all intents and purposes regulators, corporate boards and indeed governments had no idea exactly who owed what to whom. And anyway at some point it would have to paid back. Fine, as long as economies were growing; but if they slowed down or stopped? And once the US mortgage market was rocked by increasing foreclosures from over extended borrowers the doubts really set in. House prices collapsed and money markets followed. Banks didn’t know whether they could pay what they owed, as they weren’t entirely sure what their loan portfolios were actually worth. And they didn’t know to what extent other banks were in the same position, so they stopped lending them money. Some banks collapsed and markets dived. At one stage it really did look as if we would have a financial Armageddon that could engulf us all. ATM’s would stop working, accounts would be frozen, commerce would slow and who knows what else?

But it didn’t happen and the world was saved. Governments stepped in and recapitalised the banks, basically saying “we won’t let you fail” and effectively underwrote all of their toxic, highly risky debt. Then governments began trying to stimulate their economies. Some cut taxes so that people and companies could spend more. Some got their central banks to start buying their own government bonds, so that effectively more cash was provided to financial institutions and interest rates could be kept low. Some did both, and slowly it worked. The situation stabilised and although economies slowed or even went into recession they didn’t collapse.

The consequence was that the exposure from decades of dodgy lending had been well and truly been soaked up by governments. But governments who relied on the tax receipts from growth faced reducing coffers. And they still needed ever more money, just to keep their enlarged state operations running. Pulling the plug simply was not an option, as it would lead to further ruin for the millions who relied on the states largesse. Deficits, and therefore overall levels of debt, increased for governments across the west. Banks, still hurting from their bad lending decisions of the past, saw government bonds as a relatively safe haven and kept lending. Relieved politicians largely avoided having to have really difficult conversations with voters about what they could expect their governments to do for them in the future.

But it was all too good to be true and couldn’t go on forever.

Governments started to peg back their spending, but it wasn’t easy. Their populations had become used to governments doing things for them and employing large numbers of them. Although cuts were made, the still depleted tax returns meant that borrowing was still needed. It was a rock-and-a-hard-place; cut hard, slow down economies and reduce tax-take further or cut slowly and worry lenders about how much you needed to borrow. Worse, many of the governments of smaller and less advanced economies in the Eurozone had told the odd porky-pie about how much they had borrowed. They had to, if they were to stay within the rules of membership of the Eurozone and keep their populations in the manner to which they had come to expect. But it began to cost more and more for them to borrow to fund their activities.

And slowly it dawned on financial institutions. Whilst they had been saved from their own excesses over sub-prime lending in the bail-outs, they had simply replaced it with someone else’s excess: an excess of sub-prime government bonds. The doubts crept back into bank board rooms across the world. Who has lent what to which government? What happens if a government fails? Will ATM’s stop working, accounts be frozen, commerce slow? Who knows?

But it didn’t happen, because the whipping boys of the Euro sovereign debt crisis, Greece, were this week finally reigned in. The banks agreed to write off some of their expensive debt, as it gave them a bit more certainty in terms of their overall exposure. And the Greeks were given billions in further cheap loans so that they didn’t go bust. In return they effectively had to give up any pretence of sovereignty and have to ask permission from the IMF and ECB to do almost anything.

The world though can breathe a sigh of relief, as once again it has been saved. Governments can keep on borrowing, albeit the rate of growth of their borrowing will slow. But at least an uncontrolled default by a member of the Eurozone and all of its unforeseen consequences has been avoided. Apart from in Greece, relieved politicians can once again largely avoid having to have really difficult conversations with voters about what they can expect their governments to do for them in the future.

But if we are honest, we all know that it is too good to be true and it can’t go on forever.

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9 Responses to “Greece has taken one for the team; for now”

  1. Nick says:

    indeed governments had no idea exactly who owed what to whom


    And in the case of the UK government its a straightforward fraud. They do know, but they won’t tell the public the total.

    For example, the state pension.

    The government knows how many years people have accrued for their state pension.

    The government owes people the state pension as a result. It’s a debt.

    However it is hidden off the books and not reported. Even in the Whole of Government Accounts its omitted.

    Total up the increase in debts last year and you ran up a 500 bn increase.

    150 bn because you couldn’t stop spending.

    350 bn because most of the other debts are linked to CPI/RPI

  2. Bobos says:

    Is there anyone left [of the Left or anywhere] who really thinks we can go back to the debt fuelled growth of the Neo-Liberal Dreamtime? I think not.

    This article is kicking at an open door yet neglects to add a word to the ‘really difficult conversations with voters about what they can expect their governments to do for them in the future’.

    Why do feel I am being softened up for a Labour Party that commits itself to Tory spending plans and spending priorities.

    “In times of dearth bring out weight and measure”. William Blake. In other words: let Social Justice be done with what we have – and invest for a productive future.

    Over to you to continue the conversation…

  3. Peter Watt says:

    Bobos – I think that it is important that we do have honest conversations about what in reality we will be able to do as a Government when resources are tight. I think that voters would expect us to and quite frankly will not believe us if we dont.

  4. aragon says:

    Neoliberalism is a right wing philosophy why are the left been charged with the vast ponzi scheme failure.

    This article just regurgitates the conventional (neo-liberal) explanation, there is an alternative, not that you will hear it from the Labour Party.

  5. figurewizard says:

    What remains inexplicable is that for years the last government was borrowing by the billion, despite record tax revenues in order to cover a shortfall between receipts and expenditure. If a business was behaving like this it’s operating cash flow would be seen to be in deficit, which would put in in the fast lane towards bankruptcy.

    This however continued to be the case, even after the credit crunch hit home. What were the Treasury saying about this at the time and if they really did recognise that there was a problem, were they overruled and if so why? If Labour is ever going to recover the ground which has clearly been lost on economic competence it must first start to provide answers to questions like these.

  6. Peter Watt says:

    … and if you want evidence that risk has passed from banks to Countries look at this that shows how multinational company debt is now cheaper than that of Countries to insure (via @faisalislam):

    Companies > countries. How multinationals are rated better credits than nation states. Via @davidmwessel

  7. Bobos says:

    Peter – thank you and I agree that the electorate will demand that the Labour Party be frank about the finances available for its program. This is why I expect a committment to Tory overall financial forecasts before the next election. However this does leave room to change significantly the priorities for the direction of the spending and in the tax/cuts/growth mix. I have been around long enough to know all the pitfalls – the allegations of uncosted initiatives etc.

    But I think the next election will be won or lost on the percieved direction of travel of the LP. The Tories are committed to an increasingly unpopular direction and Labour has this chance of articulating an alternative which can resonate with the lost voters even [or especially] when the deficeit targets are embraced. What think you?

    Aragon! Believe me I certainly did not mean to suggest that Neo-Liberalism was a Left project. Far from it. Perhaps I should have made clear that the debt which fuelled the Neo-Liberal Dreamtime was private debt – much of which had to be Nationalised in 2008/9 to save us from the worst effects of the Crunch.

    Nick – Old Age Pensions are funded on the spending side of the account and, like Civil Service salaries [for instance] can never be counted as future debt. This is how it was set up and how it will always be. BTW private debt is forecast to increase sharply towards the end of this Parliament in order to give the Tories some wriggle room.

  8. Bobos says:

    Typos alert…deficit, perceived, commitment…whoops!

  9. I really doubt that government has ever had an honest convesation with it’s voter. They will always say everything that is comfortable for their to say. For some reason they think that people are blind and they don’t see what is really going on. We are just toys in their hands. They have no competence in econimic at all.
    They’ve boorowed a hell of money and now the only question my question is: Will it ever recover and if so what will be their econimical politics?

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