Government debt: a new stage in the global financial crisis

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Government debt: a new stage in the global financial crisis
9 February 2010

The tremors that have passed through financial markets over the past
week signal a new stage in the global financial crisis brought on by
fears in ruling circles of the onset of vast social struggles as
governments attempt to pay for the cost of massive bank bailouts
through unprecedented cuts in jobs, wages and social services.

In his book The Class Struggles in France, Karl Marx noted that
“public credit rests on the confidence that the state will allow
itself to be exploited by the wolves of finance”. Over the past 18
months, the wolves gorged themselves as bailouts by the governments of
the major capitalist nations, amounting to some 30 percent of their
combined gross domestic product, rescued the banks, increased their
profits and boosted financial markets. As the governor of the Bank of
England, Mervyn King, admitted in a speech last year, “never in the
field of financial endeavour has so much money been owed by so few to
so many”.

While the various bailout schemes and interventions have involved
apparently complex operations, in essence they have been very simple:
trillions of dollars of debt have simply been taken from the books of
the banks and finance houses and transferred to the state. Now comes
the next phase—the repayment of this debt through savage cuts in
social spending and a drastic reduction in the living standards of the
working class. This process has begun in Greece with the government’s
announcement that it would seek to cut the budget deficit from its
present level of 13 percent of GDP to 3 percent over the next two years.

Following the European Union’s endorsement of this decision, markets
remained undisturbed. But that soon changed. In the words of one
financial commentator, “the warm glow from the Brussels decision
vanished” as soon as it was announced that a general strike to protest
against the cuts would be held in Greece next month.

The shock waves that then passed through global financial markets
reflect two interconnected fears in government and financial circles.
The first concern is that the Greek developments are only the initial
expression of a debt crisis that extends across Europe and more
broadly. The second is that the situation prevailing over the past 18
months, in which governments around the world have implemented the
demands of the banks and financial markets without any significant
intervention by the working class, is about to end.

As soon as the Greek crisis came into view, attention turned to other
members of the EU—Ireland, Portugal, Italy and Spain. Last week credit
default swaps on Portuguese debt, measuring the risk of default,
surged on fears that its government could not carry out planned
austerity measures. One minister raised fears that the country was
becoming ungovernable and that “what is at stake is the credibility of
the Portuguese state”.

Default insurance costs for Spanish debt also jumped after New York
Times economics columnist Paul Krugman warned that “the biggest
trouble spot isn’t Greece, it’s Spain”. According to Barclays Capital,
net external liabilities are equivalent to 87 percent of GDP for
Greece, 91 percent for Spain and 108 percent for Portugal.

If the crisis were confined to Greece or even to the so-called
Mediterranean countries it might be able to be contained. But the
mounting budget deficits are a universal phenomenon. The International
Monetary Fund (IMF) has forecast that the ratio of debt to GDP in the
advanced economies will increase to 115 percent by 2014 compared to 75
percent in 2007—a surge unprecedented during peacetime—with the United
States and Britain, two of the worst affected.

So far the EU has decided not to provide assistance to Greece—fearing
that it would set a precedent for bailing out Ireland, Portugal and
even Italy. At the same time, the EU has opposed intervention by the
IMF because international bailouts of individual countries within the
EU would call into question the European financial system and the
stability of the euro. Reflecting EU pressure, a meeting of G7 finance
ministers at the weekend made clear that the European authorities
would “manage” the Greek crisis.

But the EU attitude has sparked criticism that it is creating even
greater problems. In a comment headlined “Europe Risks Another Global
Depression,” former IMF chief economist Simon Johnson wrote: “What are
the stronger European economies, specifically Germany and France,
doing to contain the self-fulfilling fear that weaker eurozone
countries may not be able to pay their debt—this panic that pushed up
interest rates and makes it harder for beleaguered governments to
actually pay? The Europeans with deep-pockets are doing nothing—except
to insist that all countries under pressure cut their budgets quickly
and in ways that are probably politically infeasible. This kind of
precipitate fiscal austerity contributed directly to the onset of the
Great Depression in the 1930s.”

The onset of this new stage in the global financial crisis raises
decisive political issues before working people. For the ruling elites
everything depends on the extent to which they can isolate, break-up
and suppress the struggles of the working class. For that they are
relying directly upon the social democratic and trade union
leaderships to defuse popular opposition to the cuts, channel it in
nationalist directions and above all block the development of a
socialist perspective.

However, the very character of the crisis itself poses the objective
necessity for the unification of the international working class on
the basis of a socialist program. The complex interconnections of
global finance mean that a crisis in one region is almost immediately
transmitted through the system as a whole. The sub-prime crisis in the
US initially set off the global financial crisis, now debt defaults in
Europe threaten to deepen it.

In every country, therefore, a political struggle must be launched to
resolve this crisis in the interests of working people and society as
a whole by demanding the expropriation of the entire banking and
financial system and the placing of its resources under public and
international democratic control. Only then can the grip of the
financial oligarchy be broken and society reconstructed to meet human
need and not the profits of the banks.

Nick Beams

http://wsws.org/articles/2010/feb2010/pers-f09.shtml

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