Greek Debt Crisis is the Iraq War of Finance
Guardians of financial stability are provoking a bank run endangering Europe’s system in their zeal to force Greece to its knees
June 19, 2015—Rarely in modern times have we witnessed such a display of petulance and bad judgment by those supposed to be in charge of global financial stability, and by those who set the tone for the Western world.
The spectacle is astonishing. The European Central Bank, the EMU bailout fund, and the International Monetary Fund, among others, are lashing out in fury against an elected government that refuses to do what it is told. They entirely duck their own responsibility for five years of policy blunders that have led to this impasse.
They want to see these rebel Klephts1 hanged from the columns of the Parthenon—or impaled as Ottoman forces preferred, deeming them bandits—even if they degrade their own institutions in the process.
If we want to date the moment when the Atlantic liberal order lost its authority—and when the European Project ceased to be a motivating historic force—this may well be it. In a sense, the Greek crisis is the financial equivalent of the Iraq War, totemic for the Left, and for Souverainistes on the Right, and replete with its own “sexed up” dossiers.
Does anybody dispute that the ECB—via the Bank of Greece—is actively inciting a bank run in a country where it is also the banking regulator by issuing this report2on Wednesday?
It warned of an “uncontrollable crisis” if there is no creditor deal, followed by soaring inflation, “an exponential rise in unemployment,” and a “collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership.”
The guardian of financial stability is consciously and deliberately accelerating a financial crisis in an EMU member state—with possible risks of pan-EMU and broader global contagion—as a negotiating tactic to force Greece to the table.
It did so days after premier Alexis Tsipras accused the creditors of “laying traps” in the negotiations and acting with a political motive. He more or less accused them of trying to destroy an elected government and bring about regime change by financial coercion.
I leave it to lawyers to decide whether this report is a prima facie violation of the ECBs primary duty under the EU treaties. It is certainly unusual. The ECB has just had to increase emergency liquidity to the Greek banks by €1.8 billion (enough to last to Monday night) to offset the damage from rising deposit flight. In its report, the Bank of Greece claimed that failure to meet creditor demands would “most likely” lead to the country’s ejection from the European Union. Let us be clear about the meaning of this. It is not the expression of an opinion. It is tantamount to a threat by the ECB to throw the Greeks out of the EU if they resist.
This is not the first time that the ECB has strayed far from its mandate. It forced the Irish state to make good the claims of junior bondholders of Anglo-Irish Bank, saddling Irish taxpayers with extra debt equal to 20 percent of GDP.
This was done purely in order to save the European banking system at a time when the ECB was refusing to do the job itself, betraying the primary task of a central bank to act as a lender of last resort.
It sent secret letters to the elected leaders of Spain and Italy3 in August 2011 demanding detailed changes to internal laws for which it had no mandate or technical competence, even meddling in neuralgic issues of labor law that had previously led to the assassination of two Italian officials by the Red Brigades.
When Italy’s Silvio Berlusconi balked, the ECB switched off bond purchases, driving ten-year yields to 7.5 percent. He was forced from office in a back-room coup d’etat, albeit one legitimized by the ageing ex-Stalinist EU fanatic who then happened to be president of Italy.
Lest we forget, it parachuted in its vice-president—Lucas Papademos—to take over Greece when premier George Papandreou merely suggested that he might submit the EMU bailout package to a referendum, a wise idea in retrospect. That makes two coups d’etat. Now Syriza fears they are angling for a third.
The creditor power structure has lost its way. The IMF is in confusion. It is enforcing a contractionary austerity policy in Greece—with no debt relief, exchange cushion, or offsetting investment—that has been discredited by its own elite research department as scientifically unsound.
The Fund’s culpability4 in this fiasco is by now well known. As I argued last week5, its own internal documents show that the original bailout in 2010 was designed to rescue the EMU banking system and monetary union at a time when it had no defenses against contagion. Greece was sacrificed.
One should have thought that the IMF would wish to lower the political temperature, given that its own credibility and long-term survival are at stake. But no, Christine Lagarde6 has upped the political ante by stating that Greece will fall into arrears immediately if it misses a €1.6 billion payment to the Fund on June 30.
In my view, this is a discretionary escalation. The normal procedure is to notify the IMF Board after 30 days. This period is a de facto grace period, and in a number of past cases the arrears were cleared up quietly during the interval before the matter ever reached the Board.
The IMF could have let this process run in the case of Greece. It has chosen not to do so, ostensibly on the grounds that the sums are unusually large.
Klaus Regling, head of the Eurozone bailout fund (EFSF), entered on cue to hint strongly that his organization would trigger cross-default clauses on its Greek bonds—45 percent of the Greek package—even though there is no necessary reason why it should do so. It is an optional matter for the EFSF board.
He seems to be threatening an EFSF default, even though the Greeks themselves are not doing so, a remarkable state of affairs.
It is obvious what is happening. The creditors are acting in concert. Instead of stopping to reflect for one moment on the deeper wisdom of their strategy, they are doubling down mechanically, appearing to assume that terror tactics will cow the Greeks at the twelfth hour.
Personally, I am a Burkean7 conservative with free market views. Ideologically, Syriza is not my cup tea. Yet we Burkeans do like democracy—and we don’t care for monetary juntas—even if it leads to the election of a radical-Left government.
As it happens, Edmund Burke would have found the plans presented8 to the Eurogroup last night by [Greek] finance minister Yanis Varoufakis to be rational, reasonable, fair, and proportionate.
They include a debt swap with ECB bonds coming due in July and August exchanged for bonds from the bailout fund. They would have longer maturities and lower interest rates, reflecting the market borrowing cost of the creditors.
Syriza said from the outset that it was eager to work on market reforms with the OECD, the leading authority. It wants to team up with the International Labor Organization on Scandinavian style flexi-security and labor reforms, a valid alternative to the German-style Hartz IV reforms that have impoverished the bottom fifth of German society and which no Left-wing movement can stomach.
It wished to push through a more radical overhaul of the Greek state that anything yet done under five years of Troika rule—and much has been done, to be fair.
As Mr. Varoufakis told Die Zeit: “Why does a kilometer of freeway cost three times as much where we are as it does in Germany? Because we’re dealing with a system of cronyism and corruption. That’s what we have to tackle. But, instead, we’re debating pharmacy opening times.”
The Troika pushed privatization of profitable state assets at knock-down depression prices to private monopolies, to the benefit of an entrenched elite. To call that reforms invites a bitter cynicism.
The only reason that the Troika pushed this policy was in order to extract money. It was acting at a debt collector. “The reforms were a smokescreen. Whenever I tried talking about proposals, they were bored. I could see it in their body language,” Mr. Varoufakis told me.
The truth is that the creditor power structure never even looked at the Greek proposals. They never entertained the possibility of tearing up their own stale, discredited, legalistic, fatuous Troika script.
The decision was made from the outset to demand strict enforcement of the terms agreed in the original Memorandum, which even the last conservative pro-Troika government was unable to implement—regardless of whether it makes any sense, or actually increases the chance that Germany and other lenders will recoup their money.
At best, it is bureaucratic inertia, a prime exhibit of why the EU has become unworkable, almost genetically incapable of recognizing and correcting its own errors.
At worst, it is nasty, bullying, insistence on ritual capitulation for the sake of it.
We all know the argument. The EU is worried about political “moral hazard,” about what Podemos might achieve in Spain, or the eurosceptics in Italy, or the Front National in France, if Syriza is seen to buck the system and get away with it.
But do the proponents of this establishment view—and one hears it a lot—really think that Podemos can be defeated by crushing Syriza, or that they can discourage Marine Le Pen by violating the sovereignty and sensibilities of a nation?
Do they think that the EU’s ever-declining hold on the loyalty of Europe’s youth can be reversed by creating a martyr state on the Left? Do they not realize that this is their own Guatemala, the radical experiment of Jacobo Arbenz9 that was extinguished by the CIA in 1954, only to set off the Cuban revolution and thirty years of guerrilla warfare across Latin America? Don’t these lawyers—and yes they are almost all lawyers—ever look beyond their noses?
The Versailles victors assumed reflexively that they had the full weight of moral authority on their side when they imposed their Carthiginian settlement10 on a defeated Germany in 1919 and demanded the payment of debts that they themselves invented. History judged otherwise.
—The Telegraph, June 19, 2015
1 Greek War of Independence
2 June 17, 2015 —The Bank of Greece Report on Monetary Policy 2014-2015
3 Trichet e Draghi: un’azione pressante per ristabilire la fiducia degli investitori
4 IMF Document Excerpts: Disagreements Revealed
5 IMF has betrayed its mission in Greece, captive to EMU creditors
6 IMF chief Christine Lagarde: Greece must pay up
7 Burkean Conservatism,- 07/25/11
8 Greece’s Proposals to End the Crisis: My intervention at today’s Eurogroup
9 Guatemala 1954
10 The Economic Consequences of the Peace