Banks Are Responsible for the Economic and Social Crisis in Greece

Banks are Responsible for the Economic and Social Crisis in Greece By Eric Toussaint Region: Europe Global Research, January 09, 2017 Theme: Global Economy, Poverty & Social Coalition for the Abolition of Illegitimacy Inequality Debt 9 January 2017 The present study shows that the Greek crisis that broke out in 2010 originated in private banks, not in excessive public spending. The so-called bail-out was designed to serve the interests of private bankers and those of dominant countries in the Eurozone. Greece adopting the euro played a major role among the various factors that contributed to the crisis. The analysis developed here was first presented in Athens on 6 November 2016 during a meeting of the Truth Committee on Greek Public Debt. At first sight, between 1996 and 2008, the development of Greece’s economy looked like a success story! The integration of Greece within the EU and from 2001 on within the Eurozone seemed successful. The rate of Greece’s economic growth was higher than that of the stronger economies in Europe. This apparent success actually concealed a vicious flaw, just as had been the case in several other countries – not only Spain, Portugal, Ireland, Cyprus, the Baltic Republics and Slovenia, but also Belgium, the Netherlands, the United Kingdom, Austria…, countries that had been badly hit by the 2008 financial crisis.1 | Not forgetting Italy, which was caught up by the banking crisis a few years after the others. In the early 2000s, the creation of the Eurozone generated significant volatile and often speculative financial flows 2| | that went from economies of the Centre (Germany, France, the Benelux, Austria…) towards countries of the Periphery (Greece, Ireland, Portugal, Spain, Slovenia, etc.). Major private banks and other financial institutions in economies of the Centre loaned huge sums to the public and private sectors in the economies of the Periphery for it was more profitable to invest in those countries than on the national markets of the economies of the Centre. A single currency (the euro) boosted those flows since it did away with the danger of the local currency being devaluated in case of crisis in countries of the Periphery. This resulted in a private credit bubble mostly involving real estate (mortgages), but also consumer credit. The assets of banks in the Periphery increased significantly, albeit in terms of debt. In Ireland, the crisis broke out in September 2008, when major banks went bankrupt in the wake of Lehman Brothers in the United States. In Spain, Greece and Portugal, the crisis started later, in 2009-2010. |3| | 1 When the private credit bubble burst in 2009-2010 (in the context of international recession resulting from the US subprime crisis and its contamination of banks in the European economies of the Centre), private banks had to be massively bailed out. These bail-outs led to a huge increase in public debt. Indeed the use of public money to bail out banks and other institutions turned out to be very costly. It is now clear that banks should not have been bailed out, which meant socializing their losses. Banks should have used bail-in mechanisms: organize an orderly kind of bankruptcy and call upon major private shareholders and creditors to pay for sanitizing the situation. The opportunity should also have been seized to socialize the financial sector, i.e., to expropriate the private banking sector and turn it into a public service.4| | However, there were strong ties, when not actual connivance, between Eurozone governments |5| and the private banking sector. Governments thus decided to use public money to bail out private bankers. Since States in the Periphery could not afford the financial cost of bailing-out their banks so as to protect the French and German banks, governments of the Central economies (Germany, France, the Netherlands, Belgium, Luxembourg, Austria, etc.) and the European Commission (sometimes with the help of the IMF) implemented the notorious Memorandums of Understanding (MoUs). Thanks to those MoUs, major private banks and other private financial institutions in Germany, France, countries of the Benelux and Austria (i.e. the private financial sector of the Central economies) could reduce their exposition in economies of the Periphery. Governments and European institutions used this opportunity to reinforce the offensive of capital against labour as well as to reduce the possibility for people to actually use their democratic rights throughout Europe. The way the Eurozone was constructed and the crisis of the capitalist system are accountable for the crisis that can be observed in countries of the Periphery since 2009-2010. Steps that led to the 2010 Greek crisis From 1996, under the auspices of PM Kostas Simitis (PASOK), Greece has committed itself deeper and deeper to the neoliberal model that had first been implemented in 1985 when Andreas Papandreou, after a promising start, shifted away from left-wing positions two years after François Mitterrand. |6| Between 1996 and 2004, during Kostas Simitis’ two terms as PM, an impressive programme of privatizations was implemented (which recalls Lionel Jospin’s Socialist government in France – 1997-2002 – also carrying out major privatizations which right-wing parties and employers had been dreaming of since the 1980s). Greece went farther than most EU countries in reducing corporate taxes. Measures were adopted that directly undermined social conquests won between 1974 and 1985, notably in terms of labour conditions and stability. Similarly, the Socialist government favoured a deep- seated deregulation of the financial sector (which also occurred in other EU countries and in the US); this resulted in an increase in its importance in the economy. Greek banks settled in the Balkans and Turkey, which reinforced a deceptive sense of achievement. | 2 During this period, the rate at which the Greek GDP increased was higher than the average EU rate, GDP per capita was catching up on the average, and the Human Development Index was improving. Growth was significant in some cutting-edge sectors such as optical and electrical equipment and computers. Yet in fact as they further integrated Greece into the EU and the Eurozone, Greek leaders and private corporations increased the country’s dependence and reduced any actual possibility for economic and social development. How banks developed and how the Greek economy was financialized before it entered the Eurozone Until 1998, 70% of the Greek banking system was public. Loans handed out by banks amounted to about €80 billion while deposits amounted to €85 billion, which indicated a healthy economy (see below). That situation was to change radically. Between 1998 and 2000, public banks were sold at heavily-discounted prices to private capital and four major banks emerged, covering 65% of the banking market: |7| the National Bank of Greece, Alpha Bank, Eurobank and Piraeus Bank. Among those four banks only the National Bank of Greece was still under indirect public control. During those same two years under socialist PM Kostas Simitis’ leadership, deregulation was thriving in the banking sector as indeed in other parts of the world. Let us remember that in 1999 Bill Clinton’s Democrat administration repealed the Glass-Steagall Act, which had been voted in by the Roosevelt administration to counter the 1933 US banking crisis. This meant the end of separating deposit banks from business banks and accelerated the deregulation process that led to the 2000-2001 and 2007-2008 crises. In Greece, the government supported private banks (which decreased return on deposits) through an aggressive communication campaign to prompt middle-class households, companies andpension funds to invest on the stock market; so the government did not tax capital gains. This casino-like kind of economy resulted in a stock-market bubble that burst in 2000, with tragic losses for many households, small and medium-sized companies and the pension scheme, which had invested heavily. |8| We also have to keep in mind that the stock-market bubble made it possible for rich investors to launder their dirty money. Rise in Greek private and public debt from 2000-2001 Private debt increased hugely in the first decade of the new millennium. Lured by the very attractive conditions offered by banks and the whole private commercial sector (mass retail, the automobile and construction industries, etc.), households went massively into debt, as did the non-financial companies. Moreover the shift to the euro9 | had led to a significant increase in the cost of living in a country where buying basic food takes up about half of a family’s budget. This private debt was the driving force of the Greek economy as it was in Spain, Ireland, Portugal, Slovenia and other countries of the former Eastern bloc that joined the EU. Thanks to a strong euro, Greek banks (and Greek branches of foreign banks) could expand their international activities and cheaply finance their national activities. They took out loans with a vengeance. The graph below (Fig. 1) shows that Greece’s accession to the Eurozone in 2001 boosted an inflow of financial capital, in the form of loans or portfolio investments (Non-FDI in the chart, i.e. inflows which do not correspond to long-term investments) while long-term investments (FDI–Foreign Direct Investment) remained stagnant. Figure 1 – Flow of financial capital into Greece (1999-2009) | 3 In $ million. Source: IMF |10| With the vast amounts of liquidity made available by the central banks in 2007-2009, Western European banks (above all the German and French banks, but also the Belgian, Dutch, British, Luxembourg and Irish banks) as well as Swiss and US banks lent extensively to Greece (to the private sector and to the public authorities). One must also take into account that the accession of Greece to the euro bolstered the faith of Western European bankers, who thought that the big European countries would come to their aid in case of a problem.

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