Banks Refusing a "Haircut" Spur EU Financial Crisis
Tom Ferguson: Governments demand austerity so banks get paid, even though it deepens crisis - July 14, 2011
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Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and a Senior Fellow of the Roosevelt Institute. He received his Ph.D. from Princeton University and taught formerly at MIT and the University of Texas, Austin. He is the author or coauthor of several books, including Golden Rule (University of Chicago Press, 1995) and Right Turn (Hill & Wang, 1986). Most of his research focuses on how economics and politics affect institutions and vice versa. His articles have appeared in many scholarly journals, including the Quarterly Journal of Economics, International Organization, International Studies Quarterly, and the Journal of Economic History. He is a long time Contributing Editor to The Nation and a member of the editorial boards of the Journal of the Historical Society and the International Journal of Political Economy.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. It was only about a week ago or so when the Greek debt negotiations were settled and the Greek Parliament passed new austerity measures. But the financial markets around the world greeted all of this with great glee. The euro went up. The markets went up. Now, a week later, the euro is taking a major dive and the crisis has spread to Italy and further. Now joining us to talk about all of this is Tom Ferguson. Tom teaches at the University of Massachusetts Boston. He's also a senior fellow at the Roosevelt Institute. Thanks for joining us again, Tom.THOMAS FERGUSON, POLITICAL SCIENTIST, AUTHOR: Hi, there.WOOD: So, like, one week from highs to crashes. What's going on there?FERGUSON: Well, a couple of things here. First of all, everybody's second take on the Greek bill, its passage, the realization is widespread that they in fact will never pay these debts off, that the interest rates being asked and the growth, the consequences for growth of the foolish austerity programs the European Union's been demanding means that Greece is going to get crushed. And people don't think--and, I think, very rationally, they quickly realized that the internal resistance in Greece to this is strong enough that it will probably bust through pretty soon. The other thing that's--and probably in the very short run even more controlling, is that as the realization has grown that the whole thing's breaking down, resistance to continued transfers in among the governments in Germany, in Austria, in the Netherlands, in Finland, and elsewhere has risen a lot. In effect, the political resistance to continued payments, large payments out there is growing faster than their ability to contain the crisis. That's the latest element in this was the Italian finance minister, Mr. Tremonti, turned out to be living in an elite apartment in Rome that he was apparently being provided free by one of his former associates, and that's weakened him politically. It's also clear that the Berlusconi government in Italy is for the first time in some serious political trouble. And so they're not--it's not willing to continue down sort of a Greek path of huge austerity. And, you know, Italy's a big economy, so a result is that everybody's getting scared about the status of Italian debt. And so for Italy's debt to run in the middle of a Greek crisis--and you have to also understand that everybody can see that the other countries on the periphery that are in trouble--that's Portugal and Ireland for sure, and probably Spain too--they're all going to want deals like Greece. So, basically what's happening is the total bill is rising exponentially. The willingness to bear the retrenchment costs in the periphery's grown hugely. And so--and the political support for those payments across the larger richer countries is just dissolving.JAY: Now, by "payments", what exactly are you talking about?FERGUSON: I mean transfers. I mean, the real story--.JAY: Transfers from and to?FERGUSON: Well, the real--it looks like Germany, the Netherlands, and other countries are bailing out Greece. What's actually happening is they hand the money to the Greeks, who then hand the money to French and German and other large European banks. This is really a backdoor bank bailout in disguise. The whole thing here is happening. I mean, it's not quite right to say that this is all happening because the European Union has a bad organizational structure. It does have a bad organizational structure, and the European politicians have been, you know, about as farseeing and active in dealing with this as the American politicians were before 2008 on dealing with our financial bubble, but in truth it's the unwillingness to confront the banks and the demands that they have no haircuts, as they've [incompr.] I mean, that is to say, cuts in the--real cuts in the debt payments that is bringing this whole show down. And everybody is waking up to this fact. And so you see people dumping bank shares. In Europe you see US authorities looking around, trying to figure out, like, a lot of American firms seem to have sold (surprise surprise) credit default swap protection to some European banks. The Fed and the Treasury confess they don't know who is on the hook for what. You know, this is after we passed Dodd-Frank, after we did financial reform. So you have the makings here of a truly gigantic mess, and, you know, a potential Lehman in reverse if you were to actually allow some European bank to fail. Now, nobody believes the Europeans will actually do that. But what they have been desperately trying to do is conceal the extent of the payments they're making to their own banks from their population. That sort of disguise is wearing through. That's [crosstalk] JAY: So the--and even though the longer-term consequences of all this austerity will be deepening depression,--FERGUSON: Catastrophic.JAY: --their only short-term interest is make sure the banks don't take a bigger haircut.FERGUSON: That's right. You can't be blunter than this in the European Central Bank, which also is affected by this. The European Central Bank's now holding a ton of bad debt, and it'll undoubtedly be sort of in the position of the French Central Bank was in 1931. When sterling went down, it actually had to be--the French Central Bank had to be recapitalized by its government.JAY: So if people keep bailing from the euro, I guess they're going to buy more American T-bills, the irony of all that.FERGUSON: Well, it's lovely, isn't it? I mean, all the folks in America who keep telling you we have to reassure financial markets, while we have financial markets sitting around buying enormous amounts, including today, of American treasuries. Yeah, it's a wonderful life.JAY: So what do you make of the US Treasury and government response to all this? And what would be a US Treasury, government response that would actually--might be in the interests of most Americans?FERGUSON: Well, the first thing, of course, is they've got to find out who's exposed to what on this side of the water there. I mean, that's just ridiculous that they don't know, okay? But the sort of larger problem is twofold. One is, you know, in Toronto, the Americans threw in, at the G-20 meetings last year, the Americans threw in with the European demands for austerity. The sort of worldwide press for austerity is simply killing growth. It's making it impossible to pay any of these debts, and it's just enlarging deficits around the world. So in that sense, our guys are not helping the matter by talking like the biggest problem in the world is budget cutting. It's not. It's getting employment. That's the [incompr.] The other thing they need to do is to drop their opposition to haircuts to the banks. I mean, Geithner's been on the phone. People know it. It's out in the press. The US has opposed the haircuts for the European banks--in the case of Greece less, because there's much American interest in that, although there's probably some American credit default swap protection exposure, but because they know that the thing will eventually be extended to Ireland, and there the American banks do have exposure. And I am sure that, you know, as it spreads wider into Europe, the potential exposure would grow in other countries, too. It's not helpful for the US to sort of be supporting European central banks' Maginot Line defense against bank haircuts. These guys are going to have to take hits. These debts can never be paid. They have got to do at minimum a kind of Brady bond redo of the debt program. And yet, if you'll remember that case from the 1980s on Latin America, two things had to happen for that to happen. One was you had to have the transition from Reagan to Bush, get even a new administration. And then the other ones were riots in Latin America.JAY: Well, I think when the people of the world start to more get what's going on here--maybe they already do--they're going to be looking for scalps, not haircuts. Thanks for joining us, Tom. Thank you for joining us on The Real News Network.
End of Transcript
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