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Engdahl: Goldman helped create Greek financial crisis and now EU and IMF want people to pay

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. Joining us from Frankfurt, Germany, is William F. Engdahl. William is the author of the book Full Spectrum Dominance: Totalitarian Democracy in the New World Order. Thanks for joining us again, William.


JAY: So the Greek economy is in grave crisis. It’s�for a while threw a shock through stock markets around the world, the possibility of Greece defaulting on its debt, and then what does that mean about Spain, what does that mean with the EU. And so you’re in Europe. What do you make of all this?

ENGDAHL: Well, I think this is being seen by financial markets as a very useful way to short the bonds of a number of member countries of euro land, the countries that you mentioned. But in terms of a state default, that will not happen. That’s quite clear. The European Commission in Brussels has made it clear the size of the Greek debt, foreign debt, is such that it is a manageable size. But what will happen is Greece for a number of years, since they joined the euro in 2001, has been spending way over the 3 percent deficit-to-GDP limits that are imposed by the Maastricht treaty that created this synthetic thing called the euro back in 1999. So it turns out what Greek finance ministers and politicians did, they were courted by the likes of Goldman Sachs�yes, Goldman Sachs again�and the likes of JPMorgan Chase, according to some reports. And as early as 2001, 2002, the Greek government was offered a chance to put their liabilities off the books, if you will, so that instead of showing a 6 or 7 or 8 percent deficit, state deficit-to-GDP every year, as was the reality, they were only showing 3, 3.1, 3.3 something in the ballpark. And it came out, lo and behold, around November of last year, that through the use of these complex derivative instruments that Goldman Sachs, especially, sold the Greek government, the actual debt-to-GDP or deficit-to-GDP was 12.7 percent. At that point, Moody’s, Standard & Poor’s, these great guardians of credit trust that were asleep at the switch when the subprime crisis erupted two and half years ago and were asleep during the Asia crisis back in 1997-98, they are quick on the draw and downgraded the debt of the Greek government and put it on the downward credit watch. That was a godsend for hedge funds and other highly speculative investment groups around the world, to short the euro, because the Greek currency is part of this multi-country currency union called the euro. There is no central tax power behind this synthetic thing called the euro. The European Central Bank has very limited powers in the event of such a crisis because the finance ministers are the national governments. So what it boils down to is whether the largest economy in euro land, namely Germany, is going to step up to the plate and say, okay, we’ll give a bona fide to the debt obligations of Greece and hope that they get their fiscal house in order over the next several years. The German government, so far, has refused to do that. So events are at a standstill. The European Union finance ministers, end of last week, called on Greece to impose very severe austerity measures, clean up its pension obligations, meaning cutting back on pensions to retired Greeks and so forth, and other measures, not unlike what the IMF does to developing countries.

JAY: And this at a time when Greece has elected a left-of-center government that actually in theory would be against such things.

ENGDAHL: Yeah, the Papandreou government. But I think they realize that they’re in a no-win situation. If they don’t do something very convincing, the interest rate that they’re going to have to pay on their debt�and they have to refinance something on the order of $17 billion euros this year�that they just won’t be able to refinance it. No secondary market will exist for Greek sovereign debt. So they’ve got to do something. However, the Greek populace and the trade unions in Greece have a very militant tradition, a very strong tradition of trade union activism and social protest. So people are going out in the streets and having rolling strikes across Greece to protest these austerity measures that they’re being asked to do. So it’s really kind of a Mexican standoff at this point as to what will happen. And as long as it is a Mexican standoff, the dollar miraculously is going to be strong, despite the weakness of the US economy and the fundamentals of the US economy, and the euro will be the weak man of the major economies.

JAY: And perhaps this might be the most important piece of this story is that in the next year, two, three years, not just in Greece, the fight’s going to be who’s going to pay for the bailout of the economy. It was interesting on Fareed Zakaria’s show on Sunday on American television, ABC, Fareed was giving his own prescription of what’s necessary in the coming years, and it was all about cuts to health care, cuts to Social Security benefits, pensions. And we know that when President Obama was elected, within days of his election, he met with conservative columnists, some of the best-known conservative columnists in the United States, and it was all about them saying to him, when the time comes, are you going to be willing to put entitlement programs on the table, and he assured them that he would. And this really is�what we’re seeing in Greece is perhaps the storm to come right across Europe and North America.

ENGDAHL: It could well be. It could well be. The situation in Italy is worse than that of Greece in terms of public debt to GDP. It’s well over 120 percent, and that is extreme. The only other country in the world who comes close to that is Japan, and Japan is a fiscal basket case with a demographic crisis to boot. And Italy has very poor demographics in terms of the aging of its population. The problem is Italy seems to have gone down the same route as Greece, with JPMorgan Chase and various exotic derivatives to hide the real dimension of their problems. So under the Berlusconi government, people are very skeptical that the truth is coming out as to the true fiscal situation there as well. So it could be quite likely that in the euro land there’s going to be a very, very rough patch over the next two to three years as these questions come to the surface. You can’t put these things off forever, but the question is what you do about it. And the euro construct is an artificial construct. It’s to my mind primarily a power construct of certain European elites. But the underlying strategy of those European elites is one that I call “schizophrenic”. On the one side, they have a fear of orienting their economies toward the east, which is really where the dynamic growth is in Eurasia, from China down through Kazakhstan, Russia, the Middle East, and on into Eastern Europe, over the next 20, 30 years. That is going to be where the growth in the world economy is going to be most dynamic. But these European elites like [“jis-CAR-da-STANG”] and the people who drafted this European constitution, they are quite afraid of playing a subsidiary role to that dynamic Eurasia, and therefore they hang on like a security blanket to the NATO umbrella of the United States, even though they know, when you talk in private, that the United States is sinking like the Titanic, that the “American century” is a has-been. So it’s really a state of political paralysis in Europe.

JAY: Thanks for joining us, William.

ENGDAHL: Thank you.

JAY: And thank you for joining us on The Real News Network.


Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee complete accuracy.

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F William Engdahl is an economist and author and the writer of the best selling book "A Century of War: Anglo-American Oil Politics and the New World Order." Mr Engdhahl has written on issues of energy, politics and economics for more than 30 years, beginning with the first oil shock in the early 1970s. Mr. Engdahl contributes regularly to a number of publications including Asia Times Online, Asia, Inc, Japan's Nihon Keizai Shimbun, Foresight magazine; Freitag and ZeitFragen newspapers in Germany and Switzerland respectively. His newest book is called "Gods of Money: Wall Street and the Death of the American Century". He is based in Germany.