Analysis: Ushering in a second financial crisis
While the House of Murdoch burns, the global economy is about to go up in smoke. A growing consensus suggests we are on the verge of a second global financial crisis.
The Washington-based International Monetary Fund (IMF) is now warning of an ‘earthquake scenario’ if EU leaders fail to reach agreement tomorrow over the framing of a €115bn Greek rescue package. Some $400bn or 1% could be wiped off global growth warns the IMF.
So at stake at tomorrow’s crucial meeting of European Union leaders will be the fate of the euro and world economic stability. The battle lines are drawn between Germany, the Netherlands and Finland in one corner and the markets in the other.
Greek bailout package
Germany, the Netherlands and Finland refuse to commit public funds to a Greek bailout package unless banks and hedge funds ‘take a haircut’. The original German plan was to suggest a delay in payment to banks and hedge funds who now trade and profit on Greek debt. This has evolved into banks and hedge funds being asked to swap their old bonds for new restructured ones that won’t be repaid for another seven years.
The markets – in other words banks and hedge funds – are having none of it, so creating a stand off. This has created a fear of default in Europe, and borrowing costs for Spanish and Italian bonds has reached 6%. A level considered unsustainably high.
Demands for European economies to implement severe austerity measures come as the world attempts to recover from the first bank crisis of 2008 that required a $16 trillion public bailout and triggered a global recession and a commodity price spike.
US debt ceiling and bank bonuses
Across the Atlantic, it’s more a case of High Noon. The Senate is unable to reach agreement over extending the United States’ $14.3 trillion debt ceiling by the August 2 deadline.
As the world stands on the verge of a new phase in the global financial crisis, the Office of National Statistics yesterday announced bankers scooped £13.6bn in bonuses and have seen their basic wages rise from an pre-crisis benchmark average of £150,000 to £400,000.
Costas Lapavitsas, professor of economics at the School of Oriental and African Studies and a star of Greek debt crisis movie, Debtocracy, writing in the Guardian recently, stated: ‘In short, the roots of eurozone problems lie in the private, rather than the public, sector. This might sound surprising given the torrent of references to the ‘bloated’ public sector in the periphery, especially Greece. In Spain the public sector has actually obeyed the strictures of the stability pact more rigidly than Germany, which invented them. Even Greece has a rather respectable record on public deficits in the 2000s, if you believe the numbers. Of its total debt in 2009, 58% was private and 42% public.
‘The main beneficiaries of the explosion of debt were the banks of both the core and periphery, who profited handsomely. Indeed, German and French banks behaved in an extraordinarily foolish way by continuing to lend heavily to peripheral countries, even in 2009. But the crisis extended the deficits of peripheral countries, and core banks eventually realised they were in a pickle. They held a lot of peripheral public debt, while also facing funding problems as the euro fell against the dollar. By spring this year, European banks were on the brink of a major crisis.’
These are the same banks whose employees scooped a £13.6bn bonus pot. As the Murdoch show inevitably fades from view, welcome to a new series starring bankers and hedge funds – the Towering Inferno.
