Monday, 11 April 2011

This little PIGGY had a bad day in the markets

Portugal (P) has joined Ireland (I) and Greece (G) as the third country to seek a ‘bailout’ from the European Central Bank (ECB) after Lisbon’s erstwhile leaders admitted they could not refinance the country’s debt. Thus the ‘PIG’ at the European periphery is to be provided with lines of credit in hopes it will experience mere hunger rather than starvation and not drag down the whole EU farm.

Prosperous Germans, smug French and battered Britons all tut-tut in self-righteous fustian at the sight of this PIG feeding at their neat troughs. What is missing from the picture is that the German and French and English banks would be the ones to lose big euros were the three little PIGs to stop paying. Default, sovereign default no less, is the big bad wolf whose lungs the financial titans do not want to see exercised.

Therefore, the ECB has arranged hefty loan packages to these three nations to roll over their mountains of debt while everyone prays for betters days, especially for the Euro-PIG to remain a trio and not turn suddenly into a quartet with the addition of Spain (PIGS) or even Italy (PIIG). In exchange for this self-interested largesse, the working people of Ireland, Greece and Portugal are expected to abandon any thoughts of reducing unemployment, enjoying public benefits or having the state do much of anything ever again. Such sustained assaults on the domestic economies of these countries begs the question of how they are ever expected to grow fast enough to pay off all these debts, which are not being forgiven but merely kicked down the road. The short answer is that they are not really expected to do anything of the kind.

Of what does this remind us, those of us sporting a certain age? Why, it’s nothing but the Latin American Debt Crisis of the 1980s reappearing in the Old World, a sort of non-traditional export sent back to the mother countries along with the Chilean grapes, Argentine beef and Brazilian soybeans. Then too, countries borrowed excessively; external shocks ensued; national economies went down the crapper; and suits from the International Monetary Fund rode to the rescue bearing aloft the writ of Milton Friedman. The state sector was crippled, subsidies slashed, industries privatized; shock treatment was considered the only sure-fire cure, to pile the pain on the most vulnerable after the financial geniuses in charge had driven their countries into bankruptcy.

The Portuguese and the Irish today are being taught the same strict lesson by a similar convent of nasty monetarist nuns. But there is one big difference between the peoples crushed by the IMF in the 1980s and the Europeans expected to atone for the bankers’ sins today: dictatorship. Chile’s Pinochet, Argentina’s Videla and the Brazilian generals could crush opposition to these punishing policies with the threat of torture, disappearance and death, and they did. European political elites, by contrast, have fewer repressive tools to fall back upon, and plenty of Greeks and Portuguese are old enough to remember their own dictatorships and probably not at all keen on resuscitating them.

In the long run, it is hard to see how the downward debt spiral will end in anything but default just as occurred with the historic Argentine repudiation of its debt in the early 2000s. A lot of hand-wringing took place with cries of lamentation about how the apostate country would never bounce back from the heresy of stiffing international financiers, but then again they would say that, wouldn’t they? It turned out not to be true, and after a nasty year or so, Argentina recovered remarkably and has enjoyed healthy growth ever since.

The financial sector is so dominant in western capitalist societies today that no political leader would dare to impose these essential losses on them, so the inevitable solution is postponed and the situation allowed to worsen, as encapsulated in the marvelously telling phrase, ‘Extend and pretend’. This guarantees that the eventual impact will be much worse, but such are the unhappy results of whole nations handing over their butts to banks on a silver tray. We’ve just witnessed the same denouement here and no doubt will enjoy the same rewards sooner or later.

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