What's A Little Debt Between Friends?


"It was a inexplicable turmoil, one of those confused battles where everyone collided, soldiers and captains alike, trying to save their skins: deaf, blind, having lost a clear understanding of the situation. The fronts dripped with sweat and the implacable sun that burned the markets left the exchange a fiery glare."

Since the financial market turmoil began in 2008, the pall over the global sharemarkets has been reminiscent of the 1891 stock market panic described by Émile Zola. Entire countries have been on the point of bankruptcy — only to have their ability to repay government debt guaranteed by the European Central Bank and its member nations.

This week has seen another deal for Greece settled. This time it will ensure that the indebted southern European nation can keep paying off its debts and that no further member of the Eurozone needs to default.

The Greek summit came just weeks after the latest stockmarket panic over Italy’s ability to repay its debts. As German weekly Der Spiegel put it at the time, two groups drove the "herd-like" speculation against Italian bonds. The first group were investors fearing that "their loans would return a great deal less" if Silvio Berlusconi forced them to write off a percentage of their loans.

The second were American hedge funds betting on an Italian default through "selling bonds they had only loaned out," in order to buy them back at lower prices and make large profits. Hedge funds and other investors were also buying credit default swap (CDS) bonds, originally designed to offset investor losses, "but which now used as instruments of speculation by investors with no such investments," who make large profits as the value of the bonds rise, according to Der Spiegel.

These bonds were heavily criticised in the lead-up to the summit. Madrid daily El País quotes US investor Warren Buffett’s 2002 description of the CDS bonds as "weapons of mass financial destruction". The paper adds that these have been used "in quantity" to bet on a Greek default.

By whom? El País argues that it’s a mystery: transactions of the CDS bonds are made "over the counter, between operators, with no intermediaries, no central registry, no control … but dispersed throughout the financial system".

Yet a regulation or restructure of the financial system and the instruments used by it was not on the agenda at last week’s Brussels summit. Le Temps de Génève summarises the outcomes agreed to at the summit. The European countries are to put in place a "European Monetary Fund" to begin in 2013, which will "have room for manoeuvre, without necessarily needing approval from national parliaments," when deciding how to lend out funds given by member nations to support temporarily struggling fellow Eurozone members — though Germany still has some reservations about this last.

This long-term measure was accompanied by a short-term fix for Greece, reports Le Temps, with European nations pledging to "continue supporting Greece" by extending the duration of its loans from 15 to 30 years, with the interest on these loans set at 3.5 per cent. Some private creditors will also agree to sell back some of their debt to Greece at a loss, while others will accept a suspension of their loans for six years on average.

This, plus a massive sell-off of Greek government assets, will ensure that Greece can keep going until the end of 2014. The country’s line of credit is now 214 billion euros — and it still owes 350 million euros. "The calculation is simple: Greece is foundering under a mountain of debts; the new support offered by the Eurozone means it could take on at some point in time a part of the Greek debt," is the analysis offered by the Geneva paper. Thus the debt "continues to burden with its full weight".

This solution has been criticised has been described as "idiocy" elsewhere in the European press.

German weekly Die Zeit lays into the "saviours in Brussels, Berlin and Paris" who have effectively "saved Greece until September," when the next tranche of Greek bonds expires. The Hamburg-based paper says recent attacks on the credit agencies for downgrading Greek debt miss the point: while it may be true that the credit-ratings agencies "described rubbish as gold" before the financial crisis, the "situation in Greece is every bit as bad as the pros are claiming" right now. The only solution to the crisis is the pooling of European debt, says Die Zeit — which is exactly the solution the German government is focused on avoiding.

American government debts are already pooled, but the problems with debt in the United States are just as unresolved as those in Europe.

Negotiations in Washington to agree to raise the ceiling on US debt collapsed on Friday evening "after Republican House of Representatives leader John Boehner broke off negotiations," reports the Svenska Dagesbladet. The negotiations are aiming for a 2 August deadline, after which the United States can no longer pay its bills.

The paper says Barack Obama foreshadowed on the weekend that "he alone might assume responsibility for raising the ceiling on government debt without budget cuts," a move likely to dismay his congressional opponents, who’d been insisting on the cuts.

Yet if this did not occur, and the US were to default on its debts (even for a short time) the result would be catastrophic, claims Portugal’s Expresso. America would again fall back into recession, having barely emerged from the recession of 2008-2009. This is what prompted the very high deficits of recent times: "yet this time [the deficit]has been used to mobilise the public around the ideological objectives of the Republicans" argues the Lisbon daily.

The prospective rise in the debt ceiling being argued about right now would be the 74th of its kind, says the French tabloid Le Parisien. The paper says the result of a failure in the budgetary negotiations between the President and Congress would be that the "almighty United States would astonishingly no longer be able to issue money in order to service its debts" — an event that would surely prompt a grim sigh of recognition from politicians on the other side of the Atlantic.

ABOUT BEST OF THE REST: It’s a big world out there and plenty of commentators and journalists are writing about it — but not always in English. And not surprisingly, ideas about big events of the day shift when you move away from the Anglosphere. Best of the Rest is a fortnightly NM feature by Berlin-based journalist Charles McPhedran. Charles reads the news in French, German, Spanish and Portuguese and reports on what the rest of the world is saying about the big stories.


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Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.