Financial Turbulence Shakes the Eurozone: Facing the Debt Crisis in Europe
The blatant social injustice of macro-economic policy
by Damien Millet and Eric Toussaint
July 15, 2011
One of the avatars of the financial sector crisis that began in 2007 in the United States and spread like wildfire to Europe, is the enthusiasm shown by Western European banks (especially German and French banks, but also Belgian, Dutch, British, Luxemburg and Irish ones) in using funds lent or donated massively by the Federal Reserve and the ECB to increase their loans to several Eurozone countries between 2007 and 2009 (Greece, Ireland, Portugal, Spain) racking up juicy profits due the higher interest rates there. For example: between June 2007 (beginning of the subprime crisis) and September 2008 (Lehman Brothers bankruptcy) loans by private Western European banks to Greece rose by 30%, from 120 to 160 billion Euros. Western European bankers jostled to loan money to the European Union periphery to anyone prepared to incur debt. Not satisfied with taking extravagant risks across the Atlantic in the subprime market with the money of savers who made the error of trusting in them, they repeated the same operation in Greece, Portugal and Spain… Indeed, the fact that some peripheral countries were in the Eurozone convinced Western European bankers that the governments, the European Central Bank (ECB) and the European Commission would come to their aid in the event of problems. They were not mistaken.
By the time heavy turbulence shook the Eurozone from Spring 2010, the ECB was lending to private banks at the advantageous rate of 1%, and these banks in turn demanded a far higher return from countries such as Greece: from 4 to 5% for three-month loans, approximately 12% for 10 year securities. The banks and other institutional investors justified such requirements by the “default risk” among the so-called “risky” countries. As a consequence the rates increased considerably: the IMF and European Union loan to Ireland reached 6.7%, compared with 5.2% to Greece six months earlier. In May 2011, the ten-year Greek rates exceeded 16.5%, meaning Greece could only borrow for three or six months, or resort to the IMF and to other European governments. Heretofore, the ECB had to guarantee debts held by private banks by buying State securities from them … despite its stated policy against lending directly to the States.
Seeking to reduce risks, French banks diminished their exposure in Greece in 2010. It melted by 44%, falling from 27 to 15 billion dollars. German banks made a similar move: their direct exposure fell by 60% from May 2010 to February 2011, from 16 to 10 million Euros. The IMF, ECB and European governments gradually replaced bankers and other private financiers. The ECB holds an amount of 66 billion Euros in Greek securities (20% of the Greek public debt), which it acquired on the secondary market from banks. The IMF and the European governments lent 33.3 billion Euros up to May 2011. Their loans will increase further in future. But that is not all; ECB accepted the equivalent of 120 billion Greek debt securities as guarantees (collateral) for the loans it had granted to them at a 1.25% rate. The same process has been undertaken with Ireland and Portugal.