Greek capitalism – a tragedy in several parts

This is a case of irresponsible governments, not banks. However, one has to be careful that responses to such crises are not in danger of propping up the underlying capitalism.

Mainstream commentary has focused on the corruption of Greek politicians or used the opportunity to bash the Euro. Rarely is it admitted that the problem lies with the globalization of capital itself. Greece, like most western nations in trouble, is a victim of the illusory promises of trans-national capital – the vast funds of money that come from pension, hedge and international investment funds. Its government, lured by the smell of cheap money, has borrowed heavily on international markets to run up incredible amounts of debt. 2010 government debt is expected to stand at 120% of Greece’s gross domestic product [GDP]. It is hardly any wonder the markets have spooked, with the result that nice cheap money is being withdrawn from the country leaving the new left-wing government unable to cover existing expenditure, let alone future promises. Ultimately the process starts with the notoriously secretive defence budget. Nobody knows how many billions are funneled into it, and for a long time nobody asked, making a mockery of budgeting altogether.

In 2001 Greece joined the Euro, a condition of which is a budget deficit less than 3% of GDP. It was allowed to breach this, and the equally dubious public budgets were tacitly accepted by the rest of Europe. Since 2001 it has only been in the financial years 2007-8 that Greece actually reduced its public debt to less than the 3%. In 2009, with a shrinking economy, it jumped to 12.7%. Despite a 4% growth rate in the years up to 2007, boosted greatly by the spending on the 2004 Olympics, unemployment and inflation remained well above the EU average. None of this mattered, as Greece only accounted for 3% of the European Union economy. The EU was actually a major source of financial aid, to the tune of 3.3% of Greece’s GDP. It propped up the desired story that the Euro was good news for peripheral economic powers such as Greece.

Effectively, Greece was receiving the tacit support of the economic superpower that is the European Economic Union through the Euro. In the good years there was no need for investors to question that Greece might be anything other than the slightly errant younger brother in the European family. So borrowing money from the international markets was not that hard for the Greek government. With 40% of GDP coming from government spending, it needed it. Like with the UK – and there are important similarities between the UK and Greek financial systems – and many of the other financially crumbling nations, growth, it turns out, has been largely funded by debt. The deflation of the western credit boom has not come to an end. Debt-laden nations rather than banks are those now the facing the firing line. And previous Greek governments have been depending on such credit to such an extent that the only option has been to go bust.

There are two factors of international capitalism at play here. Firstly, there are the existing funds from where Greece sourced the money to plug holes in its budget in previous years. In the light of the financial troubles in other countries, investors began scrutinizing every country. It has been fairly obvious that Greece is the weakest link in the European Union with its open flouting of rules. Already risk adverse, they began pulling their money out with the result that Greek government debt bonds fell in price. Once a downward spiral begins then it picks up momentum as more and more investors follow suit. In a downward market like this one raising new debt is very difficult. Greece has got to the point where it was becoming ever more expensive, if not impossible. Those who lend to countries which are essentially bankrupt charge higher interest rates for the risk.

rest of the article here:  http://www.freedompress.org.uk/news/2010/02/21/greek-capitalism-a-tragedy-in-several-parts/