The Chinese state’s intervention after the stock market crash was immensely political — as was the collapse itself.

A man walks past a Bank of China branch in Beijing. Steven Shaver / UPI

The sheer enormity of the destruction was staggering. In less than a month, from mid-June to early July, the Shanghai Composite Index plunged by 30%, wiping out more than $3 trillion in share value from its June 12 peak. The wealth liquidated in the crash was equivalent to approximately 30% of China’s GDP ($10 trillion in 2014), 20% of the United States’s GDP ($17 trillion), and about ten times the size of Greece’s current total debt ($350 billion).

The collapse sent shockwaves around the world, not surprising given that China accounts for more than one-third of global growth. China’s spectacular stock market crash is a testimony to the increasing volatility and the underlying contradictions of the Chinese economy. More importantly, rather than simply being a financial crash, it is also immensely political.

No one can claim they didn’t see it coming — the only uncertainty was the exact timing of the crash. Since last year, there’s been a 150% rally fueled by margin trading (the practice of using borrowed money to buy stocks). The overvaluation of shares was widely recognized, with some analysts estimating by more than 20 percent. The mainstream financial press had been describing it as a bubble for months. Even the Chinese government, which had encouraged people to invest, issued warnings back in April, and tried to tighten trading rules to dampen the exuberance.

The crash finally came this month, producing widespread panic and pushing the Chinese government to implement a range of stopgaps.

It halted all new stock listings, restricted short-selling (the practice of betting against price falls), and ordered some of the largest state-owned enterprises — and even the state pension funds –not to sell shares. Instead, the Chinese state quickly made plans to buy more shares, while the country’s top twenty-one securities brokerages collectively pledged to purchase shares worth at least $19 billion. The Chinese government also directed the central bank to lend money to brokerages and investors to buy shares totaling $365 billion.

It was this highly political intervention into the stock market — popularly dubbed jiushi, or “rescuing the market” — that came as a surprise to many, both within China and abroad. And what made it even more political was the thought of what the spectacle of tens of millions of individual investors — ordinary people investing their incomes, loans, and savings — suddenly losing their money might do to the legitimacy of the Communist Party.

The Chinese Economy and Its Discontents

Stock market crashes are a relatively new phenomena in China — during Mao’s reign (1949–1976), stock exchanges were regarded as a capitalist institution and thus abolished. They weren’t reintroduced until 1991, well into the post-Mao reform period.

In these early years, however, buying shares was considered too risky; instead, investors and ordinary people preferred to purchase government-issued bonds or put their money in state-owned banks for safe returns. Incomes for the majority of the population were also quite low, so few people could afford to invest in the stock market. While volatility and risk certainly existed, stock market crashes were not a part of the economy.

This started to change in the 2000s as China’s economic growth, facilitated by financial liberalization and the commercialization of the banking system, channeled money into the stock market and fueled a huge bubble. Between October 2005 and October 2007, the Shanghai Composite Index grew from a little over 1,000 points to almost 6,000 points — only to plummet to less than 2,000 points with the onset of the global economic recession.

The effects on Chinese industry were even worse. In the first six months of 2008, with the export sector shrinking due to declining demand in the North American and European markets, 67,000 factories closed across China. In the final quarter of 2008, an additional 50,000 factories were shut down. An estimated 20–30 million rural migrant workers temporarily lost their jobs in the process, and labor protests spiked. Many returned to their rural hometowns.

Intent on instantly propping up the country’s falling growth rate, the Chinese government rolled out a $586 billion stimulus package that focused on infrastructure instead of social services and welfare. It largely worked. The stimulus, and government intervention more broadly, was credited with successfully staving off a deeper recession. With mass unemployment and social unrest still a threat, it has committed to keeping its foot on the pedal and boosting the annual rate of economic growth above 8%.

Despite the government’s concerted intervention, China’s GDP growth rate has continued to decline: a mind-boggling 14% in 2007, it dipped to less than 10% for a few years, and then dropped to 7.4% last year — quite good by international standards, but low for China. This year, GDP growth is likely to be 7% or less, causing concerns about a further slide.

The government has made a virtue out of the slowdown, describing the Chinese economy as entering a period of “New Normal” in which growth is purportedly more balanced and sustainable. But there are lingering economic contradictions that are related to the recent stock market crash.

The housing market, built on the back of rapid urbanization, invited speculation that inflated housing prices. The rapid uptick prompted the government to depress housing prices in an attempt to prevent the bubble from bursting and triggering a wider crisis. This deflationary tactic rendered investment in housing and manufacturing industries less profitable, sending investors looking for high returns (often on borrowed money) to the stock market.

At the same time, the post-crisis stimulus package was being financed mainly through bank lending rather than direct state grants, and was made possible by loose monetary policy. The stimulus ended up exacerbating the existing local government debt problem, which the Chinese government was still working to address via a debt-for-bond swap program shortly before the stock market crash.

Finally, while fixed investment has contributed significantly to China’s growth, consumption levels remain low as a percentage of GDP. A sharper increase in domestic spending is necessary for the transition from an investment and export-led economy to a consumption-driven one, but this is a political issue more than an economic one. Low levels of consumption reflect theincreasing share of incomes going to capital instead of labor in the post-Mao era, where workers have lost employment security and labor rights, and face enormous difficulty organizing independently and engaging in collective bargaining.

The expansionary monetary and fiscal policies the government has implemented since the financial crisis have largely failed to resolve these problems, and the recent crash has only made the situation worse.

The Shape of the Stock Market

Financial liberalization and government encouragement have made it extremely easy and appealing for individuals to trade in the stock market. Since mid-2014, more than 40 million new accounts have been set up, and a significant majority are individual investors.

Share trading, unsurprisingly, is concentrated in China’s major cities and the wealthy east coast. But many also trade in second- and third-tier cities and towns, and the spectrum of who trades has broadened considerably.

One group that has entered the market in large numbers over the past year is younger people, primarily those in their twenties and thirties. These are mostly professionals workers making middle-level incomes, and migrant workers making lower- to middle-level incomes. This demographic’s slow wage growth has encouraged it to put money in the stock market in the face of China’s high urban living costs, exacerbated by the recent housing bubble.

Then there are slightly older people, the mom-and-pop investors in their fifties and sixties who have invested part of their retirement savings in the hopes of then contributing to their children’s housing down payment.

Faced with low interest rates that dissuade them from putting their money in the banks, increasing social inequality, and few other ways to earn higher incomes, more and more people are willing to gamble their savings on the stock market, believing the government will not let the market crash. So while much of the Chinese media has focused on the fact that a plurality of the individual investors has only a high-school diploma — cynically implying that investors’ lack of education caused the bubble — it’s China’s new middle class that is heavily involved in the stock market, acting rationally in an irrational system.

On its own, the stock market crash doesn’t pose a real threat to the survival of the Chinese Communist Party, but popular discontent is growing, with large protests that include an increasingly assertive working class.

Politically, many people in China hold contradictory opinions about the role of the government. They believe, for instance, that the state meddles in and manipulates the stock market to the detriment of the investors. But when the stock market collapses, they hope the government comes to the rescue. Thus, both the failure of the state to control the stock market and what some deem excessive intervention damage its credibility and undermine its legitimacy.

This is a politically sensitive period in China; since its accession in 2013, the new leadership has sought to consolidate its power and regain legitimacy. It has launched an expansive anti-corruption campaign, disciplining more than 100,000 cadres across bureaucracies and levels of government, and simultaneously tightened censorship and cracked down on civil society activism. During the stock market crash, the authorities detained and questioned more than 100 lawyers and NGO workers.

Since the 1990s, China’s middle class has reluctantly offered support to the regime in exchange for a rising standard of living at the expense of liberty and democracy. How the government responds to the crash in the coming months may test this loyalty.

While the threat to the Chinese economy is real, there is a risk of overstating the impact of the crash. Even at its lowest point the shares level in the Shanghai Composite Index merely returned to that of March, still 80% higher than a year ago.

Moreover, the stock market plays a fairly minor role in the Chinese economy relative to other developed economies. The amount available for trading is only about a third of Chinese GDPcompared to more than 100% for developed economies.

The number of participants is also comparatively low. The recent China Household Finance Survey found that only 9% of households actively traded shares and another 4% of households owned mutual funds. And less than 15% of household financial assets are invested in the stock market. This is still a large number given the size of the Chinese population, but it remains a small percentage for now.

In response to government intervention to restore confidence, two days after the market hit a low of 3,500 points, the Shanghai Composite Index surged by 10.6%, the biggest two-day gain since 2008. Fears were eased as the Shanghai Composite Index returned to 4,000 points.

However, despite the rebound, the ability of the state to continually inject money and confidence into the stock market is uncertain, and its decision to reflate the economic bubble may very well increase the size of the problem.

On Monday, the Shanghai Composite Index suffered an 8% plunge, raising fears of a repeat of the downward spiral of early this month. And if another, bigger crash occurs, it may have a significantly greater ripple effect on China’s real economy.

A Left Response

The crash rekindled the age-old debate about the role of the state in markets, and the government response is being seen as a setback for free-market advocates both inside and outside of China. We will likely hear strong calls for greater financial liberalization and a larger role for the market in the Chinese economy. Indeed, there are already criticisms of government intervention and reports of global capital’s displeasure.

The Communist Party is not opposed to more marketization. It has made clear its receptivity to more market-oriented reforms, including financial liberalization, and its willingness to encourage more market competition, private businesses, and individual consumption. However, it has not been able to implement significant reforms due to opposition within the government and state-owned industry. The current anti-corruption campaign is seen as clearing the way for the reforms.

The Left has to resist such deepening marketization, which will only lead to more economic instability and widening inequality. However, our knee-jerk response should also not be to defend Chinese state intervention in the economy as such. The Chinese government is responsible for creating a financial environment where individual investors are lured into gambling their incomes and savings, and its recent actions will likely inflate the bubble further.

Instead, we need to demand more regulation of the financial sector, as well as more equitable distribution of incomes so people won’t depend on risky investment strategies to compensate for low wages and high living costs.

Because of the highly restricted political space in which they operate, China’s social movements — including the restive labor movement, the environmental movement, and the feminist and anti-discrimination movements — often fly under the radar. But they remain China’s only hope for a more socially just and environmentally sustainable society. When the next crash comes, the ability to chart alternative responses rests on their organizational capacity.

Fonte: Jacobin

The Great Depression: Crash Course US History #33

China Bails Out Stock Market with $209 Billion Stimulus, But Who’s Getting Saved?

Political economist Zhun Xu of Beijing’s Remnin University says China is bailing out its own public-enterprises as part of a flawed plan to jumpstart the economy through the stock market –   July 20, 2015

JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to the Real News Network. I’m Jessica Desvarieux in Baltimore.So if you’ve been paying attention to the Shanghai Stock Exchange you’ve certainly noticed that shares have fallen dramatically over the past four weeks. The Chinese government responded in kind. China’s 17 largest commercial banks lent 1.3 trillion Yuan, which is the equivalent of about $209 billion, to the state-backed margin lender China Securities Finance, basically providing stimulus to the markets.Now joining us to discuss all of this is Zhun Xu. He teaches political economy at Renmin University in Beijing. Thanks for joining us.ZHUN XU, RENMIN UNIVERSITY: Thank you for having me.DESVARIEUX: So Zhun, I’m trying to understand what exactly happened. Was this caused simply by speculation?XU: Well there’s definitely the factor of speculation in this crash. But it’s more like structural forces behind this raise in prices.So from last year to now the Chinese Shanghai Stock Exchange rose about 150 percent, and then recently it crashed down to 3500, which is still very high. But then it’s a dramatic fall from the previous high point. Many people got very mad about it.DESVARIEUX: Okay. And who did it really affect? Because in my understanding less than 10 percent of Chinese households actually participate in the stock market. So who is really affected?XU: That’s true. According to the recent survey only 6 percent of Chinese households actually invest in the stock market during the first quarter of 2015. And also speaking of the real economy only 3 percent of the total financing last year came from the stock market. So the ones who are really concerned about the stock market are a very small stratum of the working class and [of course] the governments and large corporations.DESVARIEUX: I could imagine this liquidity though being pumped into the market was helping those corporations and those government-owned enterprises, as you mentioned.XU: Right. Well, I think [inaud.] is short on stimulus. But the long-term project in their minds, I think it’s more profound. As the overall Chinese economy is currently slowing down and the Chinese government is really eagerly looking for new alternatives to maintain the economic growth. And they have rediscovered the stock market as one of the solutions. So they were expecting two things from the stock market boom.First, they were expecting the household, they get more wealth income from the stock market. It would increase their consumption. The second, if they keep deregulating the stock market, they have done that many times, and recently they have removed many regulation on leverage [advancement], which obviously contributes to the recent crisis. And if they keep doing that, they believe this would enhance the economic efficiency and also contribute to growth.So it’s a very important part of the overall economic program of the government. And they obviously thought everything was under their control. So it is not surprising they got into a panic when this doesn’t work.DESVARIEUX: So you mention growth. Do you think that means that China’s ability to dictate economic growth has its limits after something like this just happened?XU: Well, comparatively speaking Chinese government is still the strongest in terms of controlling the market forces. But only in the traditional way. On the stock market, on the financial markets, when you have leverage investment you can have trillions of dollars in a very short period of time. That’s something currently beyond their, I would say imagination or capability.So encouraging investment, encouraging the stock market boom obviously increased the risk that the Chinese government cannot control the market.DESVARIEUX: You also mention consumption, and that being a big part of their economic plan, trying to increase consumption. How is China doing in terms of the level of consumption?XU: The–well, since a number of years ago Chinese growth has been relying solely on investment and very little consumption compared to international standards. So the Chinese leaders, policymakers, have been concerned about that. But a real long-term solution to that for a problem would be increase the purchasing power of the working class, giving them living wage, decent working conditions, et cetera. But the government has been avoiding that. They have chosen a relatively easier way, is to boost their wealth through a stock market boom. But obviously that’s not stable.DESVARIEUX: What is the role of the United States in that, in terms of you mentioned raising wages, living standards for everyday workers? I could imagine United States corporations wouldn’t want something like that to happen.XU: Well. I–well, I believe so. But the problem is we live in a globalized economy. And every increase in workers’ wages could be an actual cost to the company owners who would avoid that. So if the Chinese workers raise the wage by 10 percent and that might drive some capital outside China, go to Vietnam or go to other countries, or go to some other, different provinces of China, that has been going on in recent years. And I think that’s what the Chinese government have been worrying about.DESVARIEUX: All right. Zhun Xu joining us from Massachusetts. Thank you so much for being with us.

Fonte: The Real News Network

Chinese Economy Running Off the Cliff and There Is Nothing Beneath It

Rob Johnson of the Institute for New Economic Thinking says the People’s Bank of China is behind the market plunge –   July 9, 2015

The Chinese stock market is dithers, and we’re going to be discussing this with Robert Johnson. He serves as the executive director of the Institute for New Economic Thinking, INET, and he’s the senior fellow and director of the Global Finance Project for the Franklin and Eleanor Roosevelt Institute in New York.Thank you for joining us again, Robert.ROB JOHNSON, DIRECTOR, GLOBAL FINANCE PROJECT, FRANKLIN AND ELEANOR ROOSEVELT INSTITUTE, NEW YORK: My pleasure.PERIES: So give us a sense of exactly what’s happening in China that’s causing these fluctuations in the market.JOHNSON: Well, I tend to think about the old roadrunner cartoon where the person chasing the roadrunner, the animal called Wile E. Coyote runs after the roadrunner and then runs out over the cliff, stops, takes a pause and looks down, realizes nothing under him, and he starts to fall.Come back to the Chinese economy, what’s going on is with the problems in developed country, slow growth, tepid growth, slow recovery even since 2008. Exports are not vital. They have been substituting for export-led growth with construction-led growth, developing urban real estate and infrastructure.PERIES: And that’s because the demand for the, for their exports have gone down because of the economic crisis in the West.JOHNSON: They–that’s right. They’ve slowed down or decelerated, and it’s not the engine of growth that it used to be.Second dimension, as I mentioned, is the construction spending has now reached a point where they got a whole lot of buildings. A whole lot of empty buildings. What you might call over capacity. So that’s not the engine of growth. And the middle-class consumer, moving out of the, what they call the middle-income trap and moving up. That hasn’t really gotten out of the starting gate yet.So what happened was the People’s Bank of China, the central bank, like our Federal Reserve, started to cut rates. Cut interest rates and provide liquidity to soften the downturn. What that did was set off a rampage in stock speculation. Going back to last fall, in say September, to the present, that market exploded on the upside. Just was hyperbolic. But like Wile E. Coyote, they got out under the cliff, and underpinning it is not a strong, broad-based, recovering economy. And with the anxiety in Greece and the anxiety in other places around the world, and what you might call the narrowness of that stock market and the effort of so many companies to do what they call initial public offerings, IPOs, to issue stock, they just became overwhelmed. And what was an upturn turned into the falling off a cliff downturn.And how did I say–they’re not able to arrest that easily. They’re not able to stop it. The market’s down about 50 percent from its peak, I believe.PERIES: Now Rob, when this happened in the 2007-2008 crisis, the Fed stepped in and did the same thing, lowered the interest rates. Why did it work here and not there?JOHNSON: Because that wasn’t really an equity-based collapse. That was more a credit-based collapse related to the housing markets. And we also did very substantial fiscal stimulus in the Obama recovery and reinvestment act that followed on. So starting in 2009 you had a combination of plentiful liquidity, not a crazily valued stock market, and the fiscal stimulus digging us out of the hole. And the stock market started what has been a multi-year long trend up.In China right now they are not investing in a great deal of what you might call new fiscal program. That fiscal program was the infrastructure and real estate development I just mentioned. So nobody sees an endgame for a soft landing or support right now. Unless, as I said, the Chinese consumer starts to be much better paid, and therefore a much bigger part of the engine of growth domestically within that country.PERIES: Now, the financial press is reporting that attempts by Beijing to, as you said, soften the blow or control the situation doesn’t seem to be working. Why is that?JOHNSON: Well, there’s an old saying in monetary policy. You can only push on a string so far. If there’s not an uptake in terms of confidence and real investment and hiring and other things, you don’t get the follow-through. And I think what we have is a slowdown with lots of liquidity. The momentum trade where people were buying stocks because they were on the escalator, not because being on the escalator was supported by fundamental underpinnings of prosperity.So I think it was kind of a, what you might call a false alarm boom in the stock market. It’s a little bit kind of dreamy, like the optimism that prevailed at the time of the dot com bubble. There were lots of new companies. But whether they would have earnings back in ’98, ’99, 2000, was a real question. And when they didn’t have earnings that stock market declined, and the Federal Reserve wasn’t able to arrest a 3,000 point decline in the NASDAQ, which was the [over the counter] index that had many of the tech stocks in it.PERIES: And what could Beijing be doing in order to stabilize it from your point of view, having managed these kinds of situations, and dealing with hotbed economies?JOHNSON: I don’t think right now anything in terms of what you might call gimmick-type controls can make a lot of sense. But I think a broadening of the base of the economy, meaning wages, reduction of inequality, wage growth, higher living standards in a 5-10 year time frame can leave China, how did I say, in a very good place, on an upward trajectory. But that hasn’t been the custom.China built a lot of their energy on attracting foreign direct investment. And as a result they suppressed wages, they suppressed energy costs, which led to abuse of the environment, and they didn’t put in what you might call environmental protections. So a lot of companies fled there because it was the lowest cost environment for them. There are an awful lot of people in China who are very unsettled with the politics in their country. They feel like their land and their human rights, not so much like human rights we talk about, but the labor conditions, were suppressed in order to make wealthy people and a few of what they call the princelings very wealthy.And there’s a lot of, there’s a lot of dissent underneath the surface in China right now that can only be alleviated by treating people better, getting them better educated, treating the environment better, and building what you might call sober growth based on productivity.PERIES: Narrowing the gap and addressing inequality seems to be the answer for many of the issues that the economy is facing worldwide. Rob Johnson, thank you so much for joining us today.

Fonte: TRNN

Keiser Report: Greece pivoting from debt slavery (E779)

Greek Voters Deliver Stunning Rebuke to Austerity

Michael Spourdalakis, Dean of the School of Economics and Politics at the University of Athens, in an interview with Dimitri Lascaris, says it is time for the Greek government to play hardball with the Troika –   July 5, 2015

DIMITRI LASCARIS: This is Dimitri Lascaris for the Real News. Over the past five months Greece’s newly-elected government led by leftist party Syriza has been locked in difficult negotiations with the ECB, the EC, and the IMF, otherwise known as the Troika, in regard to the so-called bailout of Greece. The bailout has enabled Greece to service its debts for several years, but has also obliged Greece to enact austerity measures that have resulted in a severe contraction of the Greek economy, and what the government describes as a humanitarian crisis. The new Greek government has sought to secure further funding, but has been unable to obtain it from the Troika, in order to service its debts because it felt it could not agree to the further austerity measures being demanded by its creditors.Matters came to a head last week when the Greek government felt it was presented with an ultimatum by the Troika. Rather than accept the ultimatum, the government surprised many by calling a referendum on that ultimatum. Today Greek voters said oxhi, or no, to the last offer of the Troika. Here to discuss the consequences of this vote is Michael Spourdalakis.Michael is the dean of the School of Economics and Politics at the University of Athens, and a professor of political sociology and the director of the Laboratory of Political Communication and Media Information at the university.Welcome, Michael.MICHALIS SPOURDALAKIS: Hello from Athens.LASCARIS: And thank you for joining us at this late hour.Obviously this has been an extraordinarily difficult week for the Greek government, and also for the people of Greece. Now that the referendum is over, and the oxhi vote has clearly prevailed, please tell us where the vote currently stands and what the mood is in the capital this evening.SPOURDALAKIS: Well, we have almost all the vote counted at that point, and the result is about 61.3 or around there for the no vote, and the rest is for the yes. Clearly a difference of approximately 23 points. The most optimistic prediction just as of last night for the no vote was around 10 points.So you can imagine it was a pleasant surprise, a great victory for the forces who said no to austerity primarily. The forces who sent a strong message to Europe to stop austerity policies. And a hope for agreement, an agreement with the so-called institutions. An agreement, however, who will give a bit of space to the Greek government to maneuver and put the house in order eventually for the benefit, of course, of the lower social classes.LASCARIS: Now, many, despite the landslide victory of the oxhi camp, a substantial percentage of the population did vote yes. And many observers during the week have expressed concern that the referendum might open, or reopen, old wounds from the historical battles between the right and the left in Greece. Including, particularly, the civil war that followed the second World War. What do you expect the reaction of the yes camp to be to this rather decisive defeat at the hands of those who are opposed to austerity?SPOURDALAKIS: This is correct. The yes vote campaign was crafted around a whole scenario and a [network] of scare tactics. And also they tried to rise polarization to the level that we haven’t witnessed in the last many years, in fact.However, this didn’t work out for them. Of course there was some kind of polarization. But today it was proof that that was very artificial, and this was primarily in the media but never hit the streets, or even I would add, the hearts of the Greek voters. There were no instance in the cases, as you know, as we all know, in the cases of polarization in the previous years we had some incidents that they didn’t guarantee a peaceful process around the elections.So the elections were very smooth, very peaceful, and that proved, that brought to the fore another great defeat to the media that they, in the last few months and in particular in the last week or so, that were very aggressively campaigning for the yes vote. So I don’t think–I don’t have any fear about this function of polarization.In addition to this, Prime Minister Tsipras tonight just called for a meeting of all parties’ leaders. Now, mind you, there the leader of the opposition is not going to be present because he resigned tonight.LASCARIS: That would be Antonis Samaras, the leader of the right wing–.SPOURDALAKIS: Antonis Samaras–resigned, yeah. The leader of the opposition and the previous prime minister resigned from the leadership of his party. So that risky, for many people, initiative by Tsipras to call for a referendum had many repercussions inside Greece and outside.Send a message to Europe, say yes, we want–Greece would like to be part of the European process. But part of the European process, that first of all is democratic. Secondly is, that process and this development and dynamic should be based on real dialog, solidarity, and democracy. That’s something that we haven’t seen in the past many, many years, where primarily Germany assisted with France, occasionally in fact they dictate what is happening, what is going to happen in the union, bypassing in the most arrogant way you can imagine the will of the nations. So the governments that they might have minor differences with, with that kind of leadership.The question in Europe–let me say two more phrases. The question of the referendum and the question of the relationship between Greece and Europe is not just the economic problem. The rescue, if you like, quote-unquote, plan for Greece, it has to do with the issue of democracy.Greece has been, and we all know that, the only democratic response after the crisis in Europe. And this hasn’t been appreciated by the EU’s leadership at all. It’s been disregarded. It seems to me that European leadership can much more tolerate the right-wing populismo, or even neo-nazis, so radical right expressions or responses to austerity more than the democratic response to austerity. Even this might happen to be Syriza, in other words, a radical left party.LASCARIS: Now, in the week following the announcement of the referendum, Christine Lagarde and other officials from the Troika said that the last offer put to Greece by the creditors would expire at midnight on June 30 when the current so-called bailout expired. And after that, Greece’s Prime Minister Alexis Tsipras made an offer to Greece’s creditors which many considered a substantial acceptance of the Troika’s last offer with some modifications.Those of us who negotiate for a living usually withdraw offers that we have made once our negotiating position has strengthened substantially. And the first question I have is, do you think that that offer, the one made by Prime Minister Tsipras, is now off the table? And secondly, just minutes after it became clear that the oxhi camp was going to win the renowned economist Steve Keen, who has been quite sympathetic in his public statements about the crisis to the current government, published an op-ed in Forbes magazine in which he said it was time for Yanis Varoufakis to play hardball, because his hand had been greatly strengthened in the negotiations.And so in addition to my question about whether you think that offer will be withdrawn, what do you think the essential elements of this new deal have to be in order to satisfy those 60 percent or more of the Greek electorate who voted oxhi today?SPOURDALAKIS: Okay. 61-plus percent is a, it’s a wonderful support for the government and it’s a very clear and loud voice, an anti-austerity voice, coming from the little corner of Europe, Greece, towards Europe and towards the world. However, at the same time it’s very difficult in some ways for the government to negotiate.In other words, the government cannot ignore this strong voice. Cannot ignore the will of the people which is very clear they’re not willing to make compromises. And I don’t know what the beginning of the agreement or the plan, the proposal of the agreement would be. And if in this plan would be the latest proposal that Tsipras made.However, I can suspect judging by many statements made by many officials and Tsipras himself, they are willing to compromise even the moderate Keynesian program of the, the so-called program of [Salonika] from last September, if there four–under four conditions. Pre-conditions.One, labor relations. Labor relations should be re-instated to where they were in before 2010. Number two, no cuts in wages and pensions. Number three is on the table should be an agreement about the restructuring of the debt. And number four, a generous support for development. Everything else can be renegotiated.Now, if one looks at the proposal put forward, some of the proposals [that] the responses of the Greek government to the proposals of the institutions, one might see that the spirit of these counterproposals are more or less the same–and you’re right in that regard–with the previous plans of the institutions. In other words, we collect money, we go through some kind of austerity measures in various areas, and so we can borrow money and pay our debtors.The last, however, proposal–the last few proposals, however, they wanted to follow that path but have somehow a class bias. In other words they wanted to get money from overtaxing the rich and the upper-middle class and much less the lower, the lower social strata. In fact, it has been estimated that say two-thirds of the government’s revenue should come from the upper–the upper-middle classes, and one-third the lower classes. However, it seems to me that the IMF does not want this quote-unquote class bias. They want horizontal cuts, et cetera. So that was one major friction.Now, with 62, or almost 62 percent of the no vote, probably the government will be able to push for such, for a proposal along this line, including of course the four requirements I already referred to.LASCARIS: Okay. One more question before I let you go, because I know you’re tired. It’s late at night in Athens and I appreciate you taking [inaud.]After the referendum was announced, successive leaders of the Eurozone came forward, almost a procession of them, and stated publicly that an oxhi vote would be equivalent for a vote for GREXIT. In addition–and you talked about how the polls leading up to this referendum, none of them came close to accurately predicting the size of, the margin of victory for the oxhi camp. And there are people who have said that the polls in Greece that have shown a desire to remain within the Eurozone can’t be relied upon because they’re generally commissioned by the media, which is dominated by the oligarchy.SPOURDALAKIS: One company, in fact, was very close to–one [new] company who is supposed to be very independent and doesn’t play with data. But everybody else is–almost everybody else.LASCARIS: Right. And those who’ve, who’ve cast doubt on the polls showing a desire of a majority of the population to remain within the Euro point for example to some few polls that have been done by external polling organizations like a Gallup poll in December 2014 which showed that a slight majority of Greeks wanted to return to the drachma.In light of what the performance of, the relatively poor performance of the polls in the run up to this referendum, and in light of the fact Greek voters were told quite unequivocally by the leaders of Europe that an oxhi vote would be a vote for GREXIT, couldn’t one interpret the result tonight as being a mandate for the government to take Greece out of the Eurozone?SPOURDALAKIS: No. Because that wasn’t the essence of the campaign, although that was claimed by the yes campaign. The yes campaign was not around the actual question. The yes campaign was, tried to change the discussion or the dilemma of the referendum between Euro-drachma, kind of thing. So that’s not the case.But I have to say that to get out of the Eurozone, that’s not an easy affair. That’s not very, very, very easy. The European law should be violated more than once to be able to have a result like that. European Union forms an economic and monetary union with a sole legal currency in Europe, quote-unquote. This is in the founding document of the Union. Every country member of the Union should become member of the Eurozone. Every country who is not in the Eurozone is in a temporary deviation. I don’t know if I translated that point, the term properly, from the rules of the Union. And every two years, Eurozone people go and check the economic and fiscal preconditions of every country who is not in the Eurozone to make sure that they are preparing to enter the Eurozone.Entering the Eurozone, you cannot exit. You can–because it violates the letter and the spirit of the whole union. There are various articles of many agreements, of the Lisbon agreement, of the founding document of the European Union, that do not allow that. And if the country who is a member of the Eurozone, such as Greece, who happens to fall into this, into deviation kind of a status, needs to be assisted, cannot be kicked out. Even if Greece asked to be kicked out, asked to resign from the Eurozone, this cannot be done. So it has to be a very political decision.In other words what I’m saying, it’s very, it’s impossible as the European law stands right now to kick out any country, not just Greece from the Eurozone. And it’s extremely difficult to kick a country outside the European Union as a member state. The latter is allowed under many complex and very many difficult processes.So all along, this discussion about GREXIT, it’s a bit too much. And too much economically determined. On the other hand, I understand very well that my approach here is very legalistic, and we don’t know that either one, either the economic or fiscal approach, or the legal approach, cannot beat politics. So it’s a political decision which can bypass both economic restraint and legal requirements for Greece’s membership to EU and to the Eurozone.LASCARIS: Thank you very much, Michael. I hope we’ll be able to interview you again as this important and fascinating story unfolds, and thank you for joining us this evening.SPOURDALAKIS: You are most welcome. We always wait for your solidarity, because there are a lot more interesting things for democracy and developing, and also many hopes have arise for another kind of social arrangement. More just.LASCARIS: Thank you, Michael. And this is Dimitri Lascaris for the Real News.

Fonte: TRNN

TRNN: The Modern History of the Greek Debt Crisis

John Weeks, the author of Economics of the 1%, explains the history behind the Greek debt burden –  

February 25, 2015

I’m joined by John Weeks. He is a professor emeritus at the University of London and author of his new book The Economics of the 1%: How Mainstream Economics Serves the Rich, Obscures Reality and Distorts Policy.Thank you so much for joining me again, John.JOHN WEEKS, PROFESSOR EMERITUS, UNIV. OF LONDON: Thank you.PERIES: John, so in the earlier segment, we were talking about how Greece got to where it is now–in great debt–and the new finance minister, Yanis Varoufakis, negotiating in Europe with European finance ministers and the troika on what can Greece do in order to make sure it doesn’t default, but at the same time meet its mandate and its commitment to its voters that just elected them into power.But this segment is dedicated to how Greece got there. So, John, how did Greece get there?WEEKS: Well, it’s a long story, which I’ll shorten with, you might say–which I’ll bullet-point.But first let me say one thing everybody should get sorted out, that there’s brinkmanship being played in the European Union, but it’s not by Greece. The Greek government is accused of intemperate language and pushing things to the brink. The brinksman or the brinksmen are in Germany. They aren’t in Greece.Okay. How did we get to this situation? We need to go way back. We need to go back to World War II, when Germany occupied Greece for three and a half years. The Nazis invaded Greece. They occupied it for three and a half years. For three to half years, tens of thousands of people were killed. But the relevant thing for the current Greek debt is that during that occupation, the Nazi government required the puppet government in Athens to make loans to the German government to pay for the occupying forces. You know, you might get your head around that for a moment. So you had the Greek people paying for the soldiers that were occupying them.PERIES: They were forced to do that.WEEKS: They were forced to do that. There was no choice. And loan’s at zero interest rate.At the end of World War II, the German government recognized that this was unfair and it promised to repay it. If that were now increased at the market rate of interest all those years, it would be close to 100 billion euro, about 40 percent of the Greek debt. That debt that Germany owes Greece is not included in the reparations agreements which were made in 1953, and at several other meetings that finally cleared up what Germany owed the victorious powers–by the way, Greece got relatively little of it; most of it went to the major powers, as you might expect.Okay. So why is that relevant? It means the Greek finance minister has raised this, and it is probably something that even could be litigated. But it gives a tremendous moral strength to the Greek argument. I would say that’s the first point to make about how we got here.The second point, before we actually get to the Greek debt, is in 1953 there was a meeting in London over the debts which the German government owed to the victorious powers, and banks and the governments who were the creditors received a haircut. That is to say, the German government managed to get a renegotiation of the debts that it owed, which I think under no circumstances could be considered odious, except in the sense that the German government could have said, well, we are no longer Nazis in power, so we shouldn’t have to pay this. Now all the Greek government is asking for is a similar type of treatment.So how did they get so much debt? I would say probably one of the most important things was in the 1990s, when the Greek government wanted to enter the euro. And this is an example of be careful of what you want, because you might get it. So I’d have to stabilize the drachma in order to enter into what was called exchange rate mechanism.PERIES: Explain that, John. What do you mean destabilize the drachma to enter the euro?WEEKS: In the 1990s, in the planning for the creation of the euro, every government that wanted to join the euro–I forgot the British did not want to join. But every government that wanted to join had to link to, in effect, the Deutsche Mark and hold their currencies stable in relationship to the Deutsche Mark. So their currency was only allowed to fluctuate a little bit. And at the same time, they were required to have a certain rate of inflation and fiscal deficits and debt and so on. But those things were really secondary, because a lot of people were doing a bit of quick and dirty finance about it, such as the Italians, and also the French, in order to make those rules. So the main thing is you have to stick to the movements of the Deutsche Mark.And the way the Greek government did that was by borrowing hard currency to support the drachma in relationship to the German currency. So they built much of this debt not for wild spending on social expenditures or pensions or early retirement, all of these myths about the lazy Greeks. They built most of it up in order to enter the euro.So you got to the year 2000, and they had a substantial debt. And then you come the crisis of 2008 and the bottom falls out of the European economy, revenue declines in every country in Europe, including, of course, Greece. As revenue declines, they go from a fiscal deficit of about 2 or 3 percent, not very large at all, in 2006, 2007, until–in 2000 [sic] it’s up to 15 percent of GNP.Being in the euro, they couldn’t print money. They couldn’t borrow from themselves. So, therefore what they had to do was borrow in–from commercial banks, borrow euros from commercial banks. And that’s how they built up the debt even larger.PERIES: And so now they go into a crisis where their debt is growing at a faster rate and unable to pay it back and is unable to provide any of the basic services necessary for a state to function. And they go back to be bailed out and ask for more money in order to sustain itself.WEEKS: Yeah. You’re right. I’m going to make a couple of points on that. The first point is that the actual absolute debt is more or less stable. The problem is the ratio of debt to GNP. And when you have a declining economy–you know, you don’t have to be a statistician, you don’t have to be a Nobel Prize winner in economics to realize that if one of the your measures or criterion for success, if one of those is a ratio of debt to GNP and GNP is falling, then you’re in trouble, because the major way that countries reduce the heavy debt burden is through growth, not through reduction in how much you owe. So, for example, the United States in 1945 had a deficit coming out of the war that was 250 percent of GNP. Ten years later, it was down to 100 percent.PERIES: Okay. In the minds of the troika and the European powers, how is it that austerity actually works in their mind? Because to ordinary people, this makes no sense. You know, if government cuts back, lays off people, and there’s less revenue being generated for the state by the taxes that they would be paying otherwise, how do they see the economy growing in order to be able to pay back the loans by implementing austerity?WEEKS: Well, it’s a mystery to me, but I’ll attempt to do it.You know, some people half-seriously say, well, the German government is the moving spirit by this austerity. And in German the word for debt and the word for guilt are the same word. And so there’s this underlying idea that debt is a sinful thing. I think there is some truth to that. But I don’t think the German finance minister and Merkel and so on are coming from that place.I think that there is something more sinister going on here, if I could put it that way. Much of those debts are held–Greek debts were held by German banks. And those banks wanted full payment. Just as in the 1980s, the Latin American debt crisis that U.S. banks particularly–but there were also banks in Britain and other places held a debt of Latin American countries. They were saying, we want full payment. And they kept pressing for that until you reached a point where it was obvious that it was impossible. And only then did the U.S. government step in with some mild measures to facilitate sort of a easier repayment of the debt. That was the Baker Plan and then, subsequently, another plant in the mid 1980s.What we have now is a German government still with banks that hold about 20 percent of the Greek debt, plus Germany is benefiting quite a lot from its position of control in the European Union. And it is running a large trade surplus with the rest of the European Union, with the rest of the Eurozone in particular. And I think it is to the benefit of German big business that this austerity, these austerity policies are maintained. Now, so I think that that’s partly–if you want to know the–the formal argument that–they’re down to a very simplistic argument now. They’re just saying with this huge debt, it discourages investment; until you get it down, the economy won’t recover. This is not clear.PERIES: Now, the danger of this, of course, is it’s not just Greece, but there are several other countries that are in a similar situation, as you said earlier. Now we’re looking at Spain in a similar situation. Ireland could possibly be in a similar situation. And this could grow throughout Europe to the point that their whole continent might be in crisis. So what is the solution?WEEKS: Well, first of all, let me say you’re absolutely right. And it has finally become obvious to people throughout Europe that austerity is a class question. The austerity falls on the poor and the middle class and doesn’t fall on the rich.And debt is a class question. The debt is incurred by the rich. They–for the most part the banks and other financial institutions–hold the debt, and it’s the people who pay it off.In addition, that one thing that’s been absolutely crucial to these austerity plans is the reversal of the balance of trade of the countries suffering from austerity policies, into which they’re supposed to run a net surplus and trade. Well, again, you don’t have to know a lot of economics to understand that. So not only has Greek GNP been going down, but the amount available to Greeks has been going down, because if you run a trade surplus, what that has to mean is that what you consume domestically is less than what you produce domestically. And that trade surplus is funding repayment of the debt. It is a unrequited outflow. It’s as if the German government came and picked up in big trucks, you know, Greek olive oil and Greek whatever else Greeks export and shipped it off and didn’t pay for it. That’s in effect what it’s happening. And I think in Spain, in Ireland, that’s beginning to be recognized as what is happening. I think it’s also beginning to be recognized in France. But, unfortunately, the response in France is the rise of far right, not the rise of the left, and that is a real danger.I was–up until just a few months ago, I was quite pessimistic. I thought that the austerity policies were going to provoke a rise of fascism again in Europe. But, fortunately for all of us, in Spain and Ireland and Greece, the progressives are leading the fight against austerity, and I hope that dampens down the rise of the fascists in the other countries.PERIES: Right. And, John, we’re going to be following what the Greek finance minister has tabled in terms of what’s a more rational plan for the Greek people and how the finance ministers of Europe is going to respond, as well as the troika. And I hope you join us for further analysis on this in the near future.WEEKS: Well, I would very much like to do that and I would say to all of your listeners, keep your eye on this, because this is not some strange, arcane thing that’s going on in some small country in the corner of Europe. This is something that affects all of us in every country.

Fonte:  TRNN