Europe's economic crisis

Greece, a step away from default, the euro at risk

May 10, 2010

Last Tuesday, Standard and Poor’s rating service, one of the three agencies that, together with Moody’s and Fitch, "grade" the debt of different countries, lowered Greece’s bonds to the level of "junk bonds." The rating closes the doors for Greece to get financing through big institutional investors like investment and pension funds. With the "BB+" rating, Greece’s debt is relegated to the category of speculative investment. At the same time, the agency assigned a recovery rating of 4 to the Greek debt, which indicates that, in case of restructuring or a moratorium, one could expect an average recovery of between 30% and 50% of the value of the bonds. Standard and Poor’s also lowered Portugal’s debt rating, although without taking it to the level of the Greek debt. The effects were felt immediately, with a sharp rise in the price of gold, a decline in the price of oil, and a steep fall of stock markets on both sides of the Atlantic. While the Athens stock market fell by 6%, Lisbon’s by 5%, Spain’s by 4%, all the European stock markets were falling an average of 3%. In New York, the Dow Jones index fell by 1.9%, and the NASDAQ (technology stocks), by 2.04%; the stock markets of Brazil and Argentina also suffered big declines. The euro fell below $1.32 US, and the euro zone is in the worst economic crisis since its creation. On Tuesday, yields on Greek 10-year bonds reached 9.5%, and the yield on short-term obligations (2-year bonds) reached 15%. Yesterday, Standard and Poor’s added to the list a lowering in the rating of the Spanish debt, with which the markets again tumbled.


At the end of last week, Greece officially asked that the bailout plan agreed to by the EU and the IMF be put into practice. Over the weekend, both institutions met in Athens, negotiating with Papandreou’s Greek government. However, once more, nothing concrete came out of those meetings. First came threats from Germany, that, through its Chancellor Angela Merkel, indicated that Greece would not get help if it failed to announce more budget cuts and a program of savings and "viable and credible" reforms, to reduce its 13.6% public deficit and its debt of more than 300 billion euros. In response, Greece warned that if they do not grant the loan that it has been negotiating with the EU and the IMF, on May 19, the date when payments of approximately 9 billion euros come due, Greece will declare itself in default. Besides these factors, the depreciation of the Greek bonds responds to the fact that no one now believes it will be possible to avoid restructuring the debt (with some level of debt forgiveness), even with the application of a European and IMF bailout plan. Sources from the IMF itself have let it be known that Greece needs, as a minimum, 120 billion euros (some say 135 billion) to avoid stopping payment. This is because the 45 billion euros originally agreed upon by the EU and the IMF for the beginning of a three-year plan, would not reach half the figure. Now the IMF has let it be known that it could increase its total "assistance" from 10 billion euros to at least 25 billion.

To the tempo of Germany’s political requirements

What is really in question is not the health of the Greek economy, but the viability of the euro, and, even more, the risk that the European crisis will spread over the weak "recovery" of the world economy. Both the Director of the International Monetary Fund (IMF), Dominique Strauss-Kahn, and the Chairman of the Central European Bank (BCE), Jean-Claude Trichet, agreed on the need to make a quick decision regarding Greece, since, otherwise, "the consequences would go beyond the borders of the Old Continent." However, European leaders recently called an extraordinary summit of the European Union [EU] to release the aid package by May 10. The date clearly carries the German stamp. On May 9, regional elections that could affect the balance of power in the German parliament will take place. "The social democratic opposition has accused Merkel of being too willing to come to Greece’s rescue, and even politicians of the center-right coalition that supports the Chancellor have raised complaints over the potential costs for German taxpayers." (Wall Street Journal) Besides, according to an opinion poll, 57% of Germans are opposed to the "assistance" package, while only 33% back it. So the fate of the euro is subject to the resolution of internal German affairs. One more sign of the utopia of the single currency and the European "super-state." The policy of rating agencies like Standard and Poor’s, for its part, is only slightly "technical." The rating agency gives the Greek bonds the "junk bonds" status just when the IMF, the Central European Bank, and the EU are pushing for radicalizing the belt-tightening plans and the handing over of the Greek economy. That is, they want to leave Greece without any way out.

While Germany is resolving its internal affairs and seeking to impose the European agenda, the IMF, the rest of the members of the euro zone and the EU, with help from the rating agencies, are seeking to turn Greece into a "test case" for all the euro zone countries that are in a more than critical state. Nevertheless, the tendencies of the economy have more or less their own tempo, and, as we have shown in these pages, the tendencies of the class struggle, which can cause contagious effects in the same way, also have their own tempo.