Across Africa, western Asia and Latin America in the 1980s, the growth of per capita GDP was brought to a halt. This was not a recession, it was a severe depression. And its cause was reckless lending by banks in the ’70s.
A decade earlier, the euro currency had been invented. US dollars deposited in non-US banks and held there to avoid restrictions of US laws became negotiable financial instruments. These formed the basis for an unregulated market specialising in short-term loans.
In 1964, the market was estimated at $US14 billion, but by 1978 it was close to $500 billion after it became the chief mechanism for investing the huge oil profits of the Organization of Petrol Exporting Countries (OPEC) cartel.
Awash with petro-dollars, the global banks threw money around like confetti. This was particularly the case in Latin America, where the three largest loan recipients — Argentina, Brazil and Mexico — accumulated debts of between $60 billion and $110 billion by 1990.
The scale of these loans was enormous. The Latin American countries debts were so large that the likelihood of repayment was close to zero. But as long as the banks were earning interest on them, at an average just shy of 10%, they were not concerned.
In the early ’80s, however, Mexico became the first of the Latin American debtors to announce that it was not able to pay. Panic set in as it dawned on the banks that it was them facing bankruptcy, not Mexico.
Had Argentina and Brazil acted in concert with Mexico, all of the lender banks would have been insolvent. More likely than not, the world economy would have collapsed.
The arrangements made for re-scheduling the debts were overseen by the International Monetary Fund. The IMF imposed structural adjustment programs that cut tariffs, cut back social spending, privatised state enterprises and established a new neoliberal economic order.
As the unenforceable promise of neoliberal-led prosperity gave way to growing inequality, instability and poverty, the urban poor rose in revolt in cities across Latin America.
In 1989 in Caracas, Venezuela, two days of rioting and protests was met by a police and military invasion of the poor barrios. Hundreds of people were killed.
This mass rejection of neoliberalism eventually led to the rise of social movements and new political parties across Latin America, with three countries — Bolivia, Ecuador and Venezuela — raising the banner of “socialism for the 21st century”.
The global financial crisis that erupted in 2008, and whose consequences are still being felt around the globe, is another crisis courtesy of finance capital. It had its origins in the US when interest rates fell from 6% in January 2001 to 1% in mid-2003.
This led banks and other financial institutions flush with cheap money to conclude that lending to home buyers at risk of being unable to afford their repayments was a safe bet.
Between 2002 and 2007, sub-prime lending increased from 3% of residential mortgages to 15%. The home loan portfolio of one of the largest predatory lenders, Countrywide Financial, went from $US62 billion in 2002 to $463 billion in 2006.
By 2005, 43% of first home buyers paid no deposits on their purchases and the median first-time buyer entered the housing market with a deposit of just 2% of the sales price.
In the last quarter of 2005, new mortgage borrowings rose by $1.11 trillion, taking outstanding mortgage debt to $8.66 trillion, almost 65% of US GDP.
These loans were bundled together in financial derivative products known as collateralised debt obligations. These were parcelled into tranches of debt, then on-sold to banks and investors around the world with the assistance of AAA credit ratings from agencies handsomely paid for their stamp of approval.
When interest rates began to rise in 2006, the housing bubble burst. Mortgagees defaulted and the housing market went into steep decline.
The first institutional casualties came in July 2007 when two Bear Stearns hedge funds holding almost $10 billion in mortgage-backed securities collapsed. Two months later Northern Rock became the first British bank in 150 years to fall victim to a bank run.
In 2008, the US government carried out the biggest nationalisation in history, rescuing the mortgage lenders Fannie Mae and Freddie Mac whose debts at the time stood at $1.6 trillion.
To prevent General Motors and Chrysler from break-up and bankruptcy, the US government bailed out the auto industry at a cost of about $80 billion.
In early 2009, the US banking system was effectively insolvent. It had to be bailed out by the US government after the collapse of the investment bank Lehman Brothers that filed for bankruptcy on September 2008 with debts of $613 billion — the largest bankruptcy in history.
In January 2009, the Bank of England cut interest rates to 1.5%, the lowest rate since 1694. Two months later they were lowered to 0.5%, accompanied by a policy of quantitative easing — effectively printing money.
Direct intervention in the financial sector left the British government owning more than 50% of all mortgages and bank retail accounts, together with more than half of all loans to small and medium sized businesses.
The need for state intervention that came from reckless bank lending was slow to be learned in the Eurozone countries. Immediately after the collapse of Lehman Brothers, the first ever meeting of Eurozone heads of government took place, attended by the then-British prime minister Gordon Brown.
Brown later wrote in an article in the International Herald Tribune in August 2011 that, “even as the crisis grew, it was difficult to get Europe’s leaders to accept that it was anything other than an Anglo-Saxon one”.
At the time of this meeting in 2008, the banks and financial institutions in Europe were recklessly lending money to Greece. Two years later, when the bailout of Greek debt began, these institutions had lent the Greek government €310 billion.
The IMF, European Union and the European Central Bank — the Troika — have since then lent €252 billion to the Greek government. Of this, €149.2 billion has been spent on the reckless European banks and financial institutions and €48.2 billion used to bailout the Greek banks.
The vast majority of private bank debt has become public debt.
At present, Greece’s debt is close to €325 billion, with the Troika holding about 80% of it. In 2010 Greek debt was 133% of GDP. It has now risen to 174% as a consequence of austerity measures imposed on Greece in return for Troika funding.
This debt can never be paid off. It is reminiscent of the reparations forced on Germany at Versailles following the end of WWI.
John Maynard Keynes, the British economist who was an official representative of the British Treasury at Versailles, was so concerned by the proposed scheme of reparations that he resigned in protest against them.
Keynes argued that the reparations needed to take proper account of Germany’s capacity to pay. Failure to do so would bring Germany to its knees and threaten the world economy as well.
The lesson was learned after WWII, when the London Conference of 1953 cancelled 50% of Germany’s external debt and tied the rest to the rise of export surpluses.
Defaulting on unaffordable debt payments is neither unprecedented nor necessarily unproductive. Russia defaulted in 1998, and when Argentina defaulted in 2001, it stimulated an economy that had been stagnant for years.
The fiscal discipline now demanded of Greece comes from the EU Stability and Growth Pact introduced in 1999. Designed to ensure that fiscal indiscipline at a national level does not compromise monetary rigour at the supranational level, the pact requires each member state to stay within the limits of government deficits of 3% of GDP and debt of 60% of GDP.
A large number of EU countries have, at various times, been in breach of the Pact’s provisions. The two leading economies of the eurozone, France and Germany, have breached the Pact frequently with impunity.
It is no coincidence that the Treaty of Maastricht, which introduced the euro common currency in 1999, had its origins in a committee largely made up of central bankers.
The initial institutional arrangements that provided for European integration were best described by Perry Anderson in The New Old World: “A customs union with a quasi-executive of supranational cast, without any machinery to enforce its decisions; a quasi-legislature of inter-governmental ministerial sessions, shielded from any national oversight, operating as a kind of upper chamber; a quasi-supreme court that acts as it were the guardian of a constitution which does not exist; and a pseudo-legislative lower chamber, in the form of a largely impotent parliament that is nevertheless the only elective body, theoretically accountable to the peoples of Europe.”
Its goal is promoting “free markets” and its driving force is to clamp a neoliberal straitjacket onto the Eurozone economy.
Resistance to this, led by SYRIZA in Greece, has proven contagious, with the rise of anti-austerity movements across Europe led by Podemos in Spain. It is for this reason that the banks feel Greece has to be punished.