Eurozone: The crisis hit countries are again subsidizing the German and French banks

European Commission vice President Siim Kallas, speaking at the not so plenary session of the European Parliament. (EP Audiovisual Services).

European Commission vice President Siim Kallas, speaking at the not so plenary session of the European Parliament. (EP Audiovisual Services).

The European Commission, the European Central Bank and the International Monetary Fund, the infamous ‘Troika’, officially declared that Portugal has successfully completed the assistance program and now as a financially self-sustainable country she can address herself to the markets, whatever this last term means. Towards the end of April, Portugal sold a €750 million bond at a 3.6% interest rate in the capital market. Such a yield, despite being well below the 5.5% of February, is still a huge remuneration for investors, aka banks, given that the country remains under the protection of the European Union. In short Portugal and the other crisis hit countries by exiting from their programs they subsidize again the German and French mega-banks.

Notwithstanding the celebrations in Lisbon for the exit from the program, the country remains in reality under the watchful eye of the Troika. The official conclusion of Portugal’s graduation could take place in June, subject to the approval of ECOFIN and of the IMF Executive Board. This would allow for the disbursement of €2.6 billion (€ 1.7 billion by the EU, and about € 0.9bn by the IMF) following the approval of the current review. Let’s take one thing at a time.

Portugal like Spain and Ireland

As in the case of Ireland, the escape from the Troika’s iron fist doesn’t mean much for the real position of the country’s economy. It’s more of a public relations exercise for the entire EU political establishment ahead of the EU elections. Overall, unemployment is always around 16%; 35% of the youths don’t have a job, the economy receded by almost 1% during the first quarter of this year and more than 100,000 of Portuguese annually leave the country in search of a job abroad, be it in Europe, South America and Africa.

On top of that, the Portuguese taxpayers are now burdened with a sovereign debt of almost 130% of the GDP, which the Troika insists is sustainable, probably at the exception of the IMF. The Fund has been lately diverging from Troika’s position for its own reasons, following a strongly critical stance on Europe, mainly as the Greek case and Eurozone banks’ capital needs are concerned. In the case of Portugal, it is not clear what the IMF’s stance will finally be. According to the IMF Country Report No. 14/102, “Starting in 2014, under the programmed fiscal path, debt is expected to start gradually declining to reach about 114 percent of GDP by 2019”. This is a not at all an optimistic assessment for Portugal’s debt trajectory.

In any case, the EU Commission seems very happy with what is happening in the crisis hit countries. Commission vice President Siim Kallas stated that “After Ireland and Spain, Portugal is the third euro area country to successfully graduate from its financial assistance program. While this is a cause for celebration, there is no cause for complacency. To deliver a more robust recovery and bring down the still unacceptably high level of unemployment, it will be essential to maintain an unwavering commitment to sound budgetary policies and growth-enhancing reforms in the months and years ahead”.

For one thing, the interim EU Commissioner responsible for financial affairs, at least recognized that the Peoples of Ireland, Portugal and Spain will continue to be responsible for paying their countries’ debts. But there is a lot more to that.

An unfair arrangement

He forgot to say though, who has created all those debts. As everybody knows, it was the major German and French banks which ‘invested’ in the Irish, Spanish, Greek and Portuguese real estate bubbles and also financed the extravagant public spending in some of those countries. When the bubbles started bursting in 2010, Berlin and Paris, wholeheartedly supported by the Brussels and the ECB bureaucracies, forced all those governments to recognize and repay at face value all the imprudent credits of the German and the French banks. The indebted countries were deprived of the right to negotiate with the foreign banks and governments on an arrangement to share the responsibilities.

Last week a French TV channel ‘France 2’ interviewed Dominique Strauss-Kahn, the IMF Managing Director at the time of the eruption in Athens of Eurozone’s debt crisis, in April 2010. DSK said plainly that the then French President Nicolas Sarkozy and the German Chancellor Angela Merkel actually forced Greece politically to accept to repay all its old debts to their banks at face value. Later on, France and Germany accepted a deep hair-cut of more than 60% on the Greek debt, but their banks had already been redeemed from their dangerous exposure to Greece, by the swift interventions of the ECB, the European Union and some Eurozone governments.

Subsidising again the banks

In this way, the Greek debt was transformed from private into official, and now Greece owes 155% of GDP to ECB and the Eurozone governments, while the German and the French banks got away with their pockets full of taxpayers’ money. In short, the French and German banks unduly got back their risky and imprudent ‘investments’ at face value 100%, thus robbing the poor Greeks. At the time of this ‘fixing’, when the French and German banks got back their risky placements at 100%, those Greek loans were valued in the capital markets at 20% to 30% of their face value. This ‘successful’ Franco-German operation was repeated later on in the case of Ireland, Portugal and last in Spain.

It would have been wiser if the EU Commissioner had remained silent. It’s highly probable that the European Union will pay at face value all the injustice it has done to the crisis hit countries in this week’s European elections. In reality, the crisis hit countries (Ireland, Spain, Portugal and Greece) by exiting now from the programs and by placing their bonds in the capital market, at interest rates ranging from 3% to 5%, are again helping the German and the French banks to recapitalize themselves at the expenses of the poorest Eurozone citizens.

 

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