Posts Tagged European sovereign debt crisis
Wall Street, Coming to Your Town! (and Destroying It)
austerity isn’t just a European thing.Disastrous
November 19, 2012
Photo Credit: Songquan Deng / Shutterstock.com
This article originally appeared in Dissent Magazine.
The European debt crisis, and the ensuing austerity-fueled chaos, can seem to Americans like a distant battle that portends a dark future. Yet a closer look reveals that the future is already here. American austerity has largely taken the form of municipal budget crises precipitated by predatory Wall Street lending practices. The debt financing of U.S. cities and towns, a neoliberal economic model that long precedes the current recession, has inflicted deep and growing suffering on communities across the country.
In July 2012, Mayor Christopher Doherty of Scranton, Pennsylvania, reduced all city employees’ salaries to the minimum wage. With a stroke of his pen, wages for teachers, firefighters, police, and other municipal workers, many of whom had been on the job for decades, dropped to $7.25 per hour. The city, the mayor explained, simply could not pay them more. Ron Allen, who reported the story for NBC Nightly News, repeated this assessment. Cities like Scranton, he said, “just don’t have the money” to pay city employees more than the minimum wage. Officials blamed the crisis on a declining tax base, on reduced revenue from the state, and on public sector labor contracts that the city could no longer afford.
What does it mean to say that a former steel town in decline “just doesn’t have the money” to pay its bills? It means that it no longer has access to credit markets controlled by the big banks. For years, Scranton officials, like officials across the United States, have been selling municipal bonds to finance everything from basic services to development projects. Scranton’s problems careened out of control when they city’s parking authority threatened to default on its bonds. Wall Street responded aggressively by cutting off its credit line, and city workers paid a steep price. American-style austerity arrived in Scranton under the guise of budget cuts blamed on public employees, whose salaries and pensions had nothing to do with the economic crisis.
Scranton’s problems are hardly unique. Municipalities across the country are grappling with declining local tax revenue and reduced federal funding in an era when growth and development are equated with prosperity. This toxic mix has produced a $3.7 trillion municipal debt market, a revenue juggernaut for Wall Street. Municipal bonds are issued by virtually every city, county, and development agency in the United States. The number of taxpayer-backed bonds in circulation is five times higher than only ten years ago. This means that the world’s largest financial firms now hold the purse strings for everything from essential services like sewage treatment plants to large-scale developments such as sports arenas. Municipal bonds are extremely profitable for investors because they are tax-exempt and, like mortgages, can be packaged into securities.
How Did We Get Here?
Part of the municipal debt story can be traced to New York City’s 1975 fiscal crisis, when the city almost defaulted on its debt. New York was able to avoid bankruptcy at the last moment by issuing guaranteed bonds backed by public pension funds. As a result, the Emergency Financial Control Board, the municipal body that controlled the city’s bank accounts, was in the position of rewriting the social contract, exerting control over labor at every level. Union leadership agreed to the deal because they feared a bankruptcy filing would void labor contracts. Only after the city had disciplined the unions did the federal government move in with rescue loans.
New York City had been debt-financed since the 1960s. But the fiscal crisis of 1975 inaugurated a new funding paradigm for distressed municipalities: taxpayer-backed debt is issued to service the debt already on the books. American municipalities are now increasingly financed not with public money, but with private loans, and the pace of this shift has accelerated since 2008. The Center on Budget Policy and Priorities recently reported that thirty-one states will face unsustainable budget gaps in 2013.
Few public assets are safe from Wall Street’s profit imperative. Public transportation has long been a cash cow for investors. Since 2008, the New York Metropolitan Transportation Authority (MTA) has lost over $600 million as a result of interest rate swaps with JP Morgan Chase, Citigroup, and other big banks. As a result, thousands of transit workers have lost their jobs and hundreds of bus and subway lines have been cut. That is not enough to satisfy the bond market. In March 2013 New York transit riders can expect a new round of fare hikes. Most subway and bus riders are working-class New Yorkers, immigrants, and people of color. They will soon pay even more for the privilege of lining Jamie Dimon’s pockets.
The MTA is not the only municipal organization in the country that runs on debt. The Refund Transit Coalition, a public transportation advocacy group, has uncovered at least 1,100 of these swaps at more than 100 government agencies costing taxpayers $2.5 billion a year. None is more indebted than Boston’s Massachusetts Bay Transportation Authority (MBTA). The story is a familiar one: in 2000 state legislators ended most public subsidies for the MBTA, which was additionally saddled with almost $2 billion in debt, much of it left over from the infamous Big Dig. Wall Street was happy to provide loans so the MBTA could maintain the system’s aging infrastructure and finance expansions.
Twelve years later, Boston’s transit authority spends 33 cents of every dollar it takes in to service its debt. Lawmakers, who have learned the lessons of Scranton all too well, are unwilling to challenge Wall Street. Instead, they have proposed cutting services and raising fares by as much as 43 percent. No one believes this represents a long-term solution. As one Occupy Boston activist noted, “the MBTA has never even asked the banks and bondholders who continue to profit from the [transit system’s] enormous debt to take a similar cut, effectively giving the banks a ‘free ride,’ while forcing T riders—working people, the unemployed, students, seniors, and the disabled—to bear more of the burden.”
Increasing debt loads, along with other neoliberal policies demanding that municipalities do more with less, put cities under enormous pressure to promote private economic growth in lieu of spending public funds on public goods. This imperative is one reason that city officials have pursued controversial development strategies such as declaring a parcel of land “blighted” to allow it to be seized by eminent domain and auctioned to the highest bidder. For example, the Barclays Center, the new arena for the Brooklyn Nets, was built partially on land that was condemned before being transferred to a developer. Cities also generate revenue by leasing public assets to the private sector. In Chicago, for example, the Skyway toll road has been leased to a private company for ninety-nine years. Atlanta even privatized the city water supply, only to cancel the contract years later when residents complained about tainted water.
As the privatization of everything from land to transportation makes clear, taxpayers rarely have a direct say in which bonds are issued and which public assets are sold out from under them. But with municipalities guaranteeing loans by promising that bondholders will be repaid with tax dollars or revenue generated by the debt-funded project, taxpayers are often left footing the bill.
Meanwhile, it remains nearly impossible for municipalities to cancel bond deals. By law, most states cannot declare bankruptcy. And, in many cases, federal bankruptcy codes guarantee that creditors will be repaid. In 1994, Orange County, California declared bankruptcy to repair the damage done when its treasurer took out loans on behalf of the city and then lost $1.6 billion in the securities market. Following what was then the largest bankruptcy filing in U.S. history, the county still paid its bondholders to avoid a tarnished credit rating. Another California city, Stockton, has been implementing severe austerity measures ever since the housing market tanked in 2008 in order to make payments to bondholders. The city cut 25 percent of its police officers, 30 percent of its firefighters, and over 40 percent of all other city employees. The crime rate in Stockton has skyrocketed and unemployment surged, and the city is now considering cutting pension benefits for retirees to pay its debts. The capital of the Golden State, Sacramento, has also cut its police force, by 30 percent, to fill a budget gap, and has seen a similar rise in crime—gun violence, rapes, and robberies have increased dramatically. Communities long ago abandoned by the state are also suffering from austerity. Camden, New Jersey, one of the poorest cities in the United States, recently privatized its police force, laying off officers and canceling union contracts. Today, the Camden police force often does not have the numbers to respond to crimes that don’t involve murder or serious injury.
As cities like Scranton seek to eliminate unsustainable debts, investors grow more demanding. Bond insurers involved in bankruptcy negotiations in Stockton and San Bernardino have even suggested that bondholders have a claim to CalPERS, the retirement fund for California’s public workers. Though the retirement system is constitutionally protected, this is a troubling development because bondholders’ demands are almost always given priority. A recent CBO report noted that “of the 18,400 municipal bond issuers rated by Moody’s Investors Service from 1970 to 2009, only 54 defaulted during that period.” Bonds are bets that banks don’t lose.
Though the debt financing of U.S. cities is not illegal, that doesn’t mean deals are made fairly and transparently. We recently learned that interest rates around the world have been manipulated for years for the benefit of a few firms. Yet the LIBOR scandal is not surprising when one considers that municipal interest rate fraud has been going on for years with no public outcry. In his report on municipal bond rigging in Rolling Stone, Matt Taibbi explainedhow Wall Street has “skimmed untold billions” from hundreds of municipalities—and how they continued to invest in bonds even after they were caught. “Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again,” Taibbi wrote. “Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.” The debt financing of municipal government is an activity promoted and protected by the regulatory arm of the federal government.
What Can Be Done?
Strike Debt, a group (of which I am a member) inspired by Occupy Wall Street, has begun to address municipal bonds as part of a larger critique of debt as a system of wealth extraction. Strike Debt asserts that debt is a primary mechanism through which the 1 percent profits from the 99 percent. Debt affects everyone, especially those who are too poor to access low-interest credit. And Wall Street is the primary culprit. Framing municipal debt as part of a global system poses significant opportunities for organizers because it connects anti-austerity movements abroad to debt resistance efforts at home. Once we reframe debt as a problem that affects us all—as municipal debt obviously does—it becomes easier to imagine that we have enormous power to withdraw our consent.
Strike Debt’s analysis of debt as a system of wealth extraction is also a critique of capitalism. Municipal debt is more than just another example of Wall Street greed and local corruption. It may be the biggest scandal yet because it is not a scandal it all. U.S. cities, towns, and districts are now increasingly debt financed, which means they cannot operate without access to the credit markets controlled by the big banks. This illustrates that Wall Street’s class war against cities cannot be mitigated with more regulation. In fact, the SEC protects investors, not municipalities, from the consequences of bond deals gone bad. Even renegotiating debt often requires new loans. “When muni bond issuers unwind deals and pay enormous exit fees to Wall Street,” the New York Times recently reported, “they typically issue new debt to do so. In recent years, for example, New York State has paid $243 million to terminate such transactions; $191 million was financed by new debt issuance.” Raiding cities for wealth, which produces a cycle of indebtedness, is not illegal or unusual. It is simply the way Wall Street does business.
The idea that some debts cannot and should not be paid is gaining traction. In 2011, for example, Jefferson County, Alabama declared bankruptcy (the largest in U.S. history) to rid itself of $4 billion in debt, much of it issued by corrupt officials to finance a sewer project that left people in a predominantly low-income, African-American community without a functioning sewer. Some do not want to renegotiate the debt. Instead, they reject it outright. As one Occupy activist in Birmingham noted, “[the debt] shouldn’t ever have been issued, and therefore it shouldn’t exist. It shouldn’t have been spent. Since it shouldn’t have existed, we’re not going to pay it.” This statement could become a slogan for debt resistance movements across the country because it insists that debtors are a class, a collective “we” that can decide when enough is enough.
Some municipalities are fighting back, too. After their pay was cut to minimum wage, Scranton’s municipal unions sued the city, and their wages were restored. Baltimore, a city where more than 80 percent of school children qualify for free- or reduced-price lunch, is suing more than a dozen big banks for manipulating LIBOR, the benchmark for interest rates on many financial products. In July, a group called Boston Fare Strike declared a Free Fare Day and held turnstiles open for subway riders to protest fare hikes that enrich the 1 percent. Activists in Chicago are organizing community debt audits with the goal of identifying illegitimate debts that must be abolished. And finally, in a case that has gained national attention, Oakland, CA is trying to sever its relationship with Goldman Sachs for good. In the late 1990s, Oakland issued $187 million in bonds as part of an interest-rate swap. After the credit markets froze in 2008, Oakland could no longer make its payments to Goldman. The city council voted to cancel the deal, though Goldman insists the city must pay. CEO Lloyd Blankfein explained his firm’s unwillingness to let Oakland out of its contract. “The fact of the matter is,” he said, “we’re a bank.”
Blankfein is not wrong. Plundering U.S. cities is what large financial firms do. This is a troubling reality. A bankruptcy attorney featured on the NBC News report about Scranton offered this grim assessment: cutting worker pay is necessary to avoid “more drastic measures.” The reporter didn’t explain this statement, leaving viewers to imagine what terrible fate awaits those who don’t accept the reigning neoliberal orthodoxy that city budgets must be balanced by cutting worker pay, gutting public services, and issuing more debt to profit the 1 percent.
In fact, it is Wall Street that should be afraid of any disruption to business as usual. The cycle of debt illustrates that we cannot fix the problem through austerity. This tactic only deepens the devastation, since low wages further erode the tax base for cities, leaving them vulnerable to predatory lenders. It’s difficult to imagine how the debt financing of American cities could be scaled back without completely rethinking our economic system. Strike Debt is making the case that, in the United States as in Europe, the solution lies not in austerity but in investing in a genuine commons and in providing equitable access to public resources. These are precisely the “drastic measures” alluded to on NBC News. The question we must ask is,drastic for whom?
- Wall Street, Coming to Your Town! (and Destroying It) (alternet.org)
- Scranton Scramble (itsjustparking.wordpress.com)
- 10 Outrageous Police Tactics | Wall St. Destroying Your Town? | 5 Absurd Right-Wing Conspiracy Theories about UN (womensphilanthropy.typepad.com)
- Montclair the next Scranton? (itsjustparking.wordpress.com)
- Sen-elect Elizabeth Warren scores Senate Banking Committee seat: Suck it, Wall Street! (mbcalyn.com)
- 6 Toys That Could Make a Progressive’s Head Explode | Robert Reich: 3 Real “Cliffs” America Faces | 8 Ways Police Can Spy on You w/out Warrant (womensphilanthropy.typepad.com)
- Groups make case for the muni bond (politico.com)
- Propaganda Hiding Real Consequences of Drone Attacks | 5 Companies Mistreating Customers Badly | CIA Big Shot Killed by Homeless Assassin (womensphilanthropy.typepad.com)
- Municipal bonds: A train wreck waiting to happen (finance.fortune.cnn.com)
- Mitre Media Buys MunicipalBonds.com (pehub.com)
IMF to Spain: You’re Screwed
Posted: June 15, 2012
The International Monetary Fund (IMF) has published its preliminary findings following its meetings with Spanish officials. The outcome is neither unexpected nor good news for Spain.
First the IMF states the obvious:
The economy is in the midst of an unprecedented double-dip recession with unemployment already unacceptably high, public debt increasing rapidly, and segments of the financial sector needing recapitalization. This calls for a commensurately ambitious policy response and communicating it within a comprehensive medium-term strategy. This strategy should be based around concrete measures to deliver the needed medium-term fiscal consolidation, a roadmap for restructuring the weak segments of the financial sector, and structural reforms to boost growth. The prospective Euro area financial sector support is an important opportunity to implement such a strategy. Spain’s prospects will also be helped by further progress at the European level.
Here are the problems:
· Spain cannot meet its 2012 target of a 5.3% of GDP deficit due to revenue shortfalls, structural changes that are needed in the country’s regions, and a compressed timeframe due to the delay in passing a budget.
· No one believes that Spain can do what it says based on its failure to be honest about its 2011 budget woes.
· The banking system is in tatters and no bank can raise private funds despite the recent LTRO program and the $125 billion bailout.
· Unemployment stands at 24% for the entire population and above 50% for the young and deleveraging by Spanish citizens suggests that output will contract through 2013, meaning no or little job growth.
The IMF offers hope that successful labor reform, the bailout, and improved competitiveness “could lead to a significantly better medium-term outlook.” That assumes that Spain can somehow muddle through for another two or three years.
There’s nothing new in the IMF’s analysis of what’s wrong with Spain. But the solutions on offer are simply wishful thinking — and not very upbeat wishful thinking at that. Spain is essentially on its own now and there’s no evidence that the country will be able to stand by itself.
The IMF’s report is available here.
- IMF to Spain: You’re Screwed (247wallst.com)
- IMF: Spain should raise taxes to reduce deficit (miamiherald.com)
- Spain ‘to miss budget targets’ (bbc.co.uk)
- More pain for Spain (economist.com)
- IMF: Spanish banks need nearly $50 billion (kansascity.com)
- Eurozone finance ministers agree to 100 billion euro Spain bailout (business.financialpost.com)
- IMF: Spain should raise taxes to reduce deficit (seattletimes.nwsource.com)
- IMF says Spanish banks need nearly $50 billion (miamiherald.com)
- IMF: Spain – Financial System Stability Assessment (bespacific.com)
- IMF: Spain likely to miss 2012 deficit target (marketwatch.com)
Angela Merkel’s fireside chat
On one level it seems surreal that even an epic mistake involving an abstract concept like “money” — a tool, like the euro, meant to facilitate exchange and serve as a store of value — can now inflict immense suffering on millions. Life’s savings lost, jobs scarce, firms shuttered, the prospects of a generation darkened. All through a storm not of their own making.
How can people in Greece and Spain make sense of what’s happening? I certainly can’t claim to have wrapped my mind around it all.
But one thing is clear: Europe’s probable calamity — I hate to write those words, but that’s what it looks like to me, even if the can has a few good kicks left in it — throws into relief the profound way elites have failed. The euro crisis is a reminder of how much depends, in the end, on the quality of a society’s elites. This is an unfashionable sentiment in Western democracies, but it’s true nonetheless.
Consider a partial catalogue of elite miscalculations or misbehavior here:
First, elites across Europe decided that giving up the power to run an independent monetary policy was a good idea for a nation — even though that meant there would no longer be a way for individual countries to fight economic downturns by cutting interest rates, or to cure a loss of competitiveness by devaluing the national currency.
Next, elites assumed that at some point ordinary Europeans would agree to hand control over much of national spending and taxes to some pan-European authority as well. Huh?
What’s more, in a move that quietly helped fuel today’s crisis, regulators decided banks didn’t need to hold any capital in reserve against loans made to European governments. As a result, banks stocked up on sovereign debt that turned out not to be riskless but very risky indeed. Top bankers were happy to go along with this charade because running banks with even less capital and more leverage than the already reckless U.S. system turned out to be a way for bank executives to pay themselves more (since bonuses are often tied to a bank’s return on equity, which, at any given level of profit, rises the more leverage you employ).
What kind of “leaders” pursue such an irresponsible, shortsighted course? To ask the question is to answer it.
Which brings us to Angela Merkel. The German chancellor should listen to Franklin D. Roosevelt’s first fireside chat, delivered on March 12, 1933, eight days after Roosevelt took office. Banks had failed in droves, as citizens who’d lost confidence in the system withdrew their cash. Fear and panic were palpable. Some version of this psychology could afflict big chunks of Europe soon.
Even at a distance of eight decades, FDR’s 13-minute address is a marvel. The new president explains in clear terms what’s happened, and what the government is doing about it. He treats Americans like adults who can be trusted to back a plan that’s reasonable. He’s honest about the pain some will suffer but confident the country will come out the other side. Listening to the scratchy recording today, one can imagine the reassurance the talk gave a scared nation.
If it comes, Merkel’s televised chat will face greater challenges. For one thing, she needs to address not just her countrymen but the broader citizenry of Europe. Merkel’s talk will need translation, a jarring reminder to those outside Germany that a foreigner is shaping your fate. (Imagine Americans listening to a speech from a Mexican or Chinese leader on whose actions our well-being suddenly depended, and you see how alien the prospect seems.)
Merkel will need to explain how the European project came to this pass — a tale of good intentions gone awry. She’ll have to honor and give voice to all the emotions roiling the continent. Of course Greeks are angry about being thrust into a depression and bullied by foreigners, she’d acknowledge; of course her fellow Germans resent rescuing spendthrift nations whose people seem to work less hard than they do.
In short, Merkel will need to summon an almost superhuman empathy with the entirety of Europe. And she’ll need to marshal that understanding to sell a course of action so compelling that hundreds of millions of people over whom she has no jurisdiction will accept her authority to steer them through these trying days.
If ever the historical moment makes the man or the woman, we’re about to find out.
The details would involve things such as Europe-wide deposit insurance and bank-rescue authority. Maybe it would mean emergency legislation that sunsets these temporary powers in five years, so that nations can decide in calmer times how much sovereignty (if any) they really wish to concede. They could amend (or end) the euro in an orderly way later. But now, to avert apocalypse, a German leader needs to act, and get everyone to follow.
There’s a tragic logic to what’s unfolding. And no good options. It’s a matter of apportioning pain in hopes of rebuilding for a better day some years hence. There will be 11th-hour attempts to put patches on things, to buy time. But, absent a sudden flowering of the kind of leadership that would earn Mrs. Merkel a place in history’s pantheon, it’s hard not to have a terrible feeling about where this crisis is headed.
- Merkel backs two-speed Europe (ekathimerini.com)
- In A Brilliant New Speech, George Soros Reveals The Exact Moment That Angela Merkel Started The Euro Crisis (businessinsider.com)
- UK News: Osborne ‘optimistic’ on euro crisis (walesonline.co.uk)
- The Accidental Empire (project-syndicate.org)
- Eurozone crisis live: Spain faces bond auction test as rescue looms (guardian.co.uk)
- Spain warns euro ‘finished in months’ without banking and fiscal union (guardian.co.uk)
- Harper in Paris stresses need for euro plan (cbc.ca)
- German Chancellor: Countries must cede responsibilities to Europe (newstalk.ie)
- German Banks Catch the Euro Bug (rendezvous.blogs.nytimes.com)
- Harper, Merkel on same page on debt crisis (ctv.ca)
Should Greece Default?By DANIEL POLITI
As Greek lawmakers passed a deeply unpopular austerity bill amid huge protests to secure another bailout, many are wondering whether the country should embrace a default.
The Irish Independent thinks it’s only a matter of time. “At some stage over the next few weeks, maybe just days, matters will come to a head, Greece will default on its debts and the country will either leave or be ejected from the euro.” Stefan Kaiser, of Der Spiegel, agrees: if negotiators tried “being honest for a change” they would realize that there’s no option but bankruptcy.
For Panagiotis Sotiris, of the Greek Left Review, the real “question is not if Greece is going to default but how.” That’d be better anyway, writes Costas Lapavitsas in the Guardian: Athens should abandon “the charade of voluntary haircuts” and instead “default in a sovereign and democratic way by immediately declaring a cessation of payments.”
There are skeptics. A default could help strengthen the euro in the long term,writes Heather Stewart in the Observer, but it “would be a costly and chaotic process.” The Irish Times also argues that no matter how a default were managed, it “would prove disastrous for Greece, damaging for the euro zone” and hurt “other debt-laden peripheral economies.”
Some also question the big creditors’ motivations. M.E. Synon writes in the Irish Daily Mail that “the Germans may want to trigger a disorderly default in Greece so that Greece falls out of the eurozone — and out of the domestic political problems of Angela Merkel.”
For Greece, pride, not just economics, is at issue. “If we cannot stay in the euro zone, if we find ourselves on Europe’s edge, we will be defeated, humiliated and alone,” writes Nikos Konstandaras in the Athens-based Ekathimerini.
- More calls for Greece to default (americablog.com)
- Euro Crisis: Cold morning after a hot night in Athens… (sluggerotoole.com)
- Summary Box: Greece wary of default consequences – CBS News (cbsnews.com)
- Disgruntled Greeks Protest New Austerity Measures – Niki Kitsantonis and Rachel Donadio via NYTimes.com (underpaidgenius.com)
- Eurogroup’s Juncker warns of possible Greece default (vancouversun.com)
- Greek Parliament Passes Austerity Plan as Riots Rage – Niki Kitsantonis and Rachel Donadio via NYTimes.com (underpaidgenius.com)
- A Greek Default Doesn’t Need To Be Chaotic For Greece (zerohedge.com)
- Greece Perilously Close To Default (247wallst.com)
- Greece approves austerity cuts to secure eurozone bailout and avoid debt default (guardian.co.uk)
- Is Greece facing disorderly default? (cnn.com)