The Spark

the Voice of
The Communist League of Revolutionary Workers–Internationalist

“The emancipation of the working class will only be achieved by the working class itself.”
— Karl Marx

Global Crisis:
Renewed Speculation Targets Currencies and Public Debt

Feb 25, 2010

The following was translated from an article in issue #126 of Lutte de Classe (Class Struggle), the political journal of comrades in Lutte Ouvrière (Workers Struggle). It was written at the end of February, but the speculation and the danger attached to it as described here has only mushroomed since.

Since early this winter, the world has been enmeshed in a new crisis or, more exactly, in a new episode of the steadily deepening crisis, in the train of accelerating speculative "bubbles."

The first alarm came from Athens: Greece’s skyrocketing public debt had attracted speculators who saw the country’s predicament as an opportunity to empty the state’s treasure chest into their own pockets. It took only a couple of weeks, however, before Greece’s murky situation began to spread. Initially focused on Greece, the fires of speculation soon spread to Spain and Portugal—openly raising the question of whether these countries might also default. Then came the turn of Italy, Ireland and other Eurozone countries, including France, with the speculation shining a light on these countries’ public deficits and heavy debt load. Indeed, the financial situation of most Eurozone countries is in such a mess that some commentators have already envisaged the collapse of the Eurozone under the pressure of speculation. (For example, see the article, "Euro Downfall No Longer a Fiction?" in the February 19 issue of the French conservative daily Le Figaro.)

But the Eurozone countries are by no means the only ones to be hard hit by the present financial storm. In mid-February, the market sent the pound sterling plummeting after the British government announced it had unexpectedly borrowed 4.3 billion pounds in January. It was the first time since 1993 that public finances had gone into the red in January—a month in which tax revenues usually push the Exchequer into the black. The previous year, the January surplus was 5.3 billion pounds. The "market"—a word the politicians and the media use to avoid referring to the speculators and the bankers—had interpreted the British government’s declaration as a signal to distrust the pound. Betting on a drop in the pound’s exchange rate, financiers and speculators sold massive amounts of sterling, compelling the Bank of England to raise the interest rate on government bonds. In their attacks against Greece, the banks had used the same ploy with the same objective in mind: betting against a currency when a state needs to borrow money—in order to drive up yields. Will speculation against the British pound be carried further? Les Échos, the main French business newspaper, recently quoted Pimco, one of the world’s biggest investors in government bonds, as saying that bonds issued by the British Treasury were "resting on a bed of nitroglycerine." But some speculators no doubt see this as an opportunity to break the bank and strike it rich.

The United States, the world’s leading economic and financial power, holds the world record for total indebtedness with a 12-trillion-dollar national debt, not counting state and local government debt that has doubled over the last ten years. While the U.S. dollar, for the moment, benefits from the weakness of other currencies, nothing prevents it from becoming the target of speculators betting on a fall of the dollar. Given the magnitude of the U.S. deficit, some credit rating agencies have already raised the possibility of reducing the current top "AAA" rating for U.S. government bonds. In any case, the Federal Reserve, the U.S. central bank, has taken this threat seriously. It recently raised its own discount rate as a way of getting the message across to owners of capital that they would be wrong to bet against the dollar, that U.S. currency would deliver higher yields than before, and better than elsewhere. Will this satisfy the speculators, and for how long? It remains to be seen.

In any case, speculation on state indebtedness has increased enormously since 2008, threatening today to set off an avalanche of bankruptcies, bringing down a number of countries, including some of the richest and most economically developed.

Given the euro’s setback and the destabilization of the Eurozone, the European states deemed the situation serious enough to call for two emergency meetings in February. What came out of these negotiations? Only a call for all governments to impose more sacrifices on the population, under the pretext of fighting against public deficits. Nothing else—for the simple reason that world leaders do not have, and never had, the power to control their own system. Even if they wanted to, they could not prevent financiers from betting on or against a country, its people and its public debt—speculation which is bound to aggravate the living conditions of entire populations. While governments pretend money is lacking for housing, public services, education, decent pensions, and so on, bankers, traders and other fund managers gamble billions in a single day, driving entire countries into misery to produce a bigger return for themselves.

Only yesterday, the heads of state and government pretended the crisis was over—because pretending so was in the best interests of the class they serve. Because profits were back in the banking system, they said the crisis was behind us. But they overlooked the massive plant shutdowns and lay-offs which, far from having stopped, were on the increase. Finally, a few weeks ago, the atmosphere prevailing among the top political servants of the bourgeoisie started to change. The editor of Les Échos came to the conclusion that what is shaping up today is "the third shock, the big one."

Running up Debt to Save the Financiers, the States Prepare a New Crisis

In 2007, the speculation around subprime mortgages and their so-called "derivatives’ ended up in a generalized financial crisis. The United States was hit first, but the other Western countries soon followed. Their banks had also stuffed themselves with these "derivatives," later described as "toxic." In every country, banks were stuck with portfolios filled with worthless securities. Indeed, bank managers were incapable of knowing which securities were "healthy" (from their point of view), not contaminated by "toxic" instruments. For years, banking ingenuity consisted of mixing high-risk investments with more conventional, safer ones, into one indivisible whole.

To bail out the banks and, at the same time, to save entire economic sectors from total collapse, the states handed out trillions of dollars, euros, pounds or yen coming from the public treasury. In the United States, the Federal Reserve as part of its bailout bought 1.45 trillion dollars worth of mortgage-backed securities and other financial contracts linked with a housing sector that had been turned into a disaster area by the subprime crisis. And this was only the beginning.

However, the states and their central banks would have found it impossible to rid financiers and bankers of all the so-called "rotten" securities that over-burdened their accounts. The sums involved were just too huge, and this speculative garbage infected a good deal of the global financial system. But by declaring their intention to cleanse the system—even if they touched only a small part of it—governments reestablished confidence in the markets.

It was the markets’ generalized distrust that had jammed the financial machinery. The default by some creditors, including top-tier investment banks like Lehman Brothers, and the colossal amount of rotten securities in circulation, meant that, in a matter of weeks, financial and banking firms had stopped making loans to each other and to cash-hungry companies.

The global liquidity crisis that followed these defaults had nothing to do with a shortage of available cash, but with a surfeit of it. The normal financial channels simply froze up, and, for lack of liquidity, the economy threatened to come to a halt.

Governments gave fantastic sums or lent them at rates close to zero—or lower than zero given inflation—to bankers, big industrialists and big insurance companies. This initiative was said to be aimed at starting up the economy.

But what governments presented as a clever "way out of the crisis’ was merely a scheme to pull their financiers out of the mess in which they had mired themselves—pulling down the rest of the world with them. And this clever "way out of the crisis’ simply created the conditions for a new, deeper and more serious crisis.

The massive amounts of capital given by the states to their capitalists is the source of this latest episode of the crisis, and today continues to feed it. On the one hand, countries ranging from Greece to the United States have recorded snowballing deficits; on the other hand, the financiers the states bailed out are gambling astronomical sums, speculating on the states’ indebtedness and in the currency markets—against the euro, but also against the currencies of Central and Eastern Europe.

Greek authorities were ostracized by other Eurozone countries, and especially by France and Germany, because Greece’s public debt reached 227 billion euros. But France’s debt is more than 1.5 trillion euros, that is, over six times Greece"s! The total cumulative public debt of the G7 countries—the United States, Japan, Germany, the United Kingdom, France, Canada and Italy—is 22 trillion euros. In other words, a hundred times that of Greece, whose debt, we are told, could spark off a worldwide crash of the bond markets!

Greece is also criticized for having an exorbitant 122% ratio of public debt to its GDP. But this year, the average public debt/GDP ratio of the 20 richest countries in the world (the G20) will be over 100%, in the same range as Greece’s rate. In the United States, the ratio is just about 83%—not counting the most recent gifts—with the federal government estimating that it will reach 100% by 2011.

Public indebtedness has reached such levels that the world is indeed threatened with a financial crash, but the real threat does not come from Greece. It resides in the way the states, and especially those of the big imperialist powers, have plundered public finances to save their own capitalists.

Public Debt and Its Role

Public debt is not a new thing. Ever since the bourgeois class established its domination in Europe and North America in the 19th century, states have racked up debt, using public funds to serve the interests of capital-owners—and have asked workers to foot the bill. In 1880, the Parti Ouvrier Français (French Workers’ Party), one of the first socialist parties in history, published its program. Written by Jules Guesde in close collaboration with Karl Marx, one of its immediate demands was "to suppress the public debt."

Which goes to say that using public debt as a financial weapon against the working class is an old ploy indeed, used regularly ever since. In 1973, for example, the French Treasury was forbidden to use the French central bank to finance its borrowing, and was thus put at the mercy of private financial interests. In 1976, Giscard d"Estaing, French Finance Minister, increased the gifts to private financial institutions and rich individuals who loan money to the state when he authorized the state to pay interest rates higher than the rate of inflation. That came just in the nick of time. It coincided with the beginning of what was to become the longest crisis of the capitalist system, starting in the 1970s, when capitalists the world over were trying desperately to stop the fall in their rate of profit, and to find new sources of profit.

By adopting these measures concerning public debt, the French state—like other states at the same time and for the same reasons—opened up new fields of profit for capital, no longer dependent on the ups and downs of the economy, but only on the generosity of the people who run state affairs. In a context marked by this enduring economic slump, their job was to weigh on the population—increasing taxes and cutting funds for public services—in order to finance and subsidize the bosses in a thousand and one ways.

Year after year, budget deficits added to the cumulative public debt. But as their debt expands, states are compelled to borrow money from the "markets’ to finance their expenses and, increasingly, even just to pay the annual installments on their old debt—debt which, because it carries a compound interest rate, can double every 7 to 10 years.

France pays out 42 billion euros a year for its debt service, which has become the second most important item in the country’s budget—after education. Those who lend money to the French state earn each year the equivalent of what France collects in income tax. Such is the situation prevailing in the fifth richest country in the world!

The U.S. federal government paid out 187 billion dollars in interest on its debt last year.

This handover of wealth is normal in a system where ransacking the public treasury with the help of the state is part of the capitalists’ daily routine. But today, the deal has evolved a bit: the money that states practically gave away to the financiers is now coming back like a boomerang to hit those same states with speculation against their public debt.

Behind the "Financial Market": The Big Banks

Other countries—Italy, Ireland, the United Kingdom, France and the United States, to name those recently mentioned by the media—could soon be targeted by the so-called "financial markets."

Behind this intentionally abstract term "the financial markets’ are found most of the big banks, with their subsidiaries and departments specializing in what has become today’s most lucrative activity: speculation. This term "financial markets’ is only a cover, behind which are companies well-known for raiding the wealth of entire countries and their inhabitants.

One of them is New York-based Goldman Sachs, the world’s number one investment bank, which jumped on the opportunity to eliminate or buy out its competitors and make huge profits in the process when the sub-prime bubble collapsed. It has come under public scrutiny recently for its double-dealing role in the Greek crisis. Goldman Sachs was at the same time both the adviser, hired by the Greek government to help it find the cash it needed, and one of the main beneficiaries, via its speculative funds, of the storm that shook the country’s finances. At the end of January, Goldman Sachs led the Financial Times, the Bible of the international business community, to believe—wrongly—that Greece had failed to sell 25 billion dollars worth of bonds to China. The Greek government may have denied the rumor, but the damage had been done. And international lenders took advantage of Greece’s loss of credibility to raise the costs of loans to Greece. Floating an unsubstantiated piece of information, Goldman Sachs picked up billions of dollars for itself and its clients, through its subsidiaries and the hedge funds it controls.

This same Goldman Sachs in 2002 helped the Greek government to hide part of its debt, so it could appear to meet the European Union’s criteria for becoming a member state. Not only did Goldman Sachs pocket 300 million dollars for giving the Greek government a way to conceal one billion dollars of the ten-billion-dollar loan it had just taken out; Goldman also gained a comprehensive insight into the real financial situation of the Greek state—a very precious advantage for anyone intent on speculating on the financing needs of Greece (or of others, Goldman Sachs having done the same for Italy, for example).

When the leaders of the main European Union countries indignantly summoned Greece (not Goldman Sachs, of course), they were wallowing in hypocrisy. First of all, France and Germany have regularly hidden part of their deficits. Second, both countries’ governments and banks are and have long since been aware of the real public debt of Greece. Two banks, Germany’s Dresdner Bank and France’s Crédit Agricole, hold 30% of Greece’s public debt.

Because public debt has everywhere exploded since 2008, with the interest payments shooting up even more rapidly, the whole financial world is engulfed in this growing "bubble." And speculators have done their best to inflate it, betting on a worsening of the financial situation of the states they have targeted.

In the case of Greece, speculation spiraled up last year when the newly-elected Socialist Prime Minister announced that the budget deficit would likely be twice what the previous, right-wing government had pretended. Holders of government bonds (big banks, international investment funds, etc.) rushed to get rid of their Greek bonds, expecting a loss in the bonds’ value. The Greek government, with its state coffers drying up, urgently needed fresh funds. This is what speculators had been waiting for: with some "investors’ bailing out, the ones who would buy new bonds were in a position to demand that the Greek government increase the yield on its bonds. Any news or rumors, true or false, that weakened Greece’s credit worthiness were welcomed by speculators, because it pushed the state to increase the interest rates of its bonds even more. Greek bonds had been on a par with German bonds, but in a matter of weeks, speculation sent Greece’s bond rate soaring. Today, there is a 4% gap between the Greek rate and the rate paid by Germany for its government bonds—which serves as a reference for the entire Eurozone. Portugal and Spain have gone through the same kind of ordeal, but starting later than Greece, which explains why, for the time being, there is a smaller gap between the interest rates on their bonds and that of Germany.

There is no reason for the speculators to stop. In a few months, they have pocketed a highly profitable return. Moreover, just as with the mortgage-backed securities in the previous bubble, they benefit from the pyramid constructed of "derivative" products—much more profitable than simple speculation on Greek, Portuguese or Spanish debt—building up a new, much bigger speculative bubble.

Many European governments used the speculation as an excuse to impose new sacrifices on public sector workers. The governments pushed back the age when people could get a pension. They also froze wages—which meant a wage cut, imposed new cuts in social programs, and further dismantled public services. Meanwhile, speculation was destabilizing the part of the Eurozone that not only included Greece, but Spain, Portugal, Ireland and Italy.

The Precedent-Setting Collapse of the EMS under the Blows of Speculators

In early February, a Financial Times report indicated that in just a week, 40,000 contracts for a total of eight billion euros had been entered into by traders and hedge fund managers speculating on a fall in the value of the euro. Analysts from Natixis, a French investment bank and a banking services company, having pointed out that "the 1992-1993 economic crisis caused the breakdown of the European Monetary System," then asked whether the present crisis could "break up the Eurozone today."

The European Monetary System (EMS) was the first attempt at unifying Europe’s national currencies, bringing them together in a system that theoretically forbade them to fluctuate by more than 2.25% from a fixed rate. Against the backdrop of a global crisis, accompanied by the termination in 1971 of the U.S. dollar’s convertibility to gold, followed in 1973 by the implementation of a world system of "floating exchange rates," the EMS was trying to impose a measure of stability on the currencies of the Common Market member countries. The aim was not so much to exclude the competitive devaluations of the currencies, but to reduce their harm on intra-European trade.

In 1992, hit by a deep economic recession, and needing funds to cover the cost of absorbing East Germany (the former German Democratic Republic), Germany raised its interest rate, trying to make its money, the mark, more attractive to speculators, thus attracting capital. The French government took similar measures. But other countries could not do the same. With their currencies thus weakened, they were immediately targeted by speculators. An American financier, George Soros, acquired worldwide fame when he and a group of speculators sold massive amounts of British pounds on the foreign exchange markets, compelling British authorities to devalue the pound. The pound collapsed and the United Kingdom had to pull it from the EMS. It was soon followed by the Italian lira and the Spanish peseta. On September 16, 1992, the pound was knocked down by speculation and Soros was dubbed "the man who broke the Bank of England"—a symbol, since the Bank of England, established in 1694, was the first central bank in the world.

Ten months later, the speculators turned to punish the French franc. The Bank of France spent 300 billion francs to defend its currency, but failed to stop speculation. It was then decided that exchange rates would be allowed to fluctuate within a 15% margin inside the EMS. In other words, the EMS was as good as dead. And the speculators who had bet on its collapse started pocketing their gains. (Soros pocketed one billion dollars from speculating against the pound.)

The Euro: A Target for Speculators

In the wake of the EMS’s failure, some of the European bourgeoisies decided to create the euro. What they had in mind was a currency that could guarantee a greater cohesion for the Common Market, or at least part of it. Even though only 16 of the 27 European Union member countries joined the Eurozone, the new currency has warded off the permanent instability in exchange rates that plagued the previous system and the regular disruptions in European trade provoked by this instability.

However, there were inherent contradictions in the construction of the Eurozone, the ones that were already there at the end of World War II when the process of creating the European Union began. They are still around. These contradictions result from the more or less important conflicting interests of Europe’s imperialist powers (especially Germany, the United Kingdom and France), on the one hand, as well as their individual weakness, on the other hand, which forces them to strike deals with each other in order to survive against the two global giants, the United States and Japan.

What some of the European states wanted to create was a common money, which is not the same thing as a single currency. But there lies the problem: in order to have a single currency, there needs to be a single state to issue the money, a state able to impose itself where it exercises its authority. But that’s exactly it: such a state does not exist in europe.

This explains the euro’s congenital weakness, which is shown in many ways, and makes it more vulnerable to speculation. The statutes of the European Central Bank (ECB), for example, forbid it to behave like the U.S. Federal Reserve, which can repurchase U.S. government bonds making up part of the public debt. But the Fed is backed by a single state, that of the United States, recognized by that country’s bourgeoisie as its own state machinery. By contrast, the ECB, even though it is the guarantor of the money, depends on no single European state, and even less a unified one, and therefore the ECB must cater to the different interests, even diverging and rival ones, of several European powers.

Of course, the ECB, like other European institutions, tries to figure out a common denominator serving these European powers—when such a thing exists.

The bourgeoisies who decided 18 years ago in Maestricht to adopt the euro wanted a common currency that could facilitate the circulation of goods between the countries that adopted it. They also wanted a currency that would allow the imperialist countries of the Eurozone to export capital more easily. That meant a strong euro, which is what the European Central Bank, and behind it France and Germany, wanted. With the exchange rate favorable to the European currency, European capital can buy companies relatively cheaply, be it in the United States or elsewhere in the world where the dollar serves as a reference.

This situation is favorable to the big European financial groups. But when Europeans invest abroad, Europe as a whole loses capital that has to be compensated for by investments made by foreign investors in Europe. This is why the interest rates related to the ECB are always slightly above those of the Fed, which does not have the same problem attracting the world’s capital. The fact that investors put their money in the most powerful country on earth is guarantee enough. This was exemplified once again a few weeks ago when speculation raged against Eurozone countries, causing, according to a Danish banker, a "global rush toward the dollar and U.S. Treasury bonds."

Could this speculation compel some countries to leave the Eurozone just as some European countries did at the time of the EMS? This possibility cannot be ruled out, though nothing allows us to say that this is what will happen. However, let us keep in mind that the prevailing selfishness is such that when the EU talks about coming to the rescue of Greece, they mean only that they might do so if it does not cost anything to Germany, France and England, among others.

For the time being, we can say that powerful financial interests are gambling against countries like Greece, Spain and Portugal, forcing them to borrow money on foreign exchange markets, at always higher rates, thus weakening their common currency, the euro. Worth more than $1.50 nine months ago, the euro has since lost 10%. This setback might pass unnoticed within the countries of the Eurozone, where 80% of the trade of these countries takes place in the zone itself. However, this 10% differential means fabulous gains for those who are not usually referred to as speculators (even though they are among the most important speculators)—namely, the big companies with subsidiaries or business partners all over the world, which permanently juggle exchange rates for billions of dollars, or yen, or euros, or pounds at a time. There are also the big banks and the insurance companies for which speculation is their daily bread and butter. Then, there are the 10,000 or so hedge funds, which are entirely devoted to speculation.

The media and politicians pretend that the attacks on the euro are coming from those hedge funds, particularly outside the Eurozone, but it is almost impossible to know exactly which country the hedge funds belong to! A large number of them are based in tax havens. In any case, these hedge funds—even when they are not the direct creation of big European, American or Asian financial groups—manage colossal sums of money for these groups, which demand fast and big yields.

At a time when production wanes and the crisis deepens, yields of 15% can be obtained only through speculation. This is why all the sectors of global capitalism were so keen to buy the securities based on "subprimes’ and "derivatives’ some time ago. With the end result we know!

Well, the same phenomenon is being reproduced today in the speculation in public debt and the euro. And for the same reasons—aggravated by the fact that the euro, money of a vast economic and human ensemble, remains a political dwarf, less able to resist speculation than other moneys with global status.

Speculation’s Time-Bombs

The leaders of the big European financial groups probably don’t share the official optimism of French Economy Minister Christine Lagarde, who recently declared that devaluing the euro could be a "good thing" for Europe’s exports (because their products would automatically be cheaper in the dollar zone). But for the financial groups, a weaker euro would render it less attractive for the holders of capital looking for profitable spots to place their money. Moreover, a weaker euro would probably compel the ECB to raise its rates. That would, in turn, make the euro more expensive for enterprises in need of credit to carry on production, as well as for those who use it for speculation.

For months now, U.S., European and other financial milieus have been betting enormous sums on a fall in the euro. They have already pocketed huge sums in this worldwide casino where the states’ budgets are mere chips on the gambling table.

Could their speculation bring about the collapse of one or another of the states? They do not care, because the government bonds, Treasury bonds and other bonds issued by the Greek, Spanish or other states can be sold "short" on the assumption that these securities will lose value—and bring them a profit.

Of course, their scheme will work only if the securities take a nosedive, and if the credit of the state that issued them is called into question by the markets. The more speculation develops, the more the situation of the targeted state worsens and the more finance sharks are attracted by the smell of blood and profits. Everybody knows that this cannot go on forever. Speculators know that as speculation develops, the risk that the targeted state will be in default also grows. This is why at the same time that they try to get rid of paper money issued by the Spanish or Greek state as fast as possible, with a big profit, the speculators are in the market for so-called "credit default swaps’ (CDS). They are a sort of insurance policy against default by a borrower—whether by a company or by a state. Their creation and proliferation have followed along the lines of what happened during the so-called "sub-prime" bubble, which gave birth alongside the "sub-prime" securities to numerous derivatives (including the CDSs). Then, too, financial circles were enthusiastic about these highly risky derivatives because of their potential high payouts—until the whole house of cards collapsed in 2007 and brought about a worldwide financial crisis in 2008.

In the present case, the CDSs guarantee that, should a state find itself in default, the issuer of the CDS will pay off those who bought the CDS as a kind of insurance. That is the theory, at least. In fact, no entity could cover the debts of a defaulting state, not to speak of several states at once, given the colossal amounts of money involved. It’s in this sense that the CDSs were aptly described by the economist Paul Jorion as "a time-bomb that might accelerate the collapse of the entire financial system." Let us recall that during the 2007-2008 crisis, AIG, the biggest insurance company in the world, went bankrupt because it had sold CDSs covering many of the rotten securities issued by different Wall Street banks, including Lehman Brothers, whose bankruptcy was one of the most important episodes of the financial crisis.

Since then, the volume of CDSs has been permanently increasing, especially with the speculation on public indebtedness and the euro.

What makes them so attractive is not so much their supposed guarantee to cover a default as the gains the CDSs can generate as highly speculative "derivatives’ bought and sold on credit yielding profits that can be 20 or 30 times the initial investment. Which speculator, which fund manager, which financial director of any industrial group could resist such a lure! In comparison, the new rates offered by the Greek government, even though they are double the rates paid by Germany, appear drab indeed. The speculation on the public debt (of Greece, Spain, Italy, and perhaps tomorrow France, the United Kingdom or even the United States) is at the origin of this whole new pyramid of "derivatives." But the link between speculation and reality has almost disappeared. Speculation—and this is characteristic—tends to develop by itself, for itself in the current period of crises, with less and less of a link to the sphere of producing material goods.

The explosion of these CDSs, "derived" from public debt, gives an idea of the more and more parasitic nature of the global capitalist system. In order to guarantee forever-growing profits to a few thousand big groups and their shareholders, a multitude of firms of all sizes have specialized in speculation and are ready to drive entire countries to their knees, plunging their populations in misery; to cause the bankruptcy of states that belong to one of the richest regions of the world; to break up the Eurozone, which contains almost half a billion people and some of the most developed economies in the world.

We haven’t yet seen the worst. But the unfathomable greed for profit and the shameless irresponsibility of those who run the system is such that if they are not stopped, if the financiers of the world are not expropriated, humankind will be faced with a catastrophe that will turn out to be worse than we could imagine.