Beware of Bankers Bearing Gifts

INTRO: With the Greek debt crisis approaching a denouement in the following days and the Eurozone at serious risk of collapse, along with other less publicised areas of the global economy showing signs of considerable financial stress, we may actually be getting much closer to another economic (near) extinction level event in the weeks and months ahead. As Greg Maybury reports though, it may be China that holds the key as to how this situation plays out for us all. 

 An article by Greg Maybury

Canaries in the Euro-Coalmine

Perhaps not since Lehman Bros went pear-shaped in 2008 at the height of the Global Financial Crisis (GFC) has the hoary old metaphor of the canary in the coalmine been more apt than with the current Greek liquidity crunch. With the ‘bird’ in question still standing only because it is nailed to the perch, at least one commentator Bill Bonner has framed his assessment accordingly. Amid Greek banks limiting withdrawals due to capital controls and others closing for fear of running out of cash, along with a pending referendum which could go either way, the crisis is about to reach a denouement of sorts.

After noting the ‘sense of panic and impending doom’ becoming intensified over the weekend as Chinese authorities in the wake of developments in the Eurozone took action to halt a market downturn, Bonner – author of The New Empire of Debt, and Mobs, Messiahs and Markets – observed,

‘In the last two weeks, the Shanghai Composite Index has lost 20% of its value…[the] equivalent of the Dow losing 3,600 points. It’s the kind of thing that makes investors nervous. Or desperate. If that happens in the U.S. – which it surely will – you can bet your bippy that the feds will intervene. The Chinese are doing the same. They’ve just cut the central bank lending rate to the lowest level ever. Will that do the trick?’

In the aftermath of the Greek default, with this in mind it might be instructive to look at the broader landscape, which involves amongst other things revisiting the event that exacerbated the crisis along with identifying the real causes and the real culprits. If we are to believe certain Eurocrats, EU leaders and numerous pundits – along with many in the mainstream media (MSM), on whom the former rely to tell us what they want us to hear – the present situation is of Greece’s own making. Yet as with so much of what the MSM tells us about the pressing economic and geo-political issues of our time, increasingly we need to perform our own reality checks to garner any semblance of veracity about them.

As for the received wisdom the crisis was self-inflicted, apart from being a not entirely accurate reflection of reality, absent a more historically nuanced insight into how Greece got into such an indebted state – to say little of other EU countries with massive debt and liquidity issues such as Italy, Spain and Portugal – this crisis is unlikely to be resolved anytime soon in anyone’s favour, with the possible exception of the main private creditors. And it should go without saying that until and unless the conditions that set Greece on the path to bankruptcy are recognised and addressed, any resolution however it might be defined much less effected is even less likely to be a self-sustaining, ongoing one. At best we can expect that any progress will be of the ‘one step forward, two steps back’ variety.

That said, it would be difficult to overstate the dire implications for the European Union experiment, to say nothing of those for the global economy, if the du jour economic ‘sick-man’ of Europe falls off the aforementioned perch. Short of some sort of debt forgiveness deal being negotiated, an outcome that no-one at this stage expects, or Greece accessing loans with more favourable terms from other sources external to the IMF and the ECB (Russia for example), the EU experiment looks increasingly precarious with every day. Even if Russia comes to the rescue, it is difficult to imagine from a geopolitical perspective the U.S. and NATO states being happy with that solution, for what should be patently obvious reasons. And if anyone had any illusions about the experiment’s ‘work-in-progress’ status even after all this time, then a sustained Greek default post-referendum followed by the seemingly inevitable “Grexit”, surely will dispel them for all but the most ardent Europhiles.

In short, the economic Tower of Babel that is the Eurozone could well endure a fate not dissimilar to its Biblical namesake. By all accounts there is no Plan B for Greece’s departure from the Eurozone, with expectations in most quarters there’ll be an economic ‘domino effect’ as a consequence. Which of course makes one wonder if the West in general and the U.S. in particular will bring to bear the same determination to prevent this scenario happening that they did when confronted with a domino effect of a different kind in the halcyon daze (sic) of the Cold War.

And as we will see, this isn’t just all about Greece, or for that matter, the Eurozone. With cracks appearing along several global financial fault lines, there may well be bigger fish to fry in the grand scheme of things.

All God’s Dirty Work 

As for identifying who the main culprits were in scamming Greece into a financial death-spiral, it may come as no surprise that we have to return to the ‘scene of the crime’ as it were, the “scene” of course being Wall Street, and said “crime” being the GFC. Specifically it was the ‘Monsanto’ of Wall Street Goldman Sachs, whose financial alchemists – in the form of current CEO & Chair Lloyd “We Do God’s Work” Blankfein, President and COO Gary Cohn, and co-Managing Director Addy Loudiadis – had their fingerprints all over complex derivative deals they structured and presented to Greece [and] which enabled it to mask the true extent of its sovereign debt. Although by most accounts such deals weren’t strictly illegal, they ended up almost doubling the amount of debt owed under the decidedly one-sided, if not dodgy arrangements.

In a recent piece on the crisis, Pam and Russ Martens from Wall Street on Parade, observed it would be reasonable assumption to conclude Greece and its finance officials at the time the deal was struck were ‘knowing participants’ in inking them. The implication here is that it was simply a case of caveat emptor (aka ‘let the buyer beware’), and therefore, for this reason alone Greece should not now be crying fowl. Yet tellingly, they added this might be an acceptable view ‘were it not for the [many other] counties, cities and school districts across America….[that were] similarly fleeced and hoodwinked by investment banks on Wall Street.’ And for the record it wasn’t just in America where this ‘fleecing’ and ‘hoodwinking’ occurred, with numerous other nations including here in Australia being as much prey to the machinations of the Wall Street predators. The Martens elaborated further:

‘Wall Street padded its profits with these deals in order to extort massive bonuses for its executives from its shareholders on the basis that it was “doing God’s work”, when in fact it was catastrophically leveraging up the global economy with secret, off-balance-sheet debt deals. Wall Street then crashed the global economy in 2008……just as it had [in] 1929. And the people who structured these deals not only still have their jobs… they’ve received promotions and higher compensation while the people of Greece struggle to buy medicine and food.’

The Martens weren’t by a long shot the only commentators who believed Goldmans played a cunningly crafted and enormously profitable shell-game in duping the country’s then finance officials into accepting the deals. In a 2012 BBC report, ‘How Goldman Sachs Helped Mask Greece’s Debt’, financial journalist and author of The Devil’s Derivatives Nicholas Dunbar, had ample to say about how Greece in 2001 had been effectively hoodwinked into signing off on the deals that on paper enabled it to reduce its debt to GDP ratio ‘in order to comply with EU requirements.’ The rest to a great extent is history, with Greece entering into the deals thinking they would eventually facilitate substantial sovereign debt reduction, only to discover they had placed themselves in even greater hock.

We’ll return to the situation in Greece shortly, but we should now take a broader view of the global political and economic landscape, and some additional factors that have brought us to this point.

The Masters of the Black Hole Universe

In a recent article ‘The Care and Feeding of a Financial Black Hole’, Dmitry Orlov reflects on the state of the global financial system and the machinations of those who have created the unholy mess that passes for it in 2015. As the title implies, he likens it to a “black hole”, again another very apt metaphor. Orlov, a commentator who invariably brings an intriguing and sometimes idiosyncratic take to any number of issues including various forms of “collapse” and the factors leading to it (his book The Five Stages of Collapse makes compelling reading in this regard), begins his piece by name-checking Russian economist and (Vladimir) Putin adviser Sergey Glazyev:

‘Anyone who knows mathematics can see that the United States is on the verge of collapse because its debt has gone exponential.’

Now such notions don’t get mentioned in any State of the Union Address or receive airplay in the MSM, and Orlov acknowledges this ‘head-in-the-sand’ reality. But he nonetheless provides a compelling argument supporting Glazyev’s view. In order to flesh out his metaphor, Orlov describes how the “black hole” sucks in everything from individual families to entire cities. After noting that via the fraudulent mortgage racket, it sucks in houses and spits them out again encumbered with bad debt, he continues,

‘…[W]ith the help of the medical industry, it sucks in sick people and spits them out again, bankrupt. With the help of the education racket, it sucks in hopeful young people, and spits them out…..with worthless degrees [and] mountainous debt. With the help of the military-industrial complex, it sucks in just about anything and spits out corpses, invalids, environmental damage, terrorists and global instability. And so on.’

But in Orlov’s view, the omnipotent, insatiably ravenous and ever expanding black hole, ‘can suck in entire countries’, which of course brings us right back to the Greek situation. ‘Right now’ he says, ‘[the black hole] is busy trying to suck in Greece’. But he emphasizes, it’s having a hard time of it, because,

‘Greece is, of all things, a democracy. This has the black hole’s puppets in quite a state at the moment, and starting to clamor for “regime change” in Greece, so that Greece can be made to capitulate before the black hole gets hungry.’

In order to gain a deeper understanding not just of the Greek situation but of the broader global implications, it is worthwhile considering Orlov’s “black hole” metaphor in more depth. When it comes to entire countries he notes, if the black hole doesn’t have enough money to suck in for a period of time, ‘it gets hungry and makes the financial markets go into free-fall.’ The financial instruments of countries that happen to be farther away from the black hole — out on the periphery — fall faster.

‘In search of a “safe haven,” money floods out of these countries and into the “core” countries that are clustered tightly around the black hole—the US, Germany, Japan and a few others. The black hole gobbles up this money, but is then hungry for more. But since the periphery countries are….too weak to resist, they [are] turned into black hole fodder…by saddling them with debt they can never repay, then forcing it to keep making payments against this debt by making it a condition for maintaining a lifeline…To be able to make the payments, the country is forced [into]…austerity, to privatize everything…turning it into collateral for more loans, and to surrender its sovereignty to….the IMF and the ECB, which are involved in the care and feeding of the black hole.’

What Have the Greeks Ever Done for Us?

Not everyone is getting his/her knickers in a knot over the possibility of a Greek exit and with that the possible failure of the EU experiment, with Paul Craig Roberts seeing an upside of sorts in a recent article “Greece Again Can Save The West”. He observes that the Greek crisis is not about debt at all, and sees this purely as “the propaganda” the Empire is leveraging to ‘subdue sovereignty throughout the Western world’. This of course is not too far removed from Orlov’s own assessment articulated earlier, or for that matter many others with a more nuanced, less Empire-centric view of the geo-political order. Roberts notes the Greek government was told that “democracy doesn’t apply” when creditors are determined to make Greek citizens pay for the creditors’ mistakes with ‘reduced pensions, health care, education, employment, and social services.’ The Empire’s position he notes is that the Greek people are ‘responsible for the mistakes of their foreign creditors’, and [that] the Greek people ‘must pay for their creditors’ mistakes, especially those mistakes enabled by Goldman Sachs.’

‘As has been proven conclusively, the Empire’s claim is false. The austerity measures that have been imposed on Greece have driven down the economy by 27%, thus increasing the ratio of debt to GDP and worsening the financial situation……All austerity has accomplished is to drive the Greek people further into the ground, thus making debt repayment impossible. The Empire rejected Greece’s referendum next Sunday, because [it] doesn’t believe in democracy….[It] believes in subservience. Greece is not being subservient [and] must be punished….[It should] do what its previous governments have done, accept a pay-off and allow Greece to be looted.’

Perhaps not surprisingly, Roberts sees fundamental links between the Greek economic situation and America’s increasingly belligerent geo-political power plays all designed to impose hegemony over Europe, and indeed the rest of the world, in particular Russia and then China. The twin pillars of this existentially dangerous doctrine of course are military supremacy (principally via NATO) and economic dominion (via Wall Street). In Roberts’ untrammelled assessment, ‘Washington is brewing Armageddon.‘ But he adds, ‘Greece can save us.’

‘All the Greek people need to do is to…insist that their government, the first in awhile to represent the interests of the Greek people, give the finger to the corrupt EU, default on the debt, and turn to Russia….This would begin the unravelling of the EU and NATO and save the world from Armageddon. Most likely, Italy and Spain would follow Greece out of the EU and NATO, as these countries also are targeted for merciless looting. The EU and NATO, Washington’s mechanism for creating conflict with Russia, would unravel. The world would be saved and would owe its salvation to the ability of the Greeks to realize what really is at stake.’ 

Other commentators, whilst obviously focused on and mindful of the events unfolding in Greece and in the broader Eurozone, are casting their eyes elsewhere in order to gain and then articulate a broader view of that aforementioned landscape. Greece may appear to be the main game at the moment, but as John Rubi

no of Dollar Collapse appears to be saying, it may just be the opening act in a larger narrative still yet to play itself out, albeit one without a happy ending. He has some insightful observations about what’s happening in the world’s second largest economy China, and it is instructive to consider these. Rubino firstly notes that China has cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders after stocks plunged and bond sales drained liquidity. He adds,

‘The easing follows the biggest two-week plunge in the stock market since 1996 and a four-week rise in money-market rates as lenders hoard cash. While industrial production and retail sales stabilized in May, investment slowed further — a sign of weakness in infrastructure spending that policy makers are keen to reverse.’

Almost as an afterthought – albeit one with an ominous subtext – Rubino then cites Shen Jianguang, chief economist at Hong Kong based Mizuho Securities Asia Ltd., who, in what must be considered an understatement of the first order recently said: ‘The [Chinese] central bank doesn’t want a panic caused by the stock rout to spread, [as this] would lead to financial instability.

But Rubino has even more unsettling observations about the Chinese situation. With China having spent the past couple of decades building an infrastructure ‘twice as big as it should have been’, it’s fiddling with all kinds of imperfectly understood fiscal and monetary levers, ‘trying to maintain a 7% growth rate that is looking more and more fictitious.’ Here again he notes,

‘…[that] the best way to deal with a bubble is to not let it happen in the first place. The second best way is to let it pop and allow the market to clean up the mess. The absolute wrong way to manage a bubble is to intervene from the top to keep it going. Look where that has gotten Japan and the US.’

Others looking closer to home see signs the global economy might be in an even more precarious situation than in 2008. In his Economic Collapse blog, Michael Snyder had some things to say about increasingly troubled Puerto Rico, not the least of which is the probability that a pending default in this country – considered inevitable by most observers – may have even more serious implications for the U.S. than what is happening in Greece, if not in geopolitical terms, then at least in pure financial ones. Whilst Snyder acknowledges that the Greek crisis is much more significant by way of how much it owes international creditors ($US350bn), U.S. financial institutions’ exposure accounts for only ‘about $US14 billion’ of this. But with Puerto Rico he says, ‘things are very different.’ Just about the entire $US73 billion Puerto Rican debt is owed to U.S. banks, which could ‘potentially cause massive problems for some extremely leveraged Wall Street firms.’

He has this to say:

‘It is important to keep in mind that many of these financial institutions are very highly leveraged. So just a “couple of percentage points” could mean the different between life and death for some of these firms. And unlike what is happening with Greece, the private financial institutions that hold Puerto Rican bonds are not likely to be very eager to “negotiate”.’

Another gloomy note Snyder underscored was that a significant portion of the Puerto Rican debt is derivative based. Yes, these are the very same genetically modified financial concoctions that were at the very heart of the GFC and which are now giving the Greeks so much existential economic grief, and which the U.S. Congress have done very little since the GFC to regulate, police, control or for that matter even tax properly. Indeed, much more effort and energy has been spent by the U.S. in focusing attention on, and then controlling, Iran’s purported nuclear weapons program than the far more dangerous ‘weapons of financial mass destruction’ that are the derivatives called Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDSs).

And like John Bonner, Snyder had similar things to say about China. He referenced a New York Times story from early 2008 documenting a serious Chinese market plunge just prior to the GFC in that year, when US stocks were still riding high. Here’s what he had to say:

‘What makes this [the present Chinese market plunge] so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again. Is this yet another sign that a U.S. stock market crash is imminent?’

As if to drive home his message, Snyder then places the recent China plunge into sharper relief with the following. The amount of wealth that has been wiped out during this Chinese stock market crash – $3 trillion dollars – is already greater than the GDP of Brazil. And with the global financial system more interconnected than ever, what goes on in China ‘has a [potentially] greater impact on the rest of the globe than ever before’. Or to use a popular contemporary catchphrase, what happens in China, will definitely not stay in China.

We’re All Greeks Now

With the Greek economy in dire straits and unemployment levels at record highs then, the general resentment felt by the population towards the troika dictating the terms – ECB and the IMF, along with the EU – is high indeed, and understandable. By most accounts it is Germany that is the driving force behind the austerity measures that the majority of Greeks have decided they’ve had enough of, with Germany’s Chancellor Angela Merkel copping the most heat. After providing some important historical perspective going back to WWII when the Germans occupied, ransacked and pillaged the country with the Greek resistance movement, numbering about 2 million members, doing much to impede the Nazi war effort with very little support coming from other Allies, William Polk observed the following,

‘…[t]he national income of Greece is down about 25 percent and unemployment among younger workers is over 50 percent. So where does that leave the negotiators? Faced with German and EU demands for more austerity, Greeks are angry. They’ve deep memories of hatred against the Germans (this time, not soldiers but bankers).’

Now of course this brings us back to the issue of debt forgiveness as a way of ameliorating the crisis once and for all. With Germany seen as the resident Euro bully in its insistence on Greece accepting even more austerity measures if it is to be bailed out yet once again, there are many like Polk who recall that in the aftermath of WWII, Germany itself was heavily indebted, including to Greece itself. This debt was largely forgiven. Although not everyone agrees that the circumstances are the same, there is a very strong argument for the ‘forgiveness imperative’ now that the shoe is on the other foot.

This is the view of Pan Pylas and David McHugh from Associated Press and many others, who argue that forgiving debt, if done right, ‘can get an economy back on its feet’. Though Germany is resisting Greece’s pleas for some relief, they declare ‘it should know better than most what it can achieve.’ They further noted,

‘The 1953 [post-War German debt forgiveness] deal…was generous to West Germany. It cut the amount it owed, extended the repayment schedule and granted low interest rates….And crucially, it linked West Germany’s debt repayment schedule to its ability to pay…..[T]hat created an incentive for trading partners to buy German goods.’

In any event, according to IMF estimates revealed in a set of documents obtained by German newspaper Suddeutsche Zeitung and reported in The Guardian, even if Greece accepted all of the austerity measures demanded by its main creditors, ‘it still would not be able to make ends meet by 2030.’ The IMF estimates seem to provide support for Greece’s decision not to accept the bailout deal. For some this demonstrates that for Greece to survive, it needs real debt relief measures, not austerity reforms.

Yet Mark Weisbrot, author of the forthcoming book Failed: What the Experts got Wrong about the Global Economy, asked in a recent piece the following question: ‘Are European Authorities Trying to Topple the Greek Government?’ In his view there can only be one explanation for the Eurozone response to Greece’s default and impending referendum, a response that enforced capital controls thus compelling many banks to close their doors, and one that ‘pushed Greece closer to a more serious financial crisis than they have had in the past five years of austerity-induced depression.’

Weisbrot – who is certainly not alone in this view – had this to say:

‘From the European authorities’ point of view, “regime change” is the only logical strategy. They have a nuclear weapon, which is to cut credit to Greece entirely – thus precipitating a Greek financial meltdown that would force the country out of the euro—but German Chancellor Angela Merkel doesn’t want this, and neither does her ally, President Obama. So the European authorities continue to take steps to undermine the Greek economy and government, hoping to get rid of the government and get a new one that will do what they want’.

At this point we should return to the Martens from Wall Street on Parade, who in two separate pieces further placed the Greek crisis in the larger context.  In the first piece they suggest that Greece has two things in common with bankrupt or teetering parts of the United States:

‘…[they both] took advice and money from Wall Street while paying huge fees; now the catastrophic results of that bad advice is falling on the backs of the poor and most vulnerable citizens….From the $1.2 trillion in student debt now on the backs of U.S. college students, a growing number of whom are turning to prostitution to keep up, to teetering Puerto Rico, the bankruptcy of Jefferson County, Alabama in 2011, Detroit’s bankruptcy in 2013, Wall Street was on hand to grease the skids or set the train wreck in motion.’

And in another revealing piece ominously titled “The Perfect Storm: Greece and the Euro in Crisis and Chinese Stocks Crumbling”, after noting Chinese regulators had previously pledged to curtail risky margin lending, they have now ‘done a complete flip flop’ by permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed. As they observe,

‘This is, effectively, just another form of securitizing margin loans. Exactly what investor would want to buy the bonds of brokerage firms in China when the market is in a meltdown remains to be seen.’

In the final analysis, whether the Greek default remains unresolved and the country exits the Eurozone or not, in the grand scheme of things it may not make a lot of difference in the medium term. The global financial situation is already teetering, with the systemic problems and issues brought into sharp relief by the GFC remaining largely unresolved, not to mention the high crimes and gross misdemeanours that have gone unpunished, just some of the themes your humble scribe canvassed in a previous piece on the GFC and the folks who delivered it to us. (See “The Gangbanksters of Grab-it-All Street”.)

There appears little likelihood they’ll be addressed anytime soon, and even if by some miraculous providential intervention or collective epiphany upon the part of governments worldwide to initiate immediately a wholesale restructure of a broken, dysfunctional, parasitic and destructive system, any positive outcome from such an “intervention” or improvement from any “restructure” may just be too little too late, at least for the coming crisis that more and more folks are predicting is not too far off now.

Time will tell of course, but even that commodity is in increasingly short supply. In fact it probably is about the only “commodity” that can’t be traded on the bourse. More’s the pity I say. I’m sure I’m not on my Pat Malone there.

Greg Maybury