Frontline Index





Eurozone Debt Crisis - on the Road to Credit Crunch II?

Ralph Blake on the crisis that is threatening a new 'lehman-style' collapse in the economy

 The public debt crisis that is currently at its deepest in the Eurozone has its roots in the general crisis of capitalism. To attempt to solve capitalism’s crisis of the 1970s and the dynamic path it has followed since then vast amounts of credit were made available over the last three decades.

The Roots of the Crisis

This was carried out to ensure:

Public spending was used to support structurally weak economies as a result of capital flowing east and the credit bubble was exacerbated by the US cutting interest rates sharply to lessen impact of the bubble bursting and the resulting recession at the turn of millennium.

A European Twist to the Tail

There was a specific manifestation of this phenomenon caused by Euro. Weak economies with weak currencies entered the Euro – Greece, Portugal, Ireland & Spain. This made their domestic economies less competitive and this was compensated for by taking advantage of being able to borrow at low German Interest rates leading to differing outcomes. International and local banks took advantage of this new market for lending.

These different outcomes were:

In summary a credit led boom not corresponding to the growth in real production and wealth.

Each country in the Eurozone followed this route to varying degrees of emphasis. The table below shows the variation across the so called weak PIGS (Portugal, Ireland, Greece, and Spain)’s countries and Germany for comparison.

Public Spending Deficit

Private housing bubble

Consumer credit boom

Speculative bank bubble



























Of course the credit bubble bust and what followed was the deepest global recession since the 1930s. This led to a bailout of the financial system by governments, the propping up of economies with stimulus measures with the costs borne by governments and the recession led to lost tax revenues and increased welfare spending. All these costs were crystallised into record levels of public debt. This was the case right across the western world. The debt crisis in the US and the UK as well as the Eurozone is a result of this.

 The bailout for the PIGS is a bailout of the financial system not the PIGS’s countries’ themselves. Public money is being syphoned through the European Union (EU)/International Monetary Fund (IMF) and European Central Bank (ECB) to gives loans to the PIGS’s countries. These loans are being used by countries to pay off loans and interest to private banks and take out new loans with the same banks. They are a further indirect bailout of the banking system. They are not a bailout of indebted countries’ economies. All this is happening because governments fear another Lehman’s, a credit crunch II and second deep recession that could lead to a depression

Another Lehman’s?

What is the scale of the problem? Lehman's was a $631 billion loss. European private banking exposure to each of the PIGS countries and Italy’s public & private debt:

Greece $130 billion

Ireland $463 billion

Italy $783 billion

Portugal $194 billion

Spain $642 billion

US & UK banks have to sold $100s of billions of insurance on this debt A default could led to a domino effect with the losses much greater than Lehman’s with a second contraction in credit and recession - essentially a depression.

Greece Crisis Not Over Yet

The Greece crisis is far from over yet. The banks are being asked to accept a $50 billion default on Greek deficit. It is uncertain that they will accept this in enough numbers. The EU claims this is a one off and will not be repeated in Greece again or in other PIGS’s counties. The financial markets have shown that they think otherwise. A shortfall in accepting voluntary defaults and the fact that banks are not all willing to take losses will lead to big disagreements between Germany and France/ECB/IMF.

The next deal will be difficult to broker without more money from governments (more debt). On top of that there is quarterly review of Greece’s progress in implementing austerity measures and privatisations to see if next instalment of bailout is released. The Euro 50 billion from privatisations that Greece is expected to raise is completely unrealistic. The austerity measures are driving the economy into a spiral of decline actually increasing the deficit. This means there will be a quarterly debt crisis with eventually an involuntary default occurring either through non-payment, bond holders not accepting losses or a credit downgrade from the credit rating agencies. We are likely to see the same cycle repeated in Ireland and Portugal.

Spain too big to fail and too big to bail?

Spain has a huge housing bubble that has partially burst and has further to go with an oversupply of one million houses and 85% of Spanish homes having mortgages. Exposure to this bubble is held by local building societies (Cajas) and losses will be in the Euro 250 to 500 billion ranges. National Spanish Banks are exposed to construction and real estate companies to the tune of Euro 439 billion and Euro 100 billion to Portuguese private and public debt. Spanish public debt is 400% of tax collected and interest payments will grow from 18% of taxes collected to 23% by 2015. In addition there is a Euro 150 billion of debt held by the regions. This situation is not sustainable and a bailout looks inevitable in the next year but is likely to break the size of the European bailout fund (Euro 450 billion).

US and UK up to their eyes in debt

The debt crisis is real not just in the Eurozone but in the US and the UK as well. The roots of this crisis are the same in the US and in UK. In the US there is the added issue of US government bonds (deb) being held widely by the global banking system as a “safe haven” for capital. These bonds are used as security in global financial transaction and as a cheap source of generating instant liquid cash for banks. A downgrade of US government debt by the credit rating agencies is inevitable even with the debt ceiling being raised as this like Greece merely postpones the problem. This will lead around the world to higher borrowing costs and less capital being made available just when the global economy is slowing down.

In UK public debt is now over 80% of real GDP and annual interest payments are sucking up 12% of our centrally collected taxes – set to grow to 15% by 2015. The deficit is not under control and looks to be heading to £150 billion for 2011/2012 compared to government forecasts of £122 billion. Comparisons with the post war period are irrelevant. We were bailed out then by the US to the equivalent at today’s money of £250 billion on very favourable terms in exchange for the US becoming the dominant global financial and military power. That is the nature of the UK’s special relationship with the US. The debt to UK GDP ratio only looked so bad in the 1940s because the economy had completely collapsed when war production ceased. Expansion of the economy was rapid as it was rebuilt form the ashes of the second world war and capitalism boomed with high rates of profit allowing public debt to be paid off over a period of thirty years. This very different from today’s stagnant declining economy built on a credit system now frozen and competing with the huge emerging economies of China, India and Brasil.

Need to face reality and develop an alternative to austerity

The left is in danger of leading us blindly into a brick wall if they continue to ignore or downplay the debt crisis. We are rapidly moving to some form of credit crunch II with all that implies. The answer to this from the right will be more cuts and austerity. The left must develop a radical critique of the crisis and radical solutions that solves the crisis in the interests of the majority, that starts by taking the banking system under popular control and ownership and redistributes the wealth  from the wealthy and corporations to the less well-off all around the world. Otherwise we face a decade of hardship and poverty.


Ralph Blake is the pen name of a former investment banker and is his views are his own and not those of any of his current or previous employers