A quick question relevant to Greece and the whole Euro-crisis

[Lyev]

What does it mean in journals, newspapers, magazines, articles etc. when they talk about "vulture capitalists" and when the "markets have Greece by the throat"? I know it's something to do with bonds markets and Greece's credit rating going down to "Junk". Also, what exactly does their lower credit mean, for them, as well as the whole situation in Europe? I think this is also something to do with confines of the Euro, and how Greece can't just suddenly change back to the Drachma. I decided this forum would be a much better place than learning to ask. Thanks a lot comrades.

[FSL]

What does it mean in journals, newspapers, magazines, articles etc. when they talk about "vulture capitalists" and when the "markets have Greece by the throat"? I know it's something to do with bonds markets and Greece's credit rating going down to "Junk". Also, what exactly does their lower credit mean, for them, as well as the whole situation in Europe? I think this is also something to do with confines of the Euro, and how Greece can't just suddenly change back to the Drachma. I decided this forum would be a much better place than learning to ask. Thanks a lot comrades.

The talk of "vulture capitalists", "markets", "cazino capitalism" and the like are just to present a false reality where capitalists are actually working in favour of everyone except a few profiteers who are ruthless bankers and speculators. So, pure nonsense really.


Each country's (or each company's) finances get "examined" from some credit rating agencies. Basically, countries get money by taking loans (issuing bonds as they're called) from banks and these agencies estimate what are the chances the country won't have money to pay the loan back. These agencies think Greece is "junk", meaning it wouldn't be able to repay. Because of that banks wouldn't loan us money and there had to be this rescue plan.

To get out of this situation, governments around Europe need to cut expenses and increase taxes so that they may put their finances in order and regain the confidence of banks. That's the capitalist reasoning behind everything anyway.

Greece could change back to Drachma if it wanted but at the present time the huge trade deficit means its valuw would drop related to euro. It would also move the country away from the EU's "core" so it's not the government's first option at the moment. It might of course be later. Changing currencies by itself brings no real fundamental change, especially since even in countries that have their own currency (USA, UK) the central bank is an independent institution that looks after capitalist interests.

[ckaihatsu]

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What does it mean in journals, newspapers, magazines, articles etc. when they talk about "vulture capitalists" and when the "markets have Greece by the throat"? I know it's something to do with bonds markets and Greece's credit rating going down to "Junk".





“Anti-speculation” measures sharpen euro crisis (WSWS)


By Stefan Steinberg
21 May 2010

[...]

On May 6 German Chancellor Angela Merkel had declared that it was a “scandal” that hedge funds had not been regulated. “In some ways, it’s a battle of the politicians against the markets”, she fulminated, which “I’m determined to win.” A few days later the Swedish Finance Minister compared investment companies speculating on a fall in the value of the euro in relation to the Greek crisis as “a pack of wolves”, while the head of Bafin, Jochen Sanio, recently told the German parliament’s budget committee that Europe confronted a “war of aggression by the speculators, against the euro zone”.

The German and other European governments are now seeking to present the measures introduced at the start of this week as important steps towards the regulation of the finance markets. Nothing could be further from the case. Such posturing is largely politically motivated and utterly hypocritical. Throughout the current crisis, the German government and all other European administrations have unwaveringly followed the diktats of the financial markets and are determined to defend the interests of their own banking elites.

[...]

The slump in the value of the euro and European stocks this week has little to do with market worries that the latest German and European proposals would have any real effect on speculative forms of investment. Market insiders were agreed that, irrespective of any new European legislation, hedge funds would be able to continue their activities—albeit possibly from new locations. Finance analysts were equally dismissive of the German ban on “naked short selling”. The majority of such trading takes place in the US and the UK with very little trading in such contracts in Germany. Under conditions of a globalised finance world a German ban would have virtually no consequences. The country’s biggest bank, Deutsche Bank, conducts its own “naked short selling” from its branch in London and remains unaffected by the ban.

[...]

http://wsws.org/articles/2010/may2010/fina-m21.shtml





Also, what exactly does their lower credit mean, for them, as well as the whole situation in Europe? I think this is also something to do with confines of the Euro, and how Greece can't just suddenly change back to the Drachma. I decided this forum would be a much better place than learning to ask. Thanks a lot comrades.





Not exactly revolutionary, but it's not hard to imagine that the existing agencies would use their clout as a political weapon against leftist movements.

Excerpts http://www.reuters.com/article/idUSLDE6220EG20100303

European Union finance ministers are pushing the European Central Bank to develop its own rating system for euro zone countries

The paper quoted one official saying the plan would free the euro zone from its dependency on international rating agencies such as Standard & Poors, Moody's and Fitch.

"The agencies have been completely wrong in the case of Lehman. Who can be sure that they won't be wrong again"

ECB policymakers have been made acutely aware of problems of the current system by Greece's growing troubles.
Were Moody's to downgrade Greece below the crucial 'A' threshold --as the other two main agencies have-- Greek debt would not be able to be used as collateral in ECB lending operations come the end of the year.

[ckaihatsu]

Greece could change back to Drachma if it wanted but at the present time the huge trade deficit means its valuw would drop related to euro. It would also move the country away from the EU's "core" so it's not the government's first option at the moment. It might of course be later. Changing currencies by itself brings no real fundamental change, especially since even in countries that have their own currency (USA, UK) the central bank is an independent institution that looks after capitalist interests.


Faltering and declining global economic growth means that the social-economic infrastructure fails to keep pace with the growth of the world's population -- the differential between the two shows the extent to which the infrastructure is actually *shrinking* relative to the (growing) size of the entire world's population.

A defender of capitalism -- like a politician -- can ride the wave when things are good -- when there's *real* (GDP) growth that outpaces the growth of the population. When the economy's growing (especially during industrialization or after a war-profiteering boom) a politician can implicitly just "average out" the economic growth among the individuals in the population and put forth the line of, "Why aren't you getting your *own* slice of the pie?"

But when the *objective* economic growth fails to keep pace, and shows persistent sliding, the optimistic opportunism *slams* into reverse and the riding-the-wave behavior turns into a nervous game of hot-potato and even musical-chairs -- now, among the bourgeoisie, who has to do the shit work of delivering the *overall* *objective* bad news to the entire population? And whose heads will have to roll so as to make it look like the ruling establishment is actually paying attention?

FSL is correct, above -- in a period of decline, swapping around the institutions of finance -- even breaking apart the Euro itself -- is akin to rearranging some of the stars in the night sky. (Or the more cliched "rearranging the chairs on the deck of the Titanic.")

Of more tangible concern to all of us is that, with the world's forward momentum halted and capital-mediated economic interconnections drying up like puddles in the sun, the ruling class may *revert* to cruder, more heavy-handed modes of economic rule and social control reminiscent of feudalism and fascism, unless there's a conscious fightback and socialism-oriented organizing by the world's proletariat.





“Anti-speculation” measures sharpen euro crisis (WSWS)


By Stefan Steinberg
21 May 2010

[...]

Details of the German government’s proposals for the EU were leaked to the German business daily, Handelsblatt earlier this week. According to a confidential finance ministry document, Berlin intends to demand “a rigorous and independent examination” of stability programmes in eurozone countries by the ECB or by a “select group of research institutes.” The document goes on to advocate punitive measures against countries which fail to carry out austerity measures, including the suspension of structural funding for eurozone countries and/or a 12-month suspension of European Council voting rights. As a last resort, the document even includes a provision for member-state bankruptcy which would transform a defaulting country into “a protectorate of the European Commission.”

These thoroughly undemocratic proposals were hailed by Germany’s leading business daily as a “much needed economic model.” The paper went on to stress that “Europe has everything to gain if it continues in this direction. Germany should stick to its guns.”

Behind all the smoke and mirrors of its “fight against speculators”, the government in Berlin is intent on introducing semi-dictatorial powers and implementing austerity measures on behalf of the banks in Germany and throughout Europe on a scale unknown since the Brüning government of the 1930s.

http://wsws.org/articles/2010/may2010/fina-m21.shtml

[Jolly Red Giant]

What does it mean in journals, newspapers, magazines, articles etc. when they talk about "vulture capitalists" and when the "markets have Greece by the throat"? I know it's something to do with bonds markets and Greece's credit rating going down to "Junk". Also, what exactly does their lower credit mean, for them, as well as the whole situation in Europe? I think this is also something to do with confines of the Euro, and how Greece can't just suddenly change back to the Drachma. I decided this forum would be a much better place than learning to ask. Thanks a lot comrades.
The terminology comes from the way hedge funds manipulate their 'investments' (in reality gambles) to attacks stocks, currencies or debt.

A basic outline of hedge funds can be got here -
http://en.wikipedia.org/wiki/Hedge_fund

As can be seen from Wiki - hedge funds are called 'hedge' funds because they 'hedge' their bets. The hedge fund managers use verious mechanisms like short selling (a form of which was banned in Germany last week) derivitives, credit default swaps etc to hedge their bets. Hedge funds generally comprise of a small number of very wealthy investors who can make vast sums of money from either a rising or a falling market. The hedge funds then use their wealth to attack the markets - in the case of Greece they attacked Greek stocks, Greek debt, Greek bonds etc - while at the same time hedging their bet. So they will make a huge sum of money in one way and a lesser sum of money in the other. The problem arise if hedge funds have to sell their assets in order to repay their investors and thereby causing massive volatility in the markets.

The declaration of Greece as 'junk' by the credit agencies cost the Greek government (in effect the Greek working class) €700million in extra interest repayments because of the new credit rating. The hedge funds would have made vast sums on top of this by 'hedging' their bets or offsetting their risk - that the Greek economy would be downgraded or not. Recently the Wall Street Journal revealed a private dinner by eighteen Hedge Funds in New York in February where continuing speculation in Greece was discussed.

Now that they have succeeded with Greece the hedge funds will turn their attention to Italy, Spain, Portugal, Ireland and probably the UK and go through the same process - taking bets that the economy will go down, using their funds to attack the different aspects of the economy and force down the credit rating.

This is a very simplistic outline of what is going on - it is significantly more complex than that. Hedge funds have little regulation (significantly less than normal investment funds) and have the ability to do serious damage to the economy.

[BAM]

Each country's (or each company's) finances get "examined" from some credit rating agencies. Basically, countries get money by taking loans (issuing bonds as they're called) from banks and these agencies estimate what are the chances the country won't have money to pay the loan back. These agencies think Greece is "junk", meaning it wouldn't be able to repay. Because of that banks wouldn't loan us money and there had to be this rescue plan.

The credit ratings agencies' role is really reactive rather than pro-active. It's not that they decide a country's debt is junk-bond status, it's that the market has already "decided" and the agencies are just backing this up.

Just a little background:

When a government issues a bond, this is classed as an asset that pays a regular dividend (a "yield") by the person who holds that bond. In banking, bonds are called "fixed income", ie you are guaranteed an interest payment over the life of the bond. Thus 10-year a bond with a face value of 100 which pays a yield of 5% is worth a total of 150.

It can, and usually is, sold on the secondary market becuase that person or institution may not want to keep hold of the bond for the length of its life, until it matures. And because there's a difference between the face value of the bond and what it is worth as a whole, there's the chance to make speculative gains. (Eg, if the yield is set at 5% but you think interest rates are going to be higher than that, you would want to get rid of the bond, as you would be making a loss in real terms.)

As with all buying and selling, supply and demand means prices fluctuate. If there is little demand for the bonds, the prices fall. So our 100 is now worth 75. But for the holder of the bond, the yield is still 5% of the original 100, which the issuer has to pay regardless of the new price on the secondary market (hence "fixed income"), so in real terms, the yield is (5/75) x 100 = 6.66%.

This new yield is what "the market" will demand if/when the government comes to issue new short-term debt. Indeed, a lot of short-term debt is issued just to make the interest payments on the long-term bonds.

And if the price of the debt drops even lower, to say 50, the new yield is 10%. The problem is that maturing debt is paid off with new debt, but if the market is signalling that it doesn't want the old debt, you are going to have problems selling new bonds. So, a downward spiral begins.

Where the credit ratings comes into all this is that, in this instance, the price of Greece's bonds had already fallen before the country was classed as "junk" status. The new rating is confirmation of what is already happening. The same goes for companies. Ratings agencies have fairly regular criteria in assigning ratings to companies based on their profitability.

Also, by the way, junk bonds are not a waste of money. They will pay a higher premium to the holder, but there is a greater risk of default. There are investors who will buy these bonds, but many institutional investors, such as pension funds, banks and insurance companies, who are more interested in steady, long-term incomes, will not.