Wednesday, July 8, 2015

The ownership of DEBT in Europe: shifting from private debt of French & German banks to public debt on the shoulder of European Union citizen, saving the banks & the death of the European dream

Debt to be dealt as a main topic all over the news outlet. Although the general rhetoric seems to be rather simplistically dealt with.

It is therefore important for me to speak up against the general statement of: Greeks don't want to repay their debt and therefore they deserve the cuts and austerity?
Mind that the same goes for Italians, Spanish, Portuguese, and let us not forget Islanders and Irish too... 
The only difference with the Islanders has been the recipe applied to solve the debt problem. But we will get to it just a bit later.

Therefore, let's get into a bit of detail to get something straight. Debt comes in many shapes and forms for now we distinguish between Private Debt and Public Debt. (for a definition follow this link)
Credit (& therefore Debt) have been the cornerstone of modern economics, the capitalist version of global development is based upon CREDIT & DEBT.
Simply acknowledge that the most developed countries run a balance deficit and most countries run a positive Debt/GDP ratio: here is a link to a site that calculates it for most countries REAL TIME:

The competitiveness of the credit rate therefore moves capital from one country to another. When in Europe countries started first to run a fixed rate with their local currencies and the EURO and later adopted the EUROs credit opportunities were created by making French & German money available at a cheaper rate in the countries of the south. That is because while the EURO was common the competitiveness of each country was different, the interest rate applied to national bonds were different and therefore Italian, Spanish and Greek bonds were more lucrative thank French & German, that is why money moved from French & German banks to Greece, and Italy, and Spain, etc. etc.

Banks, consumers and individuals in the receiving countries were therefore presented with cheaper money and therefore when presented with a choice they choose the cheaper option. The same natural behavior that takes place EVERYWHERE in the world, not any different than USA, Canada, Korea or Russia. When presented with a more convenient option for similar service people choose the less costly option. 

PRIVATE LENDERS therefore flooded Southern European countries with their money (and also their goods, but that is another story!). Higher yields were convenient to the German and French banks. Nobody complained even if the risk became higher and higher as the competitiveness of the borrowers (southern European countries) was deteriorating. 

At the bursting of the 2008 global crisis the whole game came to an end.

Private money dried up instantly, and the reckless lenders: German, French and Dutch banks for the most part had to be rescued quickly from the toxic waste that they created, and so they were rescued... BUT with public money.

It is ONLY at this point that the PUBLIC debt started to pile up very quickly on the country of Southern Europe, not before. A private debt became a PUBLIC debt issue because Greece and so the other countries started receiving bail-out money that was used to cover the toxic waste of large European Banks. In fact the money of the bailout went directly from the ECB, IMF, etc. directly into the private banks they were saving. 

The rhetoric then became: Greek (or Italians, or Spaniards) don't work hard, over borrowed, etc. 
This argument is simply not credible. The reality is far too complex to believe such an oversimplification.

Southern countries were allowed into the EURO in spite of the fact that they didn't meet the Maastricht requirements (arbitrary requirements nonetheless) because they were useful to keep the value of the EURO low, to allow more competitive countries to develop a new mercantilist strategy and be able to export their goods (and funds and services) to the near shore markets of the south and gain competitiveness abroad.

The imbalances of this strategies have now wrecked any solidarity around the European Union and killed the European dream. Barriers are rising, local nationalist movements are on the rise... sacrificed all in the names of the financial markets, banks and special interests.

I wonder if there will be time for adjusting the system or we have forever deprived the next generation of a united strong and united Europe.

Data: below is a graph (unfortunately in Italian) that shows the debt divided into Bank related Debt in blue (private debt) and State related debt (public debt), you can see the development of the debt from Dec 2009 to Sept 2014, shifting from a private debt into a mostly PUBLIC debt, at that point banks were already saved and the burden of the debt shifted onto European citizen.

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