By Yanis Varoufakis, a professor of economics at the University of Athens. Cross posted from his blog
For a while now I have been arguing that Europe’s policies for reducing the public debts of fiscally stressed member-states can be described as a Ponzi austerity scheme. In this post I attempt precisely to define ‘Ponzi austerity’.
Standard Ponzi schemes are based on a sleight of hand that creates the appearance of a fund whose value grows faster than the value that has come into it. In reality the opposite is true, as the scheme’s operator usually helps himself to some of the incoming capital while the scheme is not managing to create new capital with which to replenish these ‘leakages’, let alone pay the returns it promises. The appearances of growth that does not really exist is, of course, the lure that brings into the scheme new participants whose capital is utilised by the Ponzi scheme’s operator to maintain the facade of genuine growth.
Ponzi austerity is the inverse of Ponzi growth. Whereas in standard Ponzi (growth) schemes the lure is the promise of a growing fund, in the case of Ponzi austerity the attraction to bankrupted participants is the promise of reducing their debt, so as to liberate them from insolvency, through a combination of ‘belt tightening’, austerity measures and new loans that provide the bankrupt with necessary funds for repaying maturing debts (e.g. bonds). As it is impossible to escape insolvency in this manner, Ponzi austerity schemes, just like Ponzi growth schemes, necessitate a constant influx of new capital to support the illusion that bankruptcy has been averted. But to attract this capital, the Ponzi austerity’s operators must do their utmost to maintain the façade of genuine debt reduction.
Ponzi Austerity’s Inventor: The Eurozone’s Great and Good
Ponzi growth has been around for yonks. But it took the collective wisdom of Europe’s great and good to create the first Ponzi austerity scheme. The Greek, Portuguese, Irish, Spanish and Cypriot loan agreements were the first ever examples of such a scheme. Bankrupted states, in a death embrace with bankrupted banking sectors, were forced to take in ever-increasing capital inflows (from the IMF, from the ECB, from the EFSF-ESM, shortly under the ECB’s OMT threat) on condition of belt-tightening austerity. As the scheme progresses, more capital is coming into it, debt-to-GDP ratios actually grow (just as in Ponzi growth schemes the value of the total fund is depleted) and, therefore, even more outside capital has to be brought in in order to maintain the pretense.
Ponzi Austerity’s Worst Example (*)
It is Spring 2012. The Greek government had collapsed under popular anger at the nation’s sad state and a new election is due in May. A left-wing party that advocates rescinding the bailout agreement was rising fast in the polls and the troika suspended the disbursement of loan tranches to Greece in response. Unnoticed by almost everyone, this episode represented a sinister moment when the EU asserted the right of its executive to intervene directly in the democratic process of a member-state. Unelected officials in Brussels concocted a ‘right’ to suspend unilaterally an international and intra-European loan agreement, on the basis of their assessment of which political party was and which was not ‘acceptable’ to form government in a member-state.
The caretaker Greek government was left with no alternative than to suspend its own payments to Greek institutions and individuals. Hospitals, schools, wages, pensions all diminished fast. But the concern of the great and the good was about Greece’s debt to our… ECB. You see, a year before, in an ill-fated attempt to shore up Greek government bonds, the ECB had purchased a bunch of them, at low, low prices. The ploy failed, as did Greece. Regardless, the ECB held these bonds and they started maturing. Had they not been purchased by the ECB in 2010, they would have been haircut together with the rest of the bonds in private hands a few months earlier, in early 2012. But no, the ECB cannot accept write-downs from member-states because it is against its charter which prohibits it from financing member-states. So, the caretaker Greek government, while putting Greece’s social economy through the wringer, had to find €5 billion in a few days to repay the ECB for one of these maturing bonds. But remember: the troika was not lending it any more and nor was anyone else.
The obvious thing to do, under the circumstances, would be for Athens to default on the bonds that the ECB owned. But this was something that Frankfurt and Berlin considered unacceptable. The Greek state could default against Greek and non-Greek citizens, pension funds, banks even but its debts to the ECB were sacrosanct. They had to be paid come what may. But how? This is what they came up with in lieu of a ‘solution’: The ECB allowed the Greek government to issue worthless IOUs (or, more precisely, short-term treasury bills), that no private investor would touch, and pass them on to the insolvent Greek banks. The insolvent Greek banks then handed over these IOUs to the European System of Central Banks (through the so called ELA program of the ECB) as collateral in exchange for loans that the banks then gave back to the Greek government so that Athens could repay… the ECB. If this sounds like a Ponzi scheme it is because it is the mother of all Ponzi schemes. A merry go around of Ponzi Austerity which, interestingly, left both the insolvent banks and the insolvent Greek state a little more… insolvent while, all along, the population was sinking into deeper and deeper despair. And all that so that the EU could pretend that its idiotic rules had been respected.
This is but one example of the vicious cycle of Ponzi Austerity that is being replicated incessantly throughout the Eurozone. Its stated purpose is to reduce debts. But debt is rising everywhere. Is this a failure? Yes and no. It is a failure in terms of the EU’s stated objectives but not in terms of the underlying ones. For, in reality, the true purpose of the ‘bailout’ loans was to effect a cynical transfer of the Periphery’s bad debts from the books (mainly) of the Northern European banks to the shoulders (mainly) of Northern Europe’s taxpayers. Sadly, this cynical transfer, effected in the name of European ‘solidarity’, led to a death dance of insolvent banks and bankrupt states – sad couples that were sequentially marched off the cliff of competitive austerity – with the awful result that large sections of proud European nations were dragged into the contemporary equivalent of the Victorian Poorhouse.
(*) This example comes from my recent talk entitled The Dirty War for Europe’s Integrity and Soul