Tuesday, 7 July 2015

Syriza Should Cut The Greek Capitalist Banks Loose

I have heard a number of Syriza spokespeople in recent days say that the Greek banks are solvent, and that the only problem is a lack of liquidity, caused by the refusal of the ECB to provide sufficient notes and coins to meet demand for withdrawals from customers. Whilst the banks are certainly suffering a liquidity crisis due to the ECB's actions, its not really true to say that the banks are solvent. The Greek banks are solvent only on the same basis that all the other European banks are solvent, that is if you accept as valid the quality and valuation of the assets held by the bank. But, nowhere in Europe are those bank assets a true reflection of the real state of affairs. The banks' assets are made up of 1) The equity provided to the bank by its shareholders 2) capital provided to the bank by bondholders 3) collateral provided to the bank in return for loans issued by the bank, for example mortgages, government bonds and so on 4) cash on deposit. But, like banks across Europe, the Greek banks will have used most of the cash provided to them from these different sources to lend. The solvency of the bank then depends upon its ability to repay the loans it has taken out, to meet depositors demands for cash, and the extent to which the loans it has made do not go bad.

We know that depositors have been withdrawing large amounts of funds for several years, and particularly over the last few months. If the banks become insolvent, then as happened in Cyprus and elsewhere, the shareholders and bondholders will lose their capital. A lot of those share holders and bondholders will be foreign capitalists. For example, US speculator Wilbur Ross, became a significant shareholder in Eurobank, which of the four big banks, is the one with least equity, and greatest exposure to DTA, deferred tax allowances, which allow banks to accumulate future tax credits from the government when they incur losses. In the case of Eurobank, DTAs are estimated to make up almost 90 per cent of the bank’s equity. For other large lenders, they account for about 50 per cent.

In reality, if the Greek state defaults on its bonds, then the Greek banks become insolvent. Moreover, much of the other assets owned by the Greek banks, as with every other bank across Europe, is a complete fiction. It is based upon astronomical valuations of property (which stands behind the banks mortgage holdings), as well as similarly astronomical valuations of shares and bonds, both sovereign bonds and commercial bonds. As I have written several times recently, there is growing concern amongst financial analysts who specialise in the bond markets, about a lack of liquidity in global bond markets, particularly in the high yield (junk) bond market.

In the last month, we have seen Chinese stock markets fall by around 30%, losing about $8 trillion in nominal value. Yet, the Chinese market is still trading on a price/earnings ratio of nearly 60! That is around three times the level Robert Schiller has recorded in his Cyclically Adjusted P/E ratio (CAPE), ahead of the stock market crashes in the US in 1929, 1987, 2000, and 2008. He also believes the US market is in that same territory again today. One problem of the falls in the Chinese markets, is that large numbers of Chinese amateur investors have flocked into the market over the last year, during which time it rose by around 130%! But, these unsophisticated investors, have simply treated it as yet another Chinese casino in which to operate.

They have been allowed to do so on the basis of huge amounts of borrowing – margin trading. Its reported many individuals have borrowed around $1 million each to finance their speculation. But, many of these speculators are the same people, who have also been speculating in London property over the last few years, buying new developments as part of syndicates, not with any intention, or ability to rent out the property, but solely on the expectation of making a large capital gain. They are likely to need to sell anything and everything they can get their hands on to raise cash, to pay off their margin calls as they come in, reminiscent of the sell off in the oil futures market in 2008, which signalled the start of the eruption of the financial meltdown.

That is just symptomatic of the extent to which there is this vast ocean of these cross share and bond holdings, endless derivatives and unknown counterparties that have built up over the last 20 years or more in financial markets, which makes the entire global financial system, one huge Ponzi Scheme, a house of cards, just waiting to collapse in chaos.

Under those conditions, Syriza should make it clear, immediately, that it has no reason and no intention of defending the Greek capitalist banks, or all of the other global financial institutions, whose assets will start to collapse, when those Greek banks go bust. Syriza, as the government in Iceland did, in 2008, should make it clear that if the banks become insolvent, they will be allowed to go bust, and bond and shareholders left to suffer the losses. That will focus the minds of the international money lenders.

The only responsibility of Syriza is to protect the deposits of the ordinary depositors. Syriza should work with the workers in those banks to audit the banks accounts. The simple democratic demand to open the banks books is one that should be raised immediately. If on a reasonable valuation of the banks' assets and liabilities, it is found to be insolvent, the government should take action to declare it so. Syriza should encourage bank workers to take over the bank, and operate it as a co-operative, and they should make it clear that all depositors funds will be transferred in full to this new co-operative bank. All of the banks debts should be siphoned off into a bad bank, so that the workers are not burdened with the bad debts the capitalist owners created.

Such co-operative banks should help workers in their communities to develop credit unions, and other mechanisms that can overcome the current liquidity crisis being inflicted on the country by the ECB. They should encourage the take up of debit cards, and other forms of electronic payment as an alternative to the use of notes and coins, thereby undermining the ability of the ECB to strangle the economy, by limiting the amount of notes and coins provided.

Various co-operative and mutual assistance organisations have already sprung up across the country, once again confirming Marx's analysis of the form that workers create spontaneously to resolve such problems, and reflecting the form of the future society. Not only should the government be giving official support to such organisations, but the co-operative, trade union and labour movement across Europe, should link up with these organisations, showing the way that the working-class across Europe can provide its own solutions to the problems created by capitalism, without relying on the capitalist state, or capitalist politicians to do so.

There are Co-operative pharmacies, medical centres, agricultural producers as well as vast co-operative retailers across Europe. They now have the opportunity to demonstrate how a co-operative Europe provides the future that the continent needs, in contrast to the misery being inflicted by capitalism, just as co-operative banks across Europe did in 2008.

Every trade unionist, and member of a co-op across Europe, should be demanding that their organisations give practical aid to the Greek workers immediately. We cannot allow the conservative elites, and the European money lenders to grind down our comrades in Greece. They have opened the door, it is up to us to march through it.

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