Sun, Oct 09, 2011 - Page 9 News List

Economic crisis — the new normal

It’s been nearly two years since the Greek debt crisis began, but everything that Europe has done has been ‘too little, too late’

By Larry Elliott  /  The Guardian, LONDON

Welcome to the new normal. Billions of dollars were wiped off the value of shares in London on Tuesday. Dexia, a bank jointly owned by the French and the Belgians, teetered on the brink of collapse. One of the main barometers of Wall Street sentiment slid into bear-market territory. An emergency press conference called by Greece’s finance minister was delayed because the building was being picketed by civil servants.

The UK construction sector looked like it was heading for recession as public sector projects dry up and in Spain more than one in five are out of work. The French and Belgian governments were forced to pledge that no depositor in Dexia would lose a cent let alone a euro as they tried to avoid a run on the bank. Traders, unsurprisingly, were scrabbling for their tin hats.

The turmoil overshadowed the UK Conservative party conference this week just as it did three years ago when the shock waves from the collapse of Lehman Brothers diverted attention from the then-party leader (now British prime minister) David Cameron’s attempts to portray himself as a prime minister in waiting. UK coalition government ministers know now, as the then-British prime minister Gordon Brown and his team knew then, that the global economy is teetering on the brink of recession.

Jean Claude-Trichet, in his last few days as president of the European Central Bank (ECB), said on Tuesday: “We are experiencing the worst crisis since World War II.”

US Federal Reserve Chairman Ben Bernanke said the bank would do whatever it takes to get the US economy moving again. His comments helped lighten the mood on Wall Street and limit the fall in London’s FTSE 100 to 131 points.

Even so, the FTSE closed below 5,000 for the first time since July last year.

REPEATING HISTORY

For those who believe that history repeats itself, Dexia plays the role of Bear Stearns in this unfolding tragedy. The US government found a buyer for the Bear in the spring of 2008, but failed to do the same for Lehmans six months later. Dexia will be saved courtesy of French and Belgian taxpayers. Next up is Greece, and there the endgame is now inevitably going to be default.

The panic-stricken reaction of the markets over the past few days reflects a growing mood in the financial markets that the default will not be managed and orderly but messy, with knock-on effects not just for the rest of the eurozone but for the entire world economy.

Banks will go bust, credit will dry up, trade will wither, jobs will be shed. Greece, Lehman Brothers 2.0, will be the prelude to the second Great Depression, something policymakers were congratulating themselves on avoiding only a few months ago.

The fear in finance ministries, central banks and the world’s bourses is that perhaps the bullet was not dodged after all. That is still a minority view. Despite the hamfisted way in which Europe’s policy elite has mishandled the Greek crisis — a mixture of dither and daftness — there is still a residual belief that something will be done to prevent a domino effect from a Greek default.

“I can’t believe that the German finance minister doesn’t have a file in a top drawer somewhere marked ‘plan B,’ which will be activated in the event of a Greek default,” said Nick Parsons, head of strategy at National Australia Bank in London.

Such a plan would involve allowing Greece to renege on 50 percent of its debts, already unaffordable and growing bigger by the day. Banks across Europe would suffer losses as a result, but governments would find ways of injecting more capital into any struggling financial institution, even if that meant full-scale nationalization. The ECB would step in to buy Italian and Spanish bonds in large quantities to prevent the contagion spreading.

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