Greek PM Antonis Samaras greets European Commission President José Manuel Barroso in Athens for the ceremony marking Greece's assumption of the rotating EU presidency. Credit: Apostolis Fotiadis/IPS

By Apostolis Fotiadis
ATHENS, Jan 8 2014 (IPS)

The start of Greece’s six-month presidency of the EU was marked by a ceremony Wednesday in the Greek capital attended by the EU commissioners. But protests were banned and there was no in-depth talk about the raging controversy over the bloc’s handling of the Greek debt crisis and the renewed concerns about the vitality of the Eurozone.

In May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a 110 billion euro bailout for Greece, conditional on compliance with severe fiscal consolidation, privatisations and economic reforms to bolster competitiveness. A second bailout of 130 billion euro with a debt restructure followed in February 2012, with additional austerity measures.

The recipe soon mutated into a scorched earth policy. Greece entered its seventh year of recession in 2014, with unemployment hitting a historical high of 28 percent and youth unemployment surpassing 65 percent – up from seven percent when the austerity measures began to be implemented.

In June 2013, the IMF – part of the so-called troika of international creditors overseeing implementation of the austerity policies in Greece, along with the European Commission and European Central Bank – admitted mistakes in handling the Greek debt crisis.

Deregulation of the labour market, severe taxation of the labour force and reforms of the health sector have cut so deeply through the social fabric that many are wondering whether austerity has caused a humanitarian crisis in Greece.

In 2012, nearly one million of the country’s 11.3 million people were living below the poverty line, according to the Greek Finance Ministry. Among them, more than 65,000 were surviving on less than three euros (four dollars) a day, while 102,000 people earned incomes ranging between 1,000 euros (1,358 dollars) and 2,000 euros (2,716 dollars) a year.

According to Greece’s statistics agency, by late 2012, austerity measures had shrunk the labour market by 20.8 percent – 870,000 jobs were lost since 2009 – and had taken more than 40 percent of the labour force out of the national insurance system.

Lee Buchheit, a globally acknowledged legal expert involved in the debt restructure accompanying the second bailout for Greece, told IPS that the Eurozone debt crisis is not over yet.

“It is worth remembering that with the single exception of Greek PSI [private sector involvement], not a single euro of the debt of the afflicted countries [Ireland, Portugal, Spain and Greece] has been written off. Each of those countries will be emerging from their bailout programmes carrying debt loads far heavier than when they entered the programmes.”

What has changed, Buchheit says, is the identity of the lenders. “The original private sector bondholders have been paid back in full and on time through new borrowings from official sector sources [the EU and IMF]. So the taxpayers of the debtor countries remain entirely on the hook for the repayment of those debts; they will just be paying them to a different set of creditors.”

Changing the identity of the creditor does not solve the debt problem, he said. “A sustainable solution would require either a reduction in the size of the debt loads or significant growth in the economy of the debtor countries, or both. Unfortunately, neither of those things has yet happened in the Eurozone periphery.”

But instead of considering a change of course to stimulus economics, European – most notably German – leaders are refusing to accept the failure of austerity. On the contrary, they have speculated that any extra help for Greece will come in the form of another bailout package.

Economist Philippe Legrain resigned last month from the Bureau of European Policy Advisers, an advisory body to the president of the European Commission. A week after his resignation he delivered a speech in Athens blaming European leaders for postponing an inevitable default at great social cost.

“I think Greece cannot pay back its debts in full. So the questions are not whether Greece’s debts will be written down, but when and how,” he told IPS in an email interview. “As of now, I think it will happen little by little and that it will take the form of lower interest rates and longer repayment terms rather than writing down the principal of the debt, to preserve the fiction that the debt is being repaid in full.”

Despite increasing concerns about society imploding, the Greek government insists on its optimistic scenario that foresees a return of the country to positive growth rates in 2014. The Finance Ministry has repeatedly reassured that Greece will mark a 0.6 percent primary surplus and will successfully return to the credit markets by the end of 2014.

Its optimism has been met with disbelief. The Organisation for Economic Cooperation and Development’s (OECD) forecast of a 0.4 percent contraction contrasts with the Greek government’s projection of 0.6 percent growth this year. The European Commission has predicted a Greek return to the markets in 2015.

In a scathing editorial this week, Germany’s Der Spiegel magazine described Greek Prime Minister Antonis Samaras as “out of touch with reality.”

Meanwhile, Samaras’ coalition government, expected to face a huge protest vote in the European elections next May, has no alternative but to carry on with a painful reform of Greece’s primary care sector, suspending 1,000 doctors and 8,000 administrative jobs, many of which will eventually be lost. This will make up the bulk of the 15,000 jobs the Greek government has to suspend in 2014, under its austerity obligations.

The reform will transform the biggest insurance fund in the country from a service provider to a purchaser in the private health market, with many accusing the government that the real aim is not the creation of a more effective system but the indirect privatisation of primary care which will exclude hundreds of thousands from any kind of medical coverage.

“Austerity politics are a mistake,” says cardiologist George Vichas, the spirit behind a major parallel grassroots health structure, the Metropolitan Community Clinic at Helliniko, that has treated 20,000 uninsured people in its 23 months of existence.

“But those who implemented them have not made a mistake. These results are exactly what they aimed at and what they believe in. They have experimented on Greece the last four years, but now the first signs of health sector deregulation have started appearing in Britain, France and Italy. This is Europe’s future.”

Following last week’s approval of U.S. Senate bills that critics say would weaken a major financial reform law known as Dodd-Frank, watchdog groups here are cautioning that banks deemed “too big to fail” still pose a risk to U.S. and international economic security.

“Too big to fail” was a term associated with the 2008 Troubled Assets Relief Programme (TARP), which gave 700 billion dollars in taxpayer money to rescue large U.S.-based banks whose collapse could have had a devastating impact on global economic security.You’re not going to win this tinkering with the rules...You have to break up the banks.

At a panel discussion here in Washington on Wednesday, political leaders and regulators urged the break-up of big banks as the only viable solution to what they say is still a systemically dangerous concentration of power.

“You’re not going to win this tinkering with the rules,” Neil Barofsky, former special inspector general of TARP and author of a new book on the issue, “Bailout”, said at the headquarters of Public Citizen, a consumer rights advocacy group. “You have to go to the source of these corrupting influences … You have to break up the banks.”

The push against financial regulation flexed its muscle in Congress last week, as Senate bills watering down Title VII of Dodd-Frank, which deals with the especially risky derivatives markets, were approved. The bills now proceed to a floor vote.

That move has renewed a call from regulation proponents to curb the political power of financial institutions, which some say is possible only by ending too-big-to-fail.

Supporters of this move point to the central problem in the too-big-to-fail philosophy: that protecting banks from the consequences of their own actions shields them from accountability and, ultimately, can encourage risky behaviour.

“I think as long as [the too-big-to-fail mentality] exists, the administration of justice is severely undermined in this country,” said Brooksley Born, a former chairperson of the Commodity Futures Trading Commission (CFTC), a government regulator.

Born is known for pushing for increased regulation of the derivatives market, an especially risky slice of trading activity, during the 1990s, calling this market the “hippopotamus under the rug”. Her concerns were rebuffed at the time by Federal Reserve Chairman Alan Greenspan and, under pressure from the financial lobby, Congress eventually passed legislation prohibiting derivatives regulation.

A decade later, Born’s concerns were vindicated by events that played out in the 2008 collapse, which largely began in the derivatives market.

Regarding the extent to which too-big-to-fail shields banks from prosecution, Born cited comments made by U.S. Attorney General Eric Holder last month, especially his admission that “it does become difficult for us to prosecute [the banks] when we are hit with indications that if you do prosecute … it will have a negative impact on the national economy.”

She also revealed a less public example of the government protection she says she witnessed firsthand as a member of the Financial Crisis Inquiry Commission, an official task force appointed to investigate the causes of the 2008 financial crisis.

“The Financial Crisis Inquiry Commission was given a mandate to focus on causes of the financial crisis, but our statute also said that if we came across evidence of violations of U.S. law, it was our obligation to report those violations to the Justice Department,” she said.

“We made a number of such referrals … and I have not seen anything happen on those.”

That failure, she suggests, was just one symptom of a broader illness.

“I became convinced there was a philosophy in this administration of letting the banks earn their way out of the insolvency they were in,” she said, “that the banks had to be protected from the rule of law in order to preserve the financial system.”

Cognitive capture

For some, though, the prospect of breaking up the banks is both too abstract and too politically unviable to be discussed as a serious policy proposal.

Dennis Kelleher, CEO of Better Markets, a financial reform advocacy group, says that any move to break up the banks would come in one of two guises: either as a prohibition on banks dealing with more than a certain amount of gross domestic product, or government regulators using all the authority already vested in Dodd-Frank.

“The Federal Reserve could say banks with more than 50 billion dollars pose a significant threat to the financial stability, and they have to put up 50 percent of capital [in case of extreme losses],” Kelleher told IPS. “If they did that – which they have the power to do – that wouldn’t be ‘breaking up the banks’, but that would eliminate the too-big-to-fail threat.”

Under this approach, the key problem is ensuring that regulators are aggressive enough, and especially strong enough to counter Wall Street tropes that invoke the common citizen as the main victim of regulation.

“[Regulators] actually believe the spin that comes from Wall Street and its lobbyists,” Kelleher says, calling it “cognitive capture, reinforced by a culture that equates money with brains”.

Regulation proponents, though, seemed confident that shifting public opinion was becoming a formidable opposition to these entrenched interests, even if the time is not yet ripe for putting a hard cap on the size of major banks.

“If there is another major megabank blow-up, it could easily change the political dynamics,” Kelleher told IPS. “While these too-big-to-fail banks have political support … [that support] is broad but it’s not deep – it’s very fragile.”

Political leaders in Cyprus are working on an alternative proposal to stave off bankruptcy after parliament overwhelmingly rejected an international bailout plan.

Nicos Anastasiades, president of Cyprus, has met party leaders and central bank officials on Wednesday to work out how they can raise billions of euros in funds to stave off bankruptcy.

The president also met representatives of his country’s potential creditors, from the International Monetary Fund, European Central Bank and European Commission. However, no statement was issued on the result of those talks.

The talks come a day after MPs rejected terms set by the EU and IMF to raise money in return for the 13-billion-dollar bailout by seizing up to 10 percent of people’s bank savings, with zero votes in favour, 36 against and 19 abstentions.

Meanwhile, with Russian banks and individuals heavily invested in the island, Cyprus’ finance minister has asked Moscow for help to avert a financial meltdown.

Government spokesman Christos Stylianides said that a meeting had begun at the central bank to discuss a “Plan B” on how the administration could raise funds and reduce the 5.8 billion euros (7.5 billion dollars) that must be found domestically.

Central Bank deputy governor Spyros Stavrinakis said that no decision had been taken on when banks would reopen after they were shut at the weekend.

He said that the new plan being worked on Wednesday had not yet been presented to the EU and IMF.

Russia talks

Michael Sarris, Cyprus’ finance minister, said that he had reached no deal on financing with his Russian counterpart, Anton Siluanov, but talks were continuing.

Cypriot officials disclosed that the country’s energy minister was also in Moscow, ostensibly for a tourism exhibition.

Cyprus has found big gas reserves in its waters near Israel but has yet to develop them.

“We’ll now continue our discussion to find the solution by which we hope we will be getting some support,” Sarris said after initial talks with Siluanov.

ECB support

Austria’s finance minister made clear the European Central Bank (ECB) could soon pull the plug on Cypriot banks after the island’s parliament bailout rebuffal.

Not a single politician voted for the proposed levy that would have taken up to 10 percent from larger accounts, many of which are held by foreigners, while sparing smaller savers with fewer than 20,000 euros in the bank.

It was the first time a national legislature had rejected the conditions for EU assistance, after three years in which politicians in Greece, Ireland, Portugal, Spain and Italy all accepted biting austerity measures to secure aid.

The ECB is keeping the Cypriot banking sector going by allowing the local central bank to extend emergency support.

It said it would end that if there was no bailout deal and it was clear the banks had no hope of becoming solvent again.

For now, the ECB says it will continue allowing banks access to credit. But analysts note that if there is no bailout deal within days, the ECB will have to end it.

*Published under an agreement with Al Jazeera.