Sovereign Debt Crisis - A Slow Burning Fuse

Portugal has become the latest Eurozone country to be unable to meet its sovereign debt obligations and to be forced into asking the European Union to bail it out. In late March the minority “socialist party” government collapsed after failing to get a further round of austerity measures through parliament. As Portugal’s debt is short-term (it has to find €8bn by the end of June!) the ratings agencies dropped its credit rating to A- (a couple of notches up on Greece). Speculation against Portuguese government bonds rapidly escalated and within 10 days the interest rate on 3 year government bonds had risen to 9%. This meant the government simply could not afford to borrow capital on the international markets to meet its scheduled repayments and had to turn to the EU for funds at cheaper rates of interest. By early April the caretaker government was negotiating for an €80bn bail-out (also with the IMF). Portugal follows Greece and Ireland to become the third Euro-zone country to collapse under unsustainable interest payments within a year.

So far only the weaker peripheral countries of the European Union have been affected. Greece, Ireland and Portugal respectively account for 2.6%, 1.7% and 1.9% of the Euro-zone GDP. However, the threat of national bankruptcy is not limited to the weaker peripheral countries. Spain, which is next in the firing line is a much larger economy and accounts for 11.4% of Euro-zone GDP. The position of some of the “supposed” stronger economies is no better than that of Spain. The UK, for example, has both a larger budget deficit and a larger national debt than Spain.

Although these national collapses have occurred in the Euro-zone, the sovereign debt crisis is not limited to Europe. In the US, for example, during the last tax year, states spent $500bn more than they collected in taxes and have accumulated enormous debts. The prospect of state bankruptcy has produced dramatic effects in states such as in California, where services have been cut back, a 4 day week was imposed and authorities have resorted to paying staff in IOUs. In addition US municipalities are massively in debt and 100 US cities face bankruptcy this year (1). However, behind the states and municipalities stands the federal government which will, of course, bail them out. However, the US federal government has a national debt of 85% GDP and in its recent “Stability Report” the IMF noted that both the US, and Japan which has a national debt to GDP ratio of 200%, were vulnerable to a rise in interest rates (2). Jose Vinals, spokesman for the IMF stated that government bonds are no longer without risk (3). This is coded language for saying default on the debts of the economically most powerful nations, such as the US and Japan, is now a possibility.

A Systemic Crisis of Capitalism

The Portuguese debt crisis, like that of Greece, was caused by the state’s inability to finance its borrowing. The reason Portugal could not finance its debts is according to a report by Barclays Capital Growth that it is uncompetitive.

The core of Portugal’s economic troubles lies in its low productivity growth (4).

This is banker-speak for “you need to attack your workers more in order to get the capital to repay us”. In the face of mass protests, the ruling class has so far failed to find a way to do this. Socrates’ austerity programme was rejected and political (as well as economic) paralysis has followed.

The sovereign debt crisis has now replaced the banking crisis but both are a symptom of a deeper systemic crisis of the entire capitalist system, namely, the tendency for the average rate of profit to fall. This fall results from capitalism’s tendency to increase the value of the means of production, or constant capital, consisting of machinery, buildings, raw materials etc. faster than it increases the variable capital, consisting of the labour power of workers.

For capitalism to be healthy part of the surplus produced must be accumulated as fresh capital. The fresh capital will employ new workers whose exploitation produces additional surplus value. The exploitation of workers is the only source of surplus value for the entire capitalist system. However, when the rate of profit falls beyond a certain level, capitalists begin to stop investing in new production. This is simply because they see the returns as being too low. Accumulation of capital then slows down and workers are laid off. By excluding workers from production the generation of surplus value is further restricted making the problem of profitability worse. Capitalism is therefore being thrown into crisis not by some external disaster but by its own internal contradictions. The solution to this problem, if we exclude the social revolution and the overthrow of capitalist production, is the restoration of profit rates. At the present stage of the accumulation cycle following the Second World War this can only be achieved by a massive devaluation of constant capital.

The capitalist class, of course, see only their own short term interests. When the rate of profit falls below a certain level they tend to use surplus value for speculation in such things as property, commodities or in bonds and equities, or they play safe and invest in government bonds. All of these do not generate any additional surplus value since the money invested is not functioning as capital and exploiting workers. For the individual capitalist speculation appears to generate profits, but for the capitalist system as a whole, this is an illusion. Such profits are either the result of losses sustained by other capitalists or are paid out of the nominal increase in over-valued paper assets. This causes a financial bubble, inflating values which eventually - like the sub-prime mortgage market - collapse precipitating tremendous losses. Government debt is also part of what Marx described as fictitious capital in that capital lent to the government does not directly exploit workers but commands interest as if it did. The interest paid on this debt is, however, derived from the surplus produced elsewhere in the economy and if this is insufficient, as was the case in Greece and Portugal, this interest cannot be paid. The sovereign debt crisis and the banking crisis are, therefore, expressions of the deeper systemic crisis of profitability of the entire capitalist system.

The weaker and less competitive states are the first to fall, but since they are ultimately supported by the stronger states their problems are being inexorably transferred to the core capitalist countries.

EU Strategy

Government sovereign debt in the US and Europe has always been considered by the capitalist class, to be “as good as gold.” Hence, from the start the EU has regarded default as unthinkable. If an EU country was allowed to default the holders of the debt would suffer immediate losses and this could reignite the banking crisis. Also, they argued, if even a minor country such as Greece, were allowed to default on its debts this would precipitate a tsunami of panic in the sovereign debt market leading to a wave of defaults and a disaster for global capitalism. It would be to the sovereign debt market what the collapse of Lehman Brothers was to the financial markets. The EU has, therefore, tried to contain the crisis through buying government bonds of the states most likely to default, providing bail-out loans and imposing austerity and other measures as conditions for these loans. This has slowed the process down but it has not stopped it spreading nor has it solved the debt crisis in the countries which have been bailed out.

The strategy can be simply stated as one of paying off the debts by imposing austerity on the working class. In Marxist terms this amounts to increasing the exploitation of the working class. The part of the social product which goes to the workers is to be reduced and the part which goes to the capitalist class is to be increased. The increase will be divided out between the holders of the sovereign debt. Previous texts in Revolutionary Perspectives have listed the outrageous sacrifices the workers of Greece and Ireland have been told to accept (5). The initial talks between the Portuguese government and the EU indicate that similar austerity measures, far worse than those which the parliament rejected in March, will be imposed on the Portuguese workers. The EU is also demanding that all Portuguese parties sign up to the deal before the elections, due in June, so that there will be no possibility of any attempt to renegotiate the deal, as occurred in Ireland after the Irish election. But will the strategy of containment by bail-out together with austerity work? There are now many amongst the capitalist class themselves saying it will not work and the unthinkable, namely default, must be arranged.

If a country, such as Ireland, has a sovereign debt equivalent to 120% of the GDP and the interest rate, as charged by the EU, is 5.8%, this means almost 7% of the GDP is supposed to be used for paying interest of the debt. If the economy is shrinking, and this is generally the effect of the austerity programmes, such payments become impossible. Greece, for example, needs to generate a budget surplus of 5.5% just to keep level with interest payments on its debt. At present Greece has a budget deficit of 12.7%! If Greece cannot generate the required surplus the only recourse is further borrowing. Further borrowing, however, only makes the situation worse and generates a spiral towards economic collapse. The possibility of devaluing the sovereign debt, possibly along the lines of what occurred in South America, seems to be under consideration.

In the 1980s the debts of Mexico, Brazil, Argentina and some South American countries became unsustainable and these countries defaulted. The debts were finally reduced under a scheme called the “Brady plan” which allowed the debts to be converted into “Brady bonds”. These bonds were swapped for the debt and either kept the capital constant and reduced the interest or reduced the capital and left the interest at the market rate. In many cases the bonds were sold back to the debtor nations at enormous discounts. This amounted to the creditors accepting losses and the debts being written off. How precisely this could be done in the EU is not clear but there is talk of allowing creditors to take losses after 2013. What is clear, however, is that the present strategy is not working and this will have to be faced in the near future. Devaluation of sovereign debt will, of course, mean the main European banks, particularly British, French and German banks write off enormous amounts of debt. Writing off of part of the debts amounts to a devaluation of part of the capital which is demanding interest from the profits generated elsewhere in these economies, and will make the situation easier for the debtor nations.

The weakness of the Eurozone, which is being exposed by the sovereign debt crisis, is that a common currency exists without common taxation and economic strategy. The European bourgeoisie is becoming more aware of this and more prepared to undertake changes leading to closer economic union. Changes to EU treaties have already been made to set up new financial instruments such as the European Financial Stability Fund which is used for bail-outs of debt ridden countries. The debt crisis is also enabling the stronger countries to impose economic conditions on those accepting EU loans. Ireland, for example, was told the condition for a renegotiation of its 5.8% rate on the €95bn bail-out loan was that it increase its corporation tax rate, which is at present only 12.5% to the EU average. There is, however, awareness that more drastic action is required. The Spanish Prime Minister Zapatero, for example, called for more integrated fiscal policy in the Euro-zone.

It is not enough just to have a central bank…..We also need to have a common economic policy (6).

While the German chancellor Angela Merkel is demanding common debt limits, common tax rates, common pension ages and standardised education within the Eurozone. Germany, which is emerging as the paymaster of the EU, is setting the conditions for greater economic integration.

While the crisis is exposing the weakness of the European Union it is also exposing the stupidities of capitalism. Once again we are seeing human needs going unsatisfied at the same time as capital is being used for speculation on food, oil, raw materials and other items rather than being used for production of useful commodities. At the same time many millions of workers, who could be producing useful things, remain unemployed. Capitalism’s only solution to this situation is the devaluation or destruction of the wealth produced in the period since the Second World War and restarting capital accumulation from a new low level. The only way such devaluation can be achieved is through a generalised imperialist war. The real way out of this crisis is the overthrow of the system which has become completely incompatible with the needs of humanity and the institution of production for need.


(1) Quoted in The Guardian 21/12/2010. See also the article on Wisconsin in this issue.

(2) See The Independent 14/04/2011.


(4) See Financial Times 5/4/2011

(5) See Revolutionary Perspectives 54 “Financial Crisis in the Eurozone” and Revolutionary Perspectives 56 “Crisis in Ireland: A Warning to the World’s Workers.”

(6) See Guardian 3/12/2010.

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