This speculative
attack is another evidence of the need to strictly regulate the banks
and hedge funds
Financial markets are incorrigible. Speculation now turns against the
euro or, more specifically, against Greece, and will later attack Portugal
and, subsequently, Spain - the most fragile countries in the eurozone.
The price of the credit default swaps (CDS) aimed at protecting creditors
against a possible Greek bankruptcy went from a level of 120 in October
2009 to 419 on February 9, 2010. People who buy CDS at such a high price
are betting on the country's bankruptcy, which will convert this high
price into a huge profit - a bet with a strong self-fulfilling ingredient.
The higher the bets, the more difficult it is for the country to refinance
itself, and the higher the possibility of bankruptcy.
However, speculators are not likely to win this time. It is true that
the euro has a weak point: the European Union lacks, on the one hand,
a federal authority capable of demanding higher fiscal responsibility
and higher transparency from its governments, and, on the other, more
resources to help them when in need. Yet, although the European Commission
doesn't have those resources, European governments and their ministers
of finance do.
The Greek conservative government, defeated in the last election, was
irresponsible both at fiscal and exchange rate levels, putting the State
and the country in debt. The public deficit rose to 12.7% while the current
account deficit reached 14% of GDP. And the government lied about figures.
But the new Prime Minister, George Papandreou, is a competent and cautious
Keynesian economist who is already adopting a number of fiscal measures.
And the European Union will certainly give Greece the necessary support.
The alternative would be for Greece to demand IMF's support, but Europeans
are not likely to agree on that. Greece is a country already well integrated
into the eurozone - and IMF's support for it would represent a support
for the eurozone, something that major countries of the region will not
accept. This alternative was adopted for the Eastern European countries,
but those are countries that have only recently joined the European Union.
The huge increase in capital approved by the IMF was justified by the
need to rescue those countries, whose deficits - the public deficit and
particularly the current account deficit - had irresponsibly increased.
In fact, it was approved in order to rescue the major Western banks that
had equally irresponsibly lent money to companies in those countries with
the IMF's support, because they would allegedly be "growing with
foreign savings".
The European Union was severely affected by the global financial crisis,
because some of its major banks had followed the wave of speculation based
on "financial innovations", and also because its countries'
exports were badly affected by the crisis. The household indebtedness,
however, was not as big as in the United States, and only Spain faced
a real estate bubble. The eurozone as a whole did not have the kind of
public deficits or current account deficits that the United States had.
During the crisis, after a brief depreciation against the dollar, the
euro appreciated again, indicating a higher equilibrium of the European
economy.
For all these reasons, the speculators are likely to end up losing this
game. But this speculative attack is another evidence of the need to strictly
regulate the banks and hedge funds. The creation of money is an inherent
ability of the financial system; it creates credit and finances economic
development, but money is a powerful and dangerous public good that democratic
societies must have control over.