Big banks run everything: Austerity, the IMF and the real story about world economy that the media won't tell you

If you want to understand what's really happening in Greece and Ukraine, just follow the money

Published May 28, 2015 11:00PM (EDT)

Lawrence Summers, Timothy Geithner, Christine Lagarde    (AP/Reuters/Molly Riley/J. Scott Applewhite/Ruben Sprich/Photo montage by Salon)
Lawrence Summers, Timothy Geithner, Christine Lagarde (AP/Reuters/Molly Riley/J. Scott Applewhite/Ruben Sprich/Photo montage by Salon)

Fascinating to watch the International Monetary Fund as it fronts for the U.S. Treasury and international lenders in the Greek and Ukrainian debt crises. In the former, the fund pins the Syriza government to the wall because it dares to represent its electorate. In the latter, it stands by the Poroshenko government because it has no intention of representing anybody other than banks, corporations and the global strategy set.

“Fascinating” is one word for this and it holds. “Greed in action” is three but they do a better job.

Coincidentally enough, both the Greek and Ukrainian cases now near their respective denouements. Miss this and you miss a singularly plain display of power, the way it works and what it works for in the early 21st century.

Athens has debt payments of €1.6 billion ($1.76 billion) due in June and must make them if it is to receive a further tranche of European and I.M.F. funding. This is essential if Greece is to recover—not from the 2008 financial crash and its economic fallout, which was long ago absorbed, but from the recovery program the fund and the European Union imposed in 2012. That is textbook neoliberalism, naturally, and the results are before us. Prime Minister Alexis Tsipras calls it “a humanitarian crisis,” and I have heard no one dare counter him on the point.

The Kiev government owes international bondholders $35 billion, and $23 billion of it is also due in June. Slightly different situation here: Ukraine, too, needs to shake loose I.M.F. and European funds to revive an economy even worse than Greece’s, but this is not about ameliorating any kind of social crisis. It is about inducing one, in effect, so the neoliberalization process can be completed and working people in Ukraine are made properly, structurally desperate.

It is highly unlikely you will read about these two crises in the same news report—this would be asking too much of media committed to conveying disembodied data without context so that readers and viewers cannot understand what they are (not) being told. Let us, then, treat Greece and Ukraine together. It is where the fascination comes in.

The Greek case. The story starts with the first bailout, in 2010, a €110 billion deal, and the second, two years later, worth €130 billion more. The Socialists negotiated the first bailout and it cost them power within a year. The second was agreed by New Democracy, the rightist party founded in 1974, shortly after the dictatorship of the colonels collapsed.

The New Democrats accepted the extensive austerity measures the I.M.F. and its European co-lenders insisted upon. These included budget targets requiring severe cuts in public service wages, pensions, nationalized health care provisions and all else Europe’s social democracies built over a long period of time. Labor law was to be eviscerated along with (and not coincidentally) regulations governing foreign investment. Privatizations of public-sector enterprises—rails, ports, airlines and airports, the profitable and potentially profitable first—were essential stipulations.

Under Carlos Menem—remember that clownish greedhead?—Argentinians took to call this brand of economic ideology “savage capitalism,” and the phrase has ever since proved its usefulness. Same thing in post-2012 Greece, the bailout years that matter most.

We have read of the consequences often enough: a 25 percent drop in GDP, wage cuts of equal size, unemployment hovering above 25 percent, people losing their homes and finding supper in dumpsters, shuttered schools, malnourished children, on and on. Among the technocrats in Brussels and at the I.M.F. and the bankers in Frankfurt and London, this is recovery. The macroeconomic targets are being approached if not met.

By tradition the I.M.F. tends to shape country programs with two features. It lends to stricken countries and conditions payments on multiple austerity measures. In effect, it writes checks to indebted governments, which then write checks to lenders. Bailouts are structured to rescue banks, not any given citizenry. The No. 1 casualty, apart from all those who suffer the effects of the fund’s conditionality, is the democratic process, since bankers and the fund assume, effectively via blackmail, the authority to dictate social policy.

One post-crisis variation is to be noted. In the 2012 bailout, the I.M.F. required lenders to accept a writedown in the principal and interest Athens owed. This is the famous “bail-in” or “haircut.” The 2012 haircut was 74 percent, although this is nominal, as it means not a loss of that percentage but a reduction in potential profit, and the reduction will not necessarily come to that, depending on market conditions.

Here is what we are looking at now.

Syriza, an impossible rainbow of leftist constituencies, defeated the rightist New Democrats in a snap election earlier this year. It immediately set out to renegotiate New Democracy’s bailout deal, and it has been crisis management ever since.

Yanis Varoufakis, finance minister in Alexis Tsipras’s government, developed an alternative economic strategy to recover from the recovery. It holds up, as analyzed previously in this space. The other day he presented E.U. officials with minutely detailed flow charts demonstrating that the bailout terms he and Tsipras inherited and the root of Greece’s problems now.

The technocratic facts of Greece’s case seem to matter not. Christine Lagarde, the I.M.F.’s director, makes no argument for burden sharing among lenders this time, and the E.U. has nothing of the kind on offer.

Neither wants to hear anything about a recovery plan that does not include more cuts in pensions and social spending, an increase in a highly regressive value-added tax and privatizations, which seem to be the third rail here: without them, nothing doing for Athens.

But there are facts other than technocratic. They are political and ideological.

One, Brussels and the I.M.F. do not want a left social democracy that works contaminating the European Union. It is enough to keep right-wing social democracies such as France’s contained and co-opted. Two, nothing is to be allowed to challenge the validity of the neoliberal orthodoxy, and certainly not facts on the ground.

As the Obama administration makes clear, it wants a settlement with Greece, but it has said nothing about a fair one. Per usual, Washington’s concerns are strategic. A Greek exit from the eurozone, now a distinct possibility, would evaporate leverage over a nation with a long tradition of left resistance and divided sympathies between East and West. It is not lost on the State Department, surely, that Tsipras has been playing footsie with Moscow almost since taking office.

With a payment deadline a week away, Tsipras continues to seek a compromise with E.U. ministers. It is hard to say if he will achieve one, although European stocks jumped Wednesday on news that a deal was nearly done. We will know soon one way or another.

At home, Athenians are exactly where they ought to be: in the streets. Syriza is splitting, predictably. Some factions support Tsipras and some, now shifting to internal opposition, assert that Greece should leave the euro as a project that proves simply not worth it. “This is a dysfunctional union that doesn’t serve the interests of most of its members,” Costas Lapavitsas, a prominent Syriza parliamentarian, said in an interview published in Wednesday’s Los Angeles Times. “To me it’s only a matter of time before this is recognized.”

Greece’s fate is up to Greeks, of course. My take is this: If the European project requires subverting the democratic process in a given country, to hell with it: It is 180 degrees upside down from its admirable intent at the start. If the Tsipras government’s choice lies between the dignity of serving the human beings who put trust in it or meeting technocratic targets and obliging bankers and ideologues, where is the choice?

The Ukraine case. It has to be a little embarrassing that the I.M.F. and its allies cannot get money to the Kiev government quickly enough even as they traffic in fear and a kind of terrorism with the Greeks. Doesn’t it? Please, tell me, somebody somewhere is at least a smidge ashamed.

The I.M.F. has been an adjunct of Washington’s miscalculated intervention in Ukraine from the first. Anyone requiring persuasion should consider the curious sequence of events surrounding the Minsk II ceasefire talks, concluded with an agreement signed by Germany, France, Russia and Ukraine in February.

It was an agony, especially for Chancellor Merkel, to get Poroshenko even to send a delegate to Minsk. The political captive of his extreme right, he consented only at the last moment. The deal was signed February 11 after protracted talks. A day later Lagarde announced that the fund would proceed with its $17.5 billion share of Ukraine’s $40 billion bailout plan.

Which did she wield, carrot or stick? Both, I would say.

At the moment, Natalie Jaresko, Poroshenko’s finance minister, is negotiating to get foreign lenders to accept the haircut the fund and the E.U. adamantly refuse the Greeks. All involved appear to stand behind it. “The case for debt reduction is as strong as any that I have encountered over the past quarter century,” Lawrence Summers wrote recently in a Financial Times opinion piece. Clinton administration vet, urger-on of the catastrophic Boris Yelstin, neoliberal evangelist, nonchalant advocate of regime change: Yes, that Lawrence Summers, a mess usually trailing in his wake.

The case Summers refers to rests on the I.M.F.-mandated reforms Prime Minister Arseny Yatsenyuk detailed in parliament last December. It is so cookie-cutter it is boring to type it: Very big time privatizations and across the board cuts in social services, energy subsidies essential to most Ukrainians, labor protections, impediments to foreign investment and so on. The battle against endemic corruption proceeds, Summers assures us.

Let there be no mistaking: Yatsenyuk is getting this done. As we speak he is in Washington cajoling the Obama administration to cajole, in turn, American corporations to buy up or into the 1,200 public-sector companies he proposes to put on the block, primarily valuable energy and other resource corporations. “It’s a fire sale,” Forbes observed on its web site Monday.

Some problems here, however. The Ukrainian economy makes Greece’s look like the Klondike. It is half its size in 2008 and shrank 18 percent in the first quarter of this year alone. The central bank is down to $5 billion in reserves—beer money.

Kiev pays roughly 175 percent to issue short-term Eurobond debt. Long-term debt denominated in dollars costs it 26 percent or so, and this is down from the mid-30s earlier this year. This is not junk, Forbes tells us. It is not super-junk, either. It is “super-duper junk.”

Into the valley of debt rides Lagarde.

The latest from Kiev has most people in the markets dumbstruck. Last week the parliament voted to authorize Jaresko to refuse any further payments to foreign lenders on the grounds she “has the right not to return loans borrowed by a kleptocratic government.”

This is called the “odious debt argument,” the reasoning being that a new government cannot take responsibility for a corrupt predecessor’s capriciously incurred borrowing. It has been tried before, sometimes with justification, but I seriously question if the Poroshenko government can make any such case stick.

The referenced kleptocratic regime, of course, was Viktor Yanukovych’s, which was brought down in last year’s coup. “These funds have not reached the public,” Kiev argues. “They were wasted. … Government has the right to direct the funds paid by taxpayers in Ukraine to the needs of its citizens and not to return loans….”

This looks like trouble across the board.

First of all, I have numerous reports from solid sources over many months that corruption problems, which I will address shortly, are worse now than under Yanukovych. Lenders are not stupid. They will know this. The I.M.F. is not stupid, either, and neither is the Obama administration. But to these latter this point does not matter. They already look the other way.

Second, another phrase in the bill references “unscrupulous external creditors.” Essential to note here is that 1) Russia holds a $3 billion bond issued by the Yanukovych government and is plainly considered one of these and 2) Russian Prime Minister Dimitry Medvedev said in a televised interview last week that Moscow has no intention of renegotiating the terms on these instruments.

It shapes up as a showdown. Under the circumstances, one can hardly blame the Russians for this position. It will be interesting, maybe even fascinating, to watch how Kiev’s backers line up if it defaults on the Yanukovych bonds—the odious debt argument being simply a lunge for legal protections as debts are ignored.

Third and last, this is a reckless way into debt resolution and a depressing measure of just how irresponsible the people governing Ukraine are. I am hard pressed to recall a client regime this shabby and ignorant, and Washington has settled on some real losers over the decades. Funds Yanukovych borrowed did not benefit the citizenry, and therefore…. Where does this chicanery end?

A further point on the financing question comes from a good source in European banking and financial circles: He wrote in an e-mail note the other day:

“I cannot understand for the life of me why the I.M.F., i.e., the Treasury, the E.U. et al. aren’t demanding that Kiev recover some of the approximately $1 trillion stolen over the past 20 years, except that some of the thieves are central to the current government one way or another. Even if they recovered 10 percent—which would not be hard to do—that would be three times the total public debt of $35 billion—of which they now want to force lenders and especially Ukrainians to swallow 40 percent to 50 percent.”

As to progress combating corruption, more problems. Transparency International rates Ukraine businesses worse than the oligarchs Yeltsin created and Putin now struggles to rein in. Yatsenyuk, it transpires, is under investigation on suspicion he and others in his administration have already made $325 million in public funds disappear.

On the political side, Poroshenko appears to have little leverage over his extreme right. They are on the record—not least via legislation already passed in parliament—that they will not abide any deal done within the Minsk II framework. There has been talk of a coup to depose the now-despised Yatsenyuk, I am told by reliable sources wired into Kiev.

Worthy? At this point, Yatsenyuk is nothing more than a carny tout, if you ask me. So are people such as Summers, who should be ashamed of himself. Worthiness is not the criterion, if this is not obvious by now. The true criteria are two.

One, Ukraine’s strategic importance is such that it will enjoy Western political and institutional support—and probably the haircut Jaresko wants to give the bankers—so long as there is anyone left in Kieve to cash the checks. Two, I question there is any case of the neoliberals’ ideological compulsions as extravagantly on display as they are in Ukraine today. This prize cannot be lost.

Look at Greece. You have a government made of some serious intellects. Read what they write and listen to what they say. They are in search of credible, constructive alternatives. They have one on the table. The problem with it is simple: It is an alternative.

Now Ukraine. Know-nothing stooges, evidence to the contrary always welcome. Yatsenyuk is a ventriloquist’s dream. And to propose an alternative to the orthodoxy must be the furthest thing from his mind.

Fascinating. Among other things.

By Patrick L. Smith

Patrick Smith is Salon’s foreign affairs columnist. A longtime correspondent abroad, chiefly for the International Herald Tribune and The New Yorker, he is also an essayist, critic and editor. His most recent books are “Time No Longer: Americans After the American Century” (Yale, 2013) and Somebody Else’s Century: East and West in a Post-Western World (Pantheon, 2010). Follow him @thefloutist. His web site is

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