The buzz word is “contagion”, the fear that
the financial crisis will spread. With the Irish economy on the brink of
collapse, the government has been forced to introduce even more
draconian cuts
to the tune of £20bn to pave the way for an EU/IMF bail-out package. All
eyes
are now turning to Portugal and even Spain as the speculators move from
one
country to another.
The buzz word is “contagion”, the fear that
the financial crisis will spread. With the Irish economy on the brink of
collapse, the government has been forced to introduce even more draconian cuts
to the tune of £20bn to pave the way for an EU/IMF bail-out package. All eyes
are now turning to Portugal and even Spain as the speculators move from one
country to another.
Ironically, it was only four months ago
when regulators announced that Europe’s banks had passed a stress-test and were
all given a clean bill of health – including those of Ireland. Now they seem to
be the most “stressed” of all, as bank shares plunged by 20%.
As Alan Wild, head of fixed income and
currency at Baring Asset Management explained, “Contagion is a big problem for
the eurozone. The danger is that worries about Ireland will continue rather
than ease, and the crisis will spread to Portugal, then Spain, then Italy. If
Spain needs to be bailed out, then that raises worries about the eurozone as a
whole.” In other words, they will all swim or sink together. The only thing is
if Spain defaults, its economy is bigger than Ireland, Portugal and Greece
combined. Any rescue package would be astronomical and undermine the whole
eurozone in the bargain.
“For us contagion is the issue… If the
market loses confidence in Spain, then all bets are off. Spain in too big to
bail,” says Guillaume Fonkenell, chief investment officer at Pharo.
The vultures are beginning to circle.
Bridgewater, the world’s biggest hedge fund, warned, “We judge Spanish
sovereign credit to be much riskier than is discounted because it seems to us
that there is a high risk that Spain won’t be able to sell the debt that it
needs to fund its deficits.” They are betting that Spain will be plunged into
crisis in the first quarter of 2011.
We saw the way in which the Asian crisis
spread in 1997-98, eventually forcing Argentina to default, triggering a
massive slump and political turmoil.
Ireland is not out of deep water by a long
way. The new austerity measures, if agreed, will serve to further undermine the
crisis-ridden economy, giving rise to further speculation.
Bank share in Portugal also fell sharply.
The country’s debt problems have virtually frozen them out of international
capital markets, forcing them to rely heavily on help from the European Central
Bank, as do the Irish and Greek banks. This makes them vulnerable to
speculation and the next likely target for the financial loan-sharks (the
“markets”). The austerity programme has already provoked deep anger, as
elsewhere, with further general strikes.
The strategists of capital thought they had
contained the Greek crisis in May. There was a huge sigh of relief. But that
was short lived as the crisis spread to Europe’s peripheral economies. We are
facing the biggest crisis the eurozone has ever faced, as hedge funds start
betting against the euro, which in turn will feed back into a renewed financial
crisis.
Whatever the next point in this drama,
destroying millions of livelihoods in the process, the stage is being set for
the next global economic crisis. Once again the working class will be asked to
bail-out the capitalist system. Once is enough.
