Charlie McCreevy, Financial Warmongers and Speculating on Greece
One of the things that is regularly repeated now when the current financial crisis in Ireland is being discussed is the ideological stupidity of the Fianna Fail/PD government during the “Celtic Tiger” years. Fintan O’Toole in his book Ship of Fools, provides some background to why there was a serious uplift in the economy in the 90s, which was prior to, he argues the first FF/PD coalition in government. He then says that Messers McCreevy, Harney and Ahern, through their “sheer idiocy” and “macroeconomic illiteracy” managed to blow this boom.
This stupidity was not about a lack of intelligence: McCreevy, Harney and Ahern were all very bright people. It was induced by a lethal cocktail of global ideology and Irish habits. On the one side, so-called free market ideology held government in contempt. When McCreevy boasted of spending money when he had it and not spending it when he didn’t, he was expressing a deeply held belief that it was not the business of government to interfere, for good or ill, in the workings of the economy. More broadly, if you believe, in accordance with the doctrines that dominated official thinking, that government itself is essentially evil, the very idea if using political power to effect the long-term transformation of a society is anathema.
The ideologue-in-chief, Charlie ‘Tax Relief’ McCreevy went from ruining our economy as Minister for Finance, to becoming EU Commissioner for the Single Market in a single bound. In Europe, McCreevy is reported to have raised similar heckles.
It’s interesting then to read Corporate Europe Observatory’s report Financial Warmongers Set EU Agenda out today which analyses the influence of significant lobby groups from the US and European Financial Services Industry on the EU’s new financial regulation policy.
The report focuses on the speculative trading through credit derivative swaps that is having such a devastating effect on Greece’s ability to borrow and the slowness of the EU to try and curb this highly destructive behaviour, despite Commissioner McCreevy claiming in 2008 that he intended to bring in legislation to regulate it. The reason for the delayed response they argue is because of the undue influence of financial lobbies like ISDA.
From the press release:
Corporate Europe Observatory’s analysis argues that the EU has left it far too late to take action on speculative trading through credit derivative swaps (CDS) - leaving the Greek economy exposed to speculators. The need for effective policy measures could have been identified far faster if the Commission had not relied so heavily on one-sided advice from the financial lobby.
The report highlights the role of the International Swaps and Derivatives Association (ISDA) in influencing the Commission’s work on derivatives trading - a group that represents the major EU and US banks - many of which profit from speculative trade - and a group famous for its defence for unfettered speculation.
The Commission has established a large number of expert groups to provide advice on regulation in the financial sector, including a derivatives expert group dominated by members of ISDA. Research published by the ALTER-EU coalition in November 2009 showed that most of these groups are dominated by representatives from the financial sector. The report published today shows that this pattern of policy capture continues.
The report itself is a very useful in that it explains in an easy to understand way what CDS are, and why they are a problem for Greece:
“Large scale financial institutions are buying so called “credit default swaps” (CDS) some of which act as a kind of insurance against losses they may incur on loans granted to Greece. Others are simply bets that Greece will default on its loans, with no link whatsoever to fresh investment or actual loans to the troubled Southern European country. These instruments are called “naked CDS” and are purely speculative. The more popular an investment they become, the more bleak looks the faith investors have in Greece, and the more expensive the loans to Greece becomes. The Commission is now finally considering curbing or banning this kind of “derivative”.”
While the EU is expected to table a proposal to regulate them in October, it will take months to adopt and even longer to take effect. This means that while a country like Ireland or others in the PIIGS group might be protected it will be too late for Greece.
However, as the report points out, it is the delay of the EU Commission to act, and particularly the unwillingness of the former EU Commission for the Single Market Charlie McGreevy to live up to his promises that have caused this to happen. As we can see from the excerpt below, the reason is because of McCreevy’s too close relationship with the business community, a relationship that is forcing instability, potential economic collapse and austerity on Greek workers. Who says that Ireland is not good at exports.
“In a sense, Greece is paying the price for the traditional work style of the former Commissioner for the Single Market, Charlie McCreevy, who was known for his close cooperation with the financial corporations. In the very beginning, however, McCreevy sounded reassuring. When hell broke loose in the global financial markets in September 2008 (after a prologue in the USA in autumn 2007), he promised a careful and systematic look at the rules governing the derivatives trade in the European Union and to make a break from the previous “light-handed” regulation.
Just a few months later however, he chose the usual suspects as key partners in his work on reforming the derivatives market. The first meeting of the Working Party on Derivatives took place in November 2008, with the Working Party made up of “stakeholders”, by which McCreevy meant the key EU agencies plus all major financial lobby groups including the Alternative Investment Management Association (AIMA), European Banking Federation (EBF), and the International Swaps and Derivatives Association (ISDA).
This group was set up to discuss measures to increase transparency in the derivatives market and take “a systematic look at derivatives markets in the aftermath of the lessons learned from the current turmoil,” according to McCreevy.
Key proposals were tabled at the first meeting in 2008 and work initiated. Soon after, in March 2009, one of the prominent members of the Working Party, the International Swaps and Derivatives Association (ISDA), a group representing the interests in derivatives trading of its more than 800 members, including all the major EU and US banks, delivered a letter supported by nine major financial institutions, voicing their willingness to increase transparency by trading derivatives through a limited number of intermediaries (central clearing houses) rather than bilaterally.
Later in 2009 the Commission set up an „expert group? – a group of advisors to the Commission - to ensure dialogue between the Commission and industry on industry’s voluntary commitments.
Membership of the group includes 10 members from the individual financial authorities from each Member States and from the EU, and a further 34 members from the financial sector9. Of these 25 are linked to ISDA. Five of the remaining nine are associations, four of which have many members also on the ISDA members list. The last, the hedge funds association AIMA, does not disclose its list of members. The remaining four are exchanges where financial corporations can sell their “products”. In short, the expert group is dominated by ISDA members.”
Emphasis mine. You can read the full report here.
Discussion
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Comment by: Pope Epopt
Apr 15th 2010 at 09:04
Thank you Donagh. Those linked reports have hard data supporting the assumption of regulatory capture at the EU held by many on the left. It puts the bending of the EC rules to facilitate NAMA into context.
Combine this with the takeover of the Obama Administration by Goldman Sachs and we’re in for another, probably bigger, financial crisis in pretty short order IMO.
Comment by: Conor McCabe
Apr 15th 2010 at 13:04
Essentially this is what all the talk about “competitiveness” boils down to - whether Ireland is seen as a good bet by these guys or not. Nothing to do with jobs, nothing to do with people, just guys gambling at a table, with “competitiveness” as the equivalent of a horse’s form.
As we have seen, they will bet against a country and then talk down a country’s form, making billions in the process. Just scum, really.
Comment by: Michael Youlton
Apr 19th 2010 at 12:04
Greek Mess, Euromess, Western Nations Mess, World Mess?
by Immanuel Wallerstein
Everyone is discussing what Fortune magazine is calling the “Greek maelstrom” and everyone is pointing the finger at someone else. Whose fault is it? The Greek government is accused of cheating and allowing Greeks to live beyond their means. The European Union is accused of having created an impossible structure for the euro.
Or is the fault with Goldman Sachs? It is accused of having enabled the Greek government to falsify its accounts when it sought to join the euro monetary system. It is accused today of engaging in “credit-default swaps” that make the situation of the Greek government even more vulnerable, but to the bank’s profits. The head of credit strategy at UniCredit in Munich says this is like “buying insurance on your neighbor’s house – you create an incentive to burn down the house.” Chancellor Angela Merkel of Germany calls Goldman Sachs’ actions in 2002 “scandalous” and Christian Lagarde, France’s Finance Minister, calls now for greater regulation of credit-default swaps.
Niall Ferguson says that “A Greek crisis is coming to America.” He calls this “a fiscal crisis of the Western world.” Ferguson is preaching the evils of public debt and of the concept of a “Keynesian free lunch,” which in the end is a “drag on growth.” Paul Krugman says it’s a “Euromess” because Europe should not have adopted a single currency before it was ready to have political union. But now the euro can’t be allowed to break up since it would trigger a worldwide financial collapse.
Meanwhile, it seems everyone is pressuring the Greek government to reduce its public debt as a percentage of GNP from over 12% to say 4% in say four years. Can it do this? Should it do this? The Greek government says it will do something. This “something” has been enough to bring about massive strikes of farmers, hospital workers, air traffic controllers, customs officials, and all those who are being asked to reduce their income in the middle of an economic crisis and increased unemployment.
Should Germany do something? The Germans don’t want to for two principal reasons. The first is the prospective demand of other states in economic difficulty (Spain, Italy, Portugal, Ireland) for the same thing. The second is the internal pressures of their citizens who see any help to Greece as money that is being taken away from them, when they too are feeling an economic squeeze.
On the other hand, if Greece (and other countries) squeeze their citizens to pay down the debt, it means reduced purchasing power for imports – first of all, from Germany. And this means in turn a downturn for the German economy. Josef Joffe, the editor of Germany’s Die Zeit, groans: “Europe has become a huge welfare state for everybody, for states as well as individuals.”
Meanwhile, the euro is slumping and the dollar is once again, for a moment, a “safe haven.” Ferguson warns us that “US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.”
When an analyst in the Financial Times suggested that Germany was going after all to bail out Greece, a German reader commented: “So what you’re saying is give them your money to spend in your shop.” But isn’t that just what the Chinese do when they buy U.S. Treasury bonds?
What these multiple cross-cutting analyses of short-term blame and short-term gain miss is that the problem is worldwide and structural. Banks exist to make money. The games Goldman Sachs has been playing (and other banks as well) has not only been with Greece, but with many, many countries – even with Germany, France, and the United Kingdom, even with the United States.
This is because governments wish to survive. To do this, they need to spend enough money to prevent a “maelstrom” and civil uprising. And if they don’t take in enough taxes to do this (both because they don’t want to raise taxes further and because a weaker economy means less overall tax income), they must “massage” their accounts by borrowing. And covert borrowing (from banks, for example) is better than overt borrowing, since it enables governments to avoid criticism, until the day when the secret gets revealed, and there’s a “run on the bank.”
Greece’s problems are indeed Germany’s problems. Germany’s problems are indeed the United States’ problems. And the United States’ problems are indeed the world’s problems. Analyzing who did what in the last ten years is far less useful than discussing what, if anything, can be done in the next ten years. What is going on is a world-wide game of chicken. Everyone seems to be waiting for who will flinch first. Someone is going to make a mistake. And then we’ll have what Barry Eichengreen has called “the mother of all financial crises.” Even China will be affected by that one.