Over the past few weeks the financial pages have been filled with panic over the declining value of the Euro, which is being dragged down by a few European countries struggling from huge budget deficits. The budget woes of Greece have attracted the most attention, as Greece is in the worst financial shape of any country in Europe.
Many of us remember the way that Greece was rocked by massive protests and riots last year in response to the murder of Alexander Grigoropoulos.
Students and workers outraged at the police brutality shut down major cities across Greece. But the anger was not just about Alexander, it was also a reflection of Greeks anger and frustration at their desperate economic situation rife with massive unemployment and inflation and at corrupt politicians rocked by scandal after scandal.
In Greece, protests and strikes are fairly common, but following Alexander’s death they reached a frenzied pace, and this unrest effectively ushered out the conservative Greek government and put the Socialist party in power.
The Socialist government, while a minor improvement from the conservative government (think Obama), quickly moved to push forward dramatic and profound structural adjustment (austerity programs) gutting employee benefits and social services in ways that are undoing decades of struggle.
Last week, the Greek socialist government faced one of its biggest challenges yet, a standoff with independent Greek farmers demanding their subsidies be reinstated. Across Greece farmers stood strong in the face of harsh threats from the government condemning their actions. The farmers used their tractors to block the border with Bulgaria as well as highways and main roads.
Across the business pages, the response to this resounded incredibly clear— the global ruling class is demanding Greece take serious steps to discipline its working class and continue pushing forward the austerity programs (budget cuts to government spending).
One of the major tools business interests utilize to make sure the Greek government gets its working class under control, is the mechanism of credit ratings.
Here, we can see a striking example of the similarity between the political/economic situation in Greece and California.
Greece, like California and all other regional/federal/national governments, has a credit rating. What does that mean? It means that governments borrow money much like individuals do, based on a credit score.
How is this credit score determined? Well, its not exactly clear because there are a few companies in charge of calculating these credit scores, the primary debt rating companies are Standard & Poor (or S&P) and Moody’s. S&P issues credit ratings based on a number of factors, through which it “judges” a government’s ability to pay back loans.
Reuters has been reporting that S&P is threatening to severely downgrade Greece’s credit rating if the Greek government does not effectively stand up to protests and strikes.
Standard and Poor΄s could lower Greece΄s debt rating further if the government scales back its fiscal consolidation plans due to political and social pressures, an executive told Reuters on Tuesday.
“Political and social pressures are likely,” Mrsnik told Reuters. “If they build up and impede the government from moving on and water down the budgetary effort, leading to failure to comply with the consolidation strategy, the ratings could be lowered.”
“Political and social pressures are likely,” Mrsnik told Reuters. “If they build up and impede the government from moving on and water down the budgetary effort, leading to failure to comply with the consolidation strategy, the ratings could be lowered.”
These protests and shut downs are especially dangerous because they are contagious and could easily spread to places like Spain which is similarly dealing with a huge budget deficit and an angry working class. Last year, Greece’s protests spread across Europe.
Here’s the parallel — California is and has been going through a similar situation. Last year, during this time, it was dropped to the credit rating of ‘junk’.
When California, which is the most robust state economy in the country, is given the lowest credit rating in the country, its a big deal. Interestingly, this ‘crisis’ got very little play in the general news media but was heavily covered in the business pages. What happens when a state has that low of a credit rating? Well basically it means a few things, as far as I understand it;
- 1) It means that the state government is impeded from borrowing money that it needs to run.
- 2) It means that the state government has a harder time attracting investors to BUY its debt or its bonds, which are basically debt packages backed by the State.
Why would investors buy Californian debt to begin with? Well they buy it because it is an investment that can yield high percentages of interest. If you were to put your money in the bank it may yield you, for example, .9% interest. If you instead use your money to buy debt, you can collect 5% interest and make more money instead. How come you can collect 5% interest? California has to pay a high interest rate because its a “risky loan”, thus banks lending money to the state are able to charge more interest.
Now, for years the Californian economy has been discussed within business journals as a major problem. Pressure to cut public spending did not begin with the financial crisis. The plan to cut deeply into public sector spending in California, actually predates the financial crisis. The financial crisis provided both pretext and an increased impetus for the governance in California to push forward cuts to the public sector. As one person put it in the Wall Street Journal;
“They have realized Reagan’s vision of a smaller state and local government,” said Bruce Cain, a political-science professor at the University of California at Berkeley. “They forced [Democrats] to make very deep cuts in services, to schools and to state salaries and state benefits.”
Why? Well California does not operate in a bubble. California, like Greece, and everywhere else is subjected to pressures from capitalist business interests looking for bigger margins of profit. What happens if you raise taxes on corporations? You create a less hospitable climate for business.
In a Wall Street Journal article from last year, a business analysts sheds light on some of the logic underlying how politicians approach this crisis and proposed solutions to it,
»On paper, the state could solve its budget problems by raising taxes further. But in practice, that might backfire by weakening the economy and tax base. California scores poorly in state ratings of business climate. In a CNBC survey, it ranked 32nd overall but last in “cost of business” and 49th in “business friendliness.” Information technology (Intel, Google, Hewlett Packard) and biotechnology remain strengths, but some traditional industries are struggling. High costs, as well as tax breaks from other states, have caused movie studios to shift production from Southern California. In 1996, feature films involved 14,500 production days in the Los Angeles area, says Film L.A.; in 2008, the figure was half that.«
So State governments like California are torn between the pressure to both keep taxes down, in order to make the state hospitable for businesses (which creates a larger and larger debt load, as the state borrows to make ends meet).
The debt itself also creates a very real danger and need to cut public services. Why? Funding public services are mandated federally (state governments can lose federal funding if their spending on certain public programs falls below a certain level).
Also, and perhaps most importantly, governments are forced to spend revenue in ways that prioritize certain things (like public infrastructure, public programs, GOVERNMENT SALARIES) etc., SO basically, before they can pay back the debt they owe and the interest accruing on it, they have to pay their pressing bills.
Thus, California’s budget cuts are a way of reassuring investors and/or S&P/Moody’s that they will not have budget obligations that will get in the way of the State’s ability to pay back the loans they are taking out.
Recently S&P put out a number of warnings, basically telling California that the investing community did not have faith that California governance had the ‘will’ to deal with the ‘political cost’ of dramatically reigning in spending. The business community knows these cuts are not popular, and they want to make sure governments have the muscle to withstand pressure from angry people.
Furthermore, these credit rating companies are often in bed with the business interests that rely on them, so they are prone to using credit ratings politically, often to pressure governments to allow private business more autonomy in their dealings. As soon as Governor Schwarzenegger announced the dramatic cuts to social spending that he did, the market rallied and the credit rating got bumped up.
Cuts to the public sector, and public spending in general, are often characterized as a failure of ‘upside-down priorities’. This analogy deceives people into thinking that budget cuts are merely bad policy, and that if we only get enough pressure from below we can convince politicians that they are making hurtful decisions.
If reading anything about Greece and California has taught me anything, its that governments are not suffering from bad priorities, they are dealing with the very real pressures of a capitalist market.
Greece is a very small country. It is incredibly inspiring to see the Greek working class stand up to the pressures of global business interests and the EU. There are other countries facing major deficits besides Greece, but Greece is under the spotlight because its working class has put up the fiercest fight yet. The resistance of Greeks to the violence of this economic crisis inspired and continues to inspire people all over the world, myself included. This resistance and the way it is being considered carefully by credit agencies and regional governments alike should clue us into what kinds of resistance are actually reckoned with seriously by the capitalist class.
