By Michael Burke
The rapid growth of the so-called BRIC economies (Brazil, Russia, India and China) is providing a global benefit in terms of economic growth. But their increasing weight in the world economy will also provide a growing benefit specifically to all the European economies, and most especially the majority of citizens in the most crisis-hit countries.
The latest example of this arises in relation to the Greek crisis. Because of their more rapid growth the BRIC economies subscription of the funds for the IMF are growing. Their weight in the IMF is growing as a result, where previously the interests of the US have always held sway. It is clear from a report in the Financial Times on July27th that representatives of the BRICs are unhappy with the term of the latest bailout involving Greece. The complaint is twofold - that the austerity measures imposed on Greece are too harsh and the level of losses imposed on the banks is too small.
According to the FT, ‘Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMF’s executive board, said the Greek government’s austerity plan was too tough and the restructuring of Greek debt held by European banks was too small.
“Greece is not having an easy time,” he told the FT. “The mostly European private creditors of Greece have had an easy time.”’
Mr Batista also went on to argue that, while there were suspicions about bias towards European bondholders (EU banks), Christine Lagarde the new IMF MD and former French Finance Minister had the perfect opportunity to dispel such suspicions (by taking a tougher line on bank losses).
Further, the FT reports, ‘Arvind Virmani, the Indian executive director on the board, said the plan dealt with short-term cashflows but left Greece with a large and precarious sovereign debt stock, threatening further defaults.
“I am not convinced [the plan] addresses the basic problem of liquidity versus solvency,” he said, adding the fund had dodged the question for more than a year.’ The clear implication is that Greece requires further debt write-offs if it is to become solvent.
Both men also argued that the size of the IMF loan would be unacceptably large and would not have been made available to a developing country. The obvious implication is that either European taxpayers or bondholders should make a greater contribution- and it was clear that their preference is for the banks to take greater losses.
According to the latest official documents, the debt-reduction for Greece will be €26.1bn, less than 12% of total debt outstanding of €350bn. Clearly, this is a welcome first step but wholly insufficient to bring about solvency. Once all forms of ‘credit enhancement’ (very expensive insurance) on the debt being restructured are paid for, the total estimated debt reduction is actually smaller than the €28bn projected level of Greek privatisation receipts.
As the BRIC representatives say, the cuts are too harsh and the losses for bondholders too small. Politically, as well as economically, the rise of the BRICs is a major benefit. Progressive forces in Europe (including Britain) and elsewhere should increasingly look to them. Not only is it possible to learn from their rapid growth, but it is also very valuable to have them as allies in the interests of the overwhelming majority of the population of Europe, and against the interests of the bankers.