Economic Mood Music Darkens

What are we to make of the downgrade of the opinion of UK debt by credit-rating agency Moody? The chat on the airwaves is all about the politics of the decision. As noted by the Guardian last night, 'The chancellor has used maintaining the top credit rating for government bonds as one of the key arguments for the austerity programme.' So are we likely to see the flags out to celebrate the end of austerity? I think not so long as we allow vulture financiers to suck the life out of our economy, the process for which credit rating is just a sideshow.

The credit-rating agencies invented a profitable business for themselves by taking the responsibility for assessing risk on behalf of investors. My own local council, for example, is advised by the local authority financial advisor Sector, to only place its reserves in funds with triple-A ratings. This avoids the need for us to employ our own financial experts and outsources the risk if we make bad investments. The credit-rating agencies were paid handsomely for carrying this responsibility, although at no real risk to themselves.

The fear that was engendered around the loss of the triple-A rating relates to how this measure of risk relates to the cost of national borrowing. If Moody and friends decide that we are at greater risk of defaulting on our debts then investors will expect to be paid more for lending to us to reflect this risk. The cost of our borrowing would rise, and given its vastness relative to our economic output we might teeter closer to being obviously and publicly bankrupt.

So why have the rates barely changed in the market this morning? The answer is that the credit-rating agencies never had the power they claimed for themselves. Investors have taken on the chin the downgrades of the US and France. They are not interested in some end-of-term report but make their own assessments of how they can make the greatest return. Investors believe that UK gilts are a good investment because they believe that UK citiens will make good on them through their work.

Taking a wider perspective we can see that what has happened has been a change of cast: the credit-rating agencies that were used to bully us into unprecedented cuts to pubic spending have lost favour, but the policy continues. The real question for us should be whether we are happy to continue with a  means of funding our national economic affairs that accepts that a proportion of our wealth will be constantly siphoned off to financiers. This is the reality of debt financing and the performance around triple-A rating is the show that conceals the very real decisions investors are making about which country's citizens and resources will yield them the greatest returns.
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Argentina Learns not to Pampa Financiers

As the credit noose tightens, it is not surprising that commentators are seeking examples of countries who found their way out of unrepayable debts - and lived to tell the tale. In the case of Argentina, whose debts at the time of its default in 2001 were $81bn. - a record for the time although dwarfed by current debts - life after debt has proved to be a very positive experience.

The story is told in a couple of podcasts made by Peter Day for his World of Business series on Radio 4. A paper I wrote about Argentina's barter networks introduces this story. Caught in the orbit of the US dollar, Argentina was unable to allow its currency to adjust to the needs of its own economy, much as the smaller economies of the Eurozone are today. This culminated in a financial collapse in 2001, with the loss of huge amounts of savings by the members of Argentina's middle class.

What becomes clear from the podcast is that clever young economists within the Argentinian finance depart and/or central bank were alive to the causes of their crisis and took political control. As a recent report (pp. 58-62) indicates, refusing to pay socially impossible debts was a positive decision both in Argentina and in Russia. Default was the first step, followed by a decision not to become involved in debt again. Similar decisions by other Latin American countries actually threatened the future of the IMF - since without debtors a bank is defunct - until the credit crunch in Europe gave it a new lease of life.

With no possibility of receiving credit Argentina had to live from its own resources, which turned out to be a blessing rather than a handicap. With a massive and fertile land mass, and a popuation of only 40 million well-educated people, Argentina had nothing to fear in its debt-free future. As food and fodder prices have boomed, so has Argentina, with its government benefiting from a 35% export tax on soya production.

Another interesting lesson is the rapid growth in the 'informal' sector, which is a typical feature of many poor economies but less typical of a highly sophisticated economy like Argentina. This may also be a feature of the future of European economies. On the positive side it can be interpreted as self-provisioning and self-reliance, but its shadow side is exploitation and precarity.

The sting in the tale of the story of Argentina is that its economic success has enabled it to seek foreign finance. The credit vultures are circling and seeking their share of the natural wealth of the country. How far will Argentina's politicians remember their lesson and keep control of their national wealth?
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The Silent Coup

For some time I have been worried about the political consequences of the social unrest in some of the Mediterranean countries whose history of democracy is limited and whose political cultures are unstable. I had been watching out for action by their militaries to quell street protests or a greater role for the military in political life.

But during the past few days I have realised my foolishness. The coups are happening in an entirely civilised way, carried out by men in suits rather than men in fatigues. An online dictionary defines a coup as 'The sudden overthrow of a government by a usually small group of persons in or previously in positions of authority.' In the case of democracies it can be taken to mean the replacement of one government with another without recourse to elections.

The first evidence that this was becoming the preferred strategy of the financial elites came with the removal of Papandreou when he had the effrontery to announce that such a major decision as subjecting his people to financial rule by the IMF would require their agreement through a referendum. Within 24 hours he had been ousted and today we hear he is to be replaced by Papademos, who is being politely referred to as a 'technocrat' but whose banking credentials are the reason for his appointment.

As a former vice-president of the European Central Bank he is considered a safe pair of hands by the holders of financial assets. Since he is not a member of the socialist party, who won a majority at the last election, he could hardly become the leader of such a government. In Orwellian style, the government is to be titled one of 'national unity'. In an affront to democracy Greece will now be led by a man who has never held elected office.

Italy also seems to be lurching its way towards a 'government of national unity' again headed by an unelected banker. Last evening Mario Monti was made a senator for life by Italy's President, a step seen as preparatory to his taking over as Prime Minister. He is a former politician and was European Commissioner for the single market, which included the finance brief. The total of governments that have fallen as a result of the financial crisis has now risen to five. As the financial elites jostle to protect their ill-gotten assets the main loser appears to be democracy.

The lack of democracy in our own country is blatant and was the real cause of the expenses scandal. Charging to stand in elections and the continuing and growing bias in the media against any views that question the capitalist status quo is a threat to democracy. But in May 2010 voters did have other choices: their refusal to take them is entirely different from citizens who are being prevented from making democratic choices that might cause a loss in the value of assets being held by the elite, as we are seeing in Italy and Greece.
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