TEN YEARS on from the banking crash that brought the world’s financial system to the very edge of going over the fiscal cliff, the International Monetary Fund (IMF) has issued its starkest warning yet that the banks are stuck in a sovereign ‘doom loop’ which is impossible to escape.
The sovereign bank ‘doom loop’ is the term used to describe the endless cycle that dominates the capitalist financial world. It is a cycle of banks taking on risky investments in order to swell on paper their growth and profits which inevitably leads to a financial bubble that bursts bringing the entire banking system to its knees.
In order to stave off this inevitable collapse, sovereign nation states step in to bail-out the banks. This forges an unbreakable link between the sovereign state and the banks, a link whose chains are ever-increasing debt.
The banks that have been bailed out at the expense of the state then invest their bail-out money mainly by buying up their own government bonds which, again on paper, provide a secure and profitable return for their investments.
But the doom loop means that the banks are relying on their government, actually performing sustained economic growth, enabling them to pay off the loans made by the bailed-out banks through bond purchases, while the same governments are relying on the banks continuing to fund them by buying up government debt.
This endless cycle of debt can only result in one almighty crash, and the fear that is haunting the IMF is that such a crash is rapidly unfolding in Italy, a country that has the second highest debt to GDP ratio in the Eurozone at 132% – only Greece has a higher ratio. To finance this debt, Italy, like every other capitalist state, relies on borrowing from its bailed-out banking system.
The Italian banks are completely bankrupt, the majority of their ‘assets’ are in the form of loans to the Italian state, they hold 20% of Italy’s sovereign debt. The new Italian coalition government, promising to increase public spending, in defiance of the EU banks’ demands for increased austerity and cuts to spending, has had the effect of driving down the value of the Italian bonds held by the banks.
The vicious cycle that is now dominating Italy, Europe’s third largest economy, is that the Italian state unable to bail-out the banks that hold its debt will lead to a banking collapse, which in turn would rapidly become a sovereign debt crisis with the Italian state bankrupted. What is giving the IMF nightmares, is that a sovereign debt and banking crash in Italy would spread like wildfire throughout the world – weak banks destabilising governments that support them and over-indebted governments pushing banks holding their bonds over the precipice. This is the vicious cycle capitalism cannot escape from.
Throughout Europe, banks have been buying more and more of their own governments’ bonds, more than doubling their ownership of state debt since 2008, encouraged by current EU regulations that claim sovereign debt is ‘risk-free’ and that banks do not have to hold capital against the risk of default.
What clearly emerges in this crisis, is that capitalism no longer produces anything of real value and is dominated by a world banking system that relies exclusively on debt.
What is also clear, is that when sovereign states and the entire banking system collapses, the capitalist class will attempt to make the working class of the world pay for its crisis.
Already workers have paid for the bail-outs of the past through more and more austerity cuts and they will not sit back and allow their lives to be destroyed in the coming catastrophic crash – it will revolutionise the working class and place the issue of socialist revolution immediately before them.
As the IMF admits, there is no way to escape the ‘doom loop’ encircling the capitalist system, the only way out is for the working class to cut through this loop by taking power through socialist revolution and replacing the bosses and bankers EU with the United Socialist States of Europe.