Private equity and hedge funds: you, your children and your environments are not our problem - anywhere!

The European debt crisis is moving on apace, as was strangely illustrated in two separate reports from The Independent (UK) on abandonment this past weekend. The first, last Saturday, reported a 'surge' in the amount of parents in Greece abandoning their children because they can't afford to feed them, with one note left with a kindergarten teacher - "I will not be coming to pick up Anna today because I cannot afford to look after her....Please take care of her. Sorry. Her mother." (14th January, 2012). The second, on Sunday, reported that in Britain there had been a 280 per cent increase in the abandonment of horses (15th January 2012). Now cynical readers might wonder about the relative values of children and horses in Britain, and whether the British bother to count the number of the former left abandoned, given our league table topping figures for child poverty. But that aside, what is clear is that the financial meltdown in 2008, and the debt crisis subsequently have lead to European wide riots, strikes and a noxious level of social deprivation and dissembling the like of which has not been seen in 60 years. But how have once strident economies been brought to their knees, and what does this mean for Africa (aside from the chortling about Europe now having to take the same IMF medicine).

It is worth bringing in some vintage (German) political theory, from Claus Offe, who once said of the relationship between the state and capital (translated to 'the private sector' if you are not a Marxist), that the state is defined "a) by its exclusion from accumulation (similarly translate to 'economy'), b) by its necessary function for accumulation, c) by its dependence on accumulation, and d) by its [political] function to conceal and deny a), b) and c)" (Offe 1975). Events in Europe this week brought this classic definition to mind, since they show how these separate statements contribute to the dysfunctional whole that is the state in most countries, in a financialised world economy where banks have most of the power.

In other words, the state relies on private firms for money and taxes to fund itself, meaning that it has to support capital disproportionately in relation to other interests, such as labour; and for political reasons it has to simultaneously represent itself as independent, and not doing any of this b) at all. Interesting stuff when you consider the bankruptcy of Europe, since this began with collapsing derivatives and toxic debt from the private sector. And then came the big blackmail, that states couldn't let the banking sector collapse because of social chaos, a reference to c) above (why did states not just ring-fence retail accounts, and let the tax haven based funds go hang?!). So states hand over the money as in b). But then a) the banks recover and start talking about their independence from the public sector and unnecessary regulatory reform. More, they make sure their private customers offshore get their money back first, so no repayment for the state despite c), its sorry dependence on them for revenue. So now the states are bankrupt instead. As French government bonds lost their AAA rating this week and succumbed to an AA+, Sarkozy must really regret that he hasn't read Claus Offe on the political importance of d), as French voters are a proud bunch, and the national sovereignty has been slurred by the bankers who are ruining them.

mothers to mine cadmium for phone cases in Congo, HIV/AIDS orphans to break stones at quarries ... while the investors, directors and shareholders greedily suck profits

And to add some salt into Sarkozy and Merkel's wounds, in last weeks round of crisis talks, the European leaders were told by the private hedge funds that they were not prepared to take a 'haircut' (reduction in value) on their Greek debt to save the French and German bailout and the Eurozone. Some of the big banks were, and the bilateral public lenders, but not the private hedge funds – because – wait for it - they are privately insured (as well as by the state it seems through the blackmailing routine)! They have debt default swaps against Greece going bankrupt. They would rather not be paid at all as Greece collapses (and collect the full value of their Greek bonds by their insurers) than be paid 50 per cent in a deal to avert further social disaster. In other words, the life of a private hedge fund is untouchable. If things go catastrophically wrong financially, even if it is your own greed at fault – you blackmail the state to bail you out. But if the state has a problem, you turn and run, leaving Europe in the grips of a vicious cycle of austerity. This was recently well summarised by the economist Professor Richard Wolff, in the context of the downgrading of countries bond ratings because of their failure to implement enough austerity (from the bankers' point of view):

"So the creditors are now pressing governments to ensure the safety of the national debt (to themselves)... The references to "satisfying the markets" simply disguise the whole outrageous process. The crisis drama deepens: creditors' pressure on governments increases austerity policies that increase mass opposition that frightens creditors who increase their pressure on governments..." (Wollf, 28th December, 2011)

This shows that bankers are (a bit) worried by political fallout, if only in so far as angry and resisting citizens can adversely affect profits. But cheeky? Absolutely, because the European states are only in this much debt because they handed over the contents of the public vaults to the bankers, no less than three years ago. So Offe's d), his idea that states must hide their role in markets. What is the political fallout? How much does it matter that we can see the state as 'managing the common affairs of the whole bourgeoisie' as Marx once put it?

Well the most obvious answer, for capital, is not much. Outside of the social crisis, profits are up. Why? I can only think that it is because capital has been so successful in already building its new life in the tax haven bunkers used to store the majority of the banks' money. Before the divorce with the European state, the mistress offshore was well prepared! And here is why this all matters a lot for Africa, because from these tax havens (and shored up with European tax payers money), the banks go raiding into the economies of Asia and Africa, whose peoples and environments are vulnerable from poverty and prior historical disadvantage (caused by prior European colonisation). The banks use ephemeral private equity funds and special purpose vehicles, to take control of the commanding heights of whole industrial, energy, infrastructure and mining sectors. Their underling companies, never watched that attentively, then ensnare children and their mothers to mine cadmium for phone cases in Congo, HIV/AIDS orphans to break stones at quarries or pick rubbish at landfills, and young men to risk life and limb in unsupported mine shafts, while the investors, directors and shareholders greedily suck profits into their offshore funds.

Take the case of South Africa, where the private equity market is worth ZAR100 billion, with the majority offshore and dedicated to infrastructure, energy and mining. In actual projects onshore, only about 20 per cent of these funds would routinely do environmental impact assessment. The risks of killing people in industrial accidents, or despoiling nature, or exploitative employment practices, and the risk of being found out for any of the above, are generally the property of the onshore business partner, or government in the cases of public private partnerships (for example, the Africa Infrastructure Funds in Mauritius and the N3 toll company). The only risks the private fund carries is that affected communities might chance litigation (low) or that sites might be disturbed by protestors (also low, given police practices). The asset related risks are held by the construction and implementing partners, (such as landslides, cost overruns), or government (community opposition, low usage for roads), whereas the income stream from the underlying asset (the ATM that is the tollgate in the case of roads) flows straight offshore into the fund.

In short, banks and their funds have successfully globalised social crisis. As European states should have known back in 2008, you don't kill a snake by feeding it! So are there now grounds for a deeper global solidarity between the two continents? European citizens (in good times) have looked the other way for so long about how banks have historically privileged them, and exploited other people, that many in Africa will find it hard to be empathetic to a struggling Europe, particularly since levels of social deprivation in 'off grid' Africa remain acute and arguably worse. But peoples in both continents are being abjected by the same (newly fattened) banks and funds, so there has never been more expedient reason to work together.

References

Offe C, (1975), "The Theory of the Capitalist State and the Problem of Policy formation", in L. Lindberg et al. (eds.), Stress and Contradiction in Modern Capitalism, Lexington, Mass.

The Independent, 15th January, Thousands of horses abandoned by owners last year

The Independent, 14th January, While technocrats haggle, ordinary people feel the pain

Richard D. Wolff: Professor of Economics Emeritus, University of Massachusetts, Amherst (28th December, 2011).