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Europe’s real bailout: most of the money is still going to banks


4:51 pm - June 16th 2012

by Frances Coppola    


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According to James Mackintosh of the Financial Times, JP Morgan produced some figures today that showed where the money provided to Greece in its much-publicised bailouts actually went. Here’s what James said on twitter:

JP Morgan estimates only €15bn of €410bn total “aid” to Greece went into economy – rest to creditors. No wonder they are cross

No wonder indeed. The price they paid for those bailouts has been severe cuts in public spending and five years of deep recession. Their adult unemployment is now about 20% and their youth unemployment over 50%. And there is no relief in sight, only further cuts and deeper recession. The Greek economy is collapsing.
No prizes for guessing who the main creditors are, either. Banks, of course.

This fun interactive graphic from Thomson Reuters shows which countries’ banks are the most exposed to Greece and therefore, presumably, have benefited the most from the bailouts.

In the most recent bailout, the private sector took substantial losses. But they had already sold a lot of it. Guess who they sold it to? The ECB and the IMF – neither of which took a haircut. So quite a bit of the bailout money has also gone to those institutions. But their purchases of that debt were also effectively a rescue of the banks that were overexposed to Greek debt.

So directly or indirectly, the main beneficiaries of Greek bailout money have been French and German banks. “Aid” to Greece? Anything but. The Greeks can be justifiably angry that their economy has been wrecked in order to fool German taxpayers into believing that they were rescuing a profligate southern state when actually they were bailing out their own banks and protecting France.

For Portugal, the main beneficiary has been Spanish banks. Ireland is interesting, because the banks most exposed are UK banks, though closely followed by German ones. It would seem that despite the UK’s steady refusal to participate in Eurozone rescue packages, some of the bailout money is propping up its banks. Nice.

The Spanish bailout acknowledges that the main problem lies with the domestic banks not the sovereign, and therefore imposes “austerity” – of a sort – on the banks, not the people. It is the first sovereign “bailout” to do this. But it won’t remain like that for long.

Eventually Spain will require a sovereign bailout – at which point the screws will be turned on the Spanish people, even though they are already buckling under self-imposed austerity measures and have adult and youth unemployment rates higher than Greece. The Bundesbank’s Jens Weidmann is already making noises about higher taxes and deeper spending cuts for Spain

By now it should be apparent where the bailout money has mainly been going, and – more importantly – where it will go when first Spain and then Italy require sovereign bailout. Yes, the UK and Spanish banks have benefited. But they aren’t the main beneficiaries overall.

The Thomson Reuters graphic shows that the principal beneficiaries of bailout money are French and German banks.

So Germans, too, should be angry. Not with the Eurozone sovereigns, but with their own banks and the French banks. Because it is the reckless lending of those banks, primarily, that has brought the Eurozone to its knees.

Yes, we can blame the half-baked Euro for the trade imbalances within the Eurozone, and the incompetent ECB for the crippling deflation in the periphery that is now dragging the entire Eurozone into recession. But the debt crisis – that was created by banks.


A longer version is here.

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About the author
Frances is an occasional contributor to Liberal Conspiracy. She spent 17 years of her life working at a senior level in banks, but now is a professional singer, singing teacher and image consultant. She blogs here.
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Reader comments


I broadly agree with the narrative here, but I think you’re over-sanitising Greece’s position.

German and French banks lent money to the Greek state, which was stolen/wasted; the current “bailout” is not of Greece but of German and French banks. But Greece’s fundamental problem is that its government borrowed shedloads of money, which was then stolen/wasted.

Spain, like Ireland and the UK, is in this shit because of its banks’ stupid decisions despite having a fairly fiscally responsible government. Greece is the opposite.

dsquared’s comment on Twitter is also relevant: “I swear some folks, if you paid a mortgage off for them, would say “Ha! All the money went to creditors! Nothing for me, all for banksters!”

Creditors before citizens – shows how capitalism dominates our thinking – so sad.

Creditors choose to lend – they take risk : correction, they used to take risk. Now they expect no risk, large returns and if necessary paid by increased taxes, benefit cuts, public sector cuts, and public servants reducing wages.

What a fair society we have created !

4. Luis Enrique

When a sovereign is bailed out, where can the money go?

It can go to replacing old debts with new – the sovereign can’t pay it’s debts, so the bail-outer lends it new money with which it pays off old debts. In this sense, when there is a sovereign debt crisis a bailout *means* paying off creditors. If anybody thought the bailouts were not about paying off debts, they haven’t been paying attention.

But a bailout can also mean allowing the sovereign to do net new borrowing, and if that net new borrowing isn’t spend servicing debts, what has it been spent on? The real economy, i presume. So I guess JPMorgan is saying that since the bailouts Greece has only had 15bn of net new borrowing in this sense. I am surprised by that but maybe so, shame Macintosh provides no link or further details.

“Aid” to Greece? Anything but.

Dsquared puts it best. What’s the counterfactual? If Greece hadn’t been lent new money to pay off its debts, what would have happened? This is what determines whether the bailout has aided Greece. I’m not sure the “anything but” conclusion is warranted.

But the debt crisis – that was created by banks.

What about non-bank lenders? But beside that, any debt requires a lender and a borrower, I don’t know how you decide the lender creates the problem.

Hands up who wants to see banks more regulated and take less risk?

Now, what did the regulations say about EU sovereign debt again? Pre-2007 if you think EU banks should have held less EU sovereign debt, in addition to recognising that the regulations wer sending the opposite message you need to ask how current account deficits would have been financed. Either you are retrofitting a mechanism to, in effect, prevent those current account balances from having occurred, or you are saying somebody else ought to have financed them. Who? And how would we be faring now if more non-bank lenders had done it? I don’t know.

5. Churm Rincewind

Well, sort of. An irresponsible loan is the result of an irresponsible lender, and/or an irresponsible borrower, and/or an irresponsible political/regulatory regime.

So I don’t buy the argument that the debt crisis was “created by the banks”. Yes, they were a necessary part of the structure. But, as John B points out, it’s arguable that in the case of Greece, their politicians must take much of the blame.

So I’m not sure what course you’re recommending. Do you think the banks should be allowed to fail?

6. Frances_coppola

2 john b

dsquared’s comment is simply silly. The mortgage hasn’t been paid off. All the bailout money has done is meet two mortgage payments. If the mortgage HAD been paid off, we would not be playing the bailout game again and again.

I’m not exonerating Greek politicians. They were stupid and corrupt. But so were the banks.

4 Luis

Personally I take the view that borrowers and lenders are equally responsible for problem debts and the best solution is often a negotiated one where both take a writedown. In the case of Greece that has of course happened to some extent, as I said in the post, but much of the debt had already been sold on to creditors who were not going to take any sort of writedown. The bailout of banks is not just the money lent to Greece but also the money provided to banks by the ECB. In my view the official sector should also be sharing in the writeoffs.

Greece has not been lent new money to “pay off its debts”. Part of its debts have been written off, not paid. The rest remain outstanding. What would have happened if Greece had not been lent the money is that French and German banks would have failed and their governments would have bailed them out directly. I would have thought that was obvious from the post. What kind of world is it that keeps banks afloat at the price of 22% unemployment? The last time banks trumped people in that way was in the 1930s. Why are we repeating it now?

5 Churm Rincewind

Sunny unfortunately cut the last paragraph of my original post, or you would know what I think. It is up to the governments of those countries to decide whether they wish to bail out those banks or let them fail. Or, more correctly, it is up to their electorates. Those electorates are being given no choice at the moment. Their banks are being bailed out whether they agree or not, and they are being systematically misled into believing that they are bailing out other countries when in fact they are bailing out their own banks. If they knew the truth they might decide otherwise.

Germans have as much reason to be angry with the way this crisis is being handled as Greeks do – but they should be angry with the banks and the politicians, not with the people of other countries.

7. Luis Enrique

Greece has not been lent new money to “pay off its debts”

Frances, I think you misunderstand. You have written a post saying that bailout money ended up in the hands of banks – how did it get there if not because the banks held Greek debt which has been paid off? The the bailout involves lending Greece money to pay off its debts, but the old debts are replaced with new debts. It’s like if you had lots of debt, and I lent you money to pay off yours debt, you’d then owe me. The debt is still outstanding, as you put it.

What would have happened if Greece had not been lent the money is that French and German banks would have failed…

Why would the banks have failed? Because Greece would have defaulted. I think that means Greece would have been kicked out of the Euro, unable to fianance it’s current account deficit or government defiicit, and it would have been in big trouble. As much trouble as it is in now, or worse? That’s the question, and I don’t have the answers, but it’s just wrong to say the banks were bailed out at the cost of 22% unemployed as if the Greek economy would not have been devastated by everything that would have followed from not getting bailed out.

8. Frances_coppola

7 Luis

I understand perfectly well. Replacing an old debt with a new one leaves the debtor as indebted as before. From their point of view, the debt has not been paid off – it has been restructured, but they still owe the money. As I pointed out, some of the debt has actually been written off – but not enough of it to enable the Greek economy to recover. Writing off much more of the debt is needed but will not happen while the official sector refuses to take losses.

Writing down debt to a sustainable level would directly help the Greek economy (and others: this post is not limited to Greece), but it would cause banks to fail. That is not the same as default.

” In the most recent bailout, the private sector took substantial losses. But they had already sold a lot of it. Guess who they sold it to? The ECB and the IMF – neither of which took a haircut. ”

Could you tell me the mechanism whereby the private sector sold Greek paper to the IMF? The IMF only deal with national governments and never lend to the private sector. One can’t blame the IMF for not taking a haircut when their rules forbid them from taking a haircut. They can only disburse IMF funds on the basis that they are a priority creditor. Therefore, only complete failed states fail to repay the IMF. The IMF is one of the institutions to get the Left howling at the moon. However, they are not the guilty party in the Greek debacle. The European institutions are entirely to blame because if the IMF had been in charge things would have been handled quite different. Dumping Greek debt onto official bodies such as the ECB was predictable and rational when the private sector had such notice about what was going to happen. Only vulture funds and the mentally insane were buying it after about 2010.

I think it is a mistake to paint a picture of poor innocent Greece labouring under the weight of repaying foreign creditors. Not that I am saying you are doing so. They are not paying 1 cent. Other people are paying their debts and currently financing the state that they have built for themselves. Every time they used their public services without paying the taxes to support such expenditure they benefited from the spending that Greece borrowed. Of course the ECB as an official creditor could not tolerate a haircut because that would mean Greek collateral was no good and they would be forced to stop accepting Greek collateral i.e. effectively expelling them from the monetary union.

I think the mistake in this article is to lump all the peripheral nations as one crisis. However, I know that you recognise that their crisis all had different causes. Unfortunately, the trap that binds them is the same and we all know what that is. To describe lending in the Spanish and Irish overinvested property markets as ‘ reckless ‘ is fair comment. However, we have reached a sorry state in the ‘ European project ‘ if European institutions lending to a sovereign state to pay their pensions and public services is considered reckless. Especially since Basel and European rules stated such lending to governments could be accounted as risk-free. We can’t ex post facto blame institutions for believing the rules.

It was pretty obvious to me from early 2009 that the Eurocrats were in denial and did not understand the crisis that they had created. All their half-baked solutions since just reinforce that point. All their suboptimal solutions are because they are trying to hold a system together that does not work. Asking them to go for different and optimal solutions would often be the same thing as asking them to unravel their project. Therefore, we get half-baked interventions hoping to buy time in the vain hope that things turn around. What is actually happening is the cross-border financial flows that make the single market work are retreating to national borders. They have risked the very existence of the single market, rather than accept that some EZ members would be better leaving.

Banks are just the conduit that makes the single market work by enabling cross-border flows of capital. Blaming them is like blaming the electricity transmission network for giving you a shock when you touch an exposed cable. The blame should be placed on the inadequate European architecture.

10. Frances_coppola

Richard,

I am slightly the victim of Sunny’s editing! The original post does mention the effect of the Euro and the ECB’s policies.

My bad re the IMF. I should just say the ECB has bought Greek paper. But IMF lending to Greece has effectively gone straight to banks – which was the point of the post. It may not actually have bought Greek debt from banks, but it has still bailed them out. To be fair, as ensuring financial stability is the IMF’s purpose, bailing out banks via indebted sovereigns to many people is a reasonable use of its funds. And your comment that the IMF would have handled things differently is simply wrong. The IMF is a member of the Troika which is imposing intolerable conditions on bailout recipients, and its record on handling sovereign bailouts is appalling. Go and look at its behaviour in the Asian crisis, for example. Its bailout conditions made things worse, not better.

If by “European institutions” you mean banks, I’m afraid I must disagree with you. Whatever the Basel rules regarding risk weightings for sovereign debt, the banks should have done their own due diligence on investments. I do consider that the lending done by European banks to European sovereigns was reckless. But even if it was not reckless at the time, it was commercial lending, and the rules of commercial lending are such that if the debtor is unable to pay back the loan, the creditor loses their investment. Unfortunately that has not proved to be the case with sovereign debt.

I do not think it is reasonable to exonerate banks for the sovereign debt crisis, I’m afraid. I absolutely agree that the European economic architecture was fundamentally flawed. But both countries AND investors chose to take advantage of that fatal flaw. Why should those countries suffer but not investors?

Frankly, calling banks “just a conduit” is a total misrepresentation of their role in developed economies. Passive, they aren’t.

And saying that Greeks “aren’t paying 1 cent” is ridiculous. The Greek economy is now in the fifth year of one of the most severe recessions in recorded history and there is no end in sight. The country is running out of food (which it imports), medicines, oil. There are shortages of key workers such as nurses and midwives because of public sector job cuts. Don’t tell me they aren’t paying. They are – with their lives and with their futures. As are the Irish, Portuguese and Spanish, with much less justification. The willingness of the Eurozone leadership to trash weaker economies in order to bail out banks in stronger economies is disgraceful.

good EU PLAN B:
Let South be obrero / migrant workers for Euro’s again.
This is how Eu once started.
Form the EU of willing of the North.
North is 80% anyway. what’s the point splitting between workers and spanish educated obrero’s …
Stop the debt AND flow free labour laws and south can pay.
A good economy needs dual labour laws. US/mexican. Chineese rual workers ect.

@ 10. Frances_coppola

Exactly a member of the Troika i.e. not in charge. The IMF did not want to be there at all and there is absolutely no need for them. Europe is rich enough to solve their own problems and just used the IMF as cover for their own inadequacy. The IMF warned from the beginning in Greece and then Ireland that the conditions and interest rate demanded was too high. They can’t be too explicit in their criticisms for obvious reasons, but reading between the lines they were never happy. However, the European thinking was to punish Greece and that would frighten the rest of the periphery into reforms. Did not work out too well.

When I say they would have done things different I mean their MO is default on external creditors, devalue, raise taxes, cut spending to generate a primary surplus. Reform the economy to prevent future economic difficulties. When you take the first two, which are the most important out of play they are working with one hand tied behind their back.

“…and its record on handling sovereign bailouts is appalling. Go and look at its behaviour in the Asian crisis, for example. Its bailout conditions made things worse, not better. ”

The IMF certainly did not handle the Asian financial crisis very well, which is why they reformed their rules on conditionality of loans. Look, there is some sort of idea that everything is going well with everyone holding hands singing kumbaya, and in marches the IMF to make life worse for people. IMF assistance is sought when nations have totally screwed up their own economy, they can’t fund themselves by internally generated revenue and no one else will lend to them. The fact that they need IMF assistance hardly suggests that they were pursuing successful economic policies. Therefore, some sort of reform is self-evidently required. Structural economic reforms are rarely popular but the governments of those countries use the IMF as a convenient scapegoat. The IMF tend to turn up at problem countries the way the fire brigade tend to turn up at house fires, neither cause the fires. However, since we see the IMF involved in countries making painful economic adjustments some draw the conclusion that the IMF cause the pain.

” I do consider that the lending done by European banks to European sovereigns was reckless. ”

Which is the same thing as saying that government spending on their public services was reckless. What you are implicitly arguing is for governments to run balanced budgets. Yet, moving towards that goal is imposing ‘ intolerable conditions on bailout recipients. ‘ Lending to them is reckless and not giving Greece more money is intolerable. Do you consider the institutions lending over £100 billion per year to the UK government to be reckless?

Since Greece has a trade deficit and a primary deficit there obviously can’t be 1 cent in net repayments. Don’t think for one moment that I agree with how Greece and the rest are being treated. I think it is appalling but never expected anything different. However, the notion that the suffering in Greece is down to repaying foreign creditors is just not true. What you describe about shortages etc is precisely what happens when financial flows stop. Greece needs to leave the EZ and receive aid, not loans. That will be their route to recovery.

13. Frances_coppola

Richard,

The price that is being paid for bailouts is economic devastation. All the bailouts do is preserve the status quo – indebted sovereign and insolvent foreign banks – while the economic devastation makes Greece ever more dependent on foreign aid to pay its creditors. It is no solution to the problem. Really that was my point in doing this post, and it is consistent with comments I have made previously, that Greece needs debt forgiveness and economic aid, not bailouts that go straight to its creditors. On that you and I are in agreement, I think.

The point that everyone is missing in this post is the insolvency of banks. The fact is that European banks are in dreadful shape. Their balance sheets are appallingly risky and they are seriously under-capitalised. We know that Spanish banks (especially the cajas) are in trouble, but what is not so often remarked upon is the exposure of French and German banks to the rest of Europe and the implications of sovereign debt writedown or default for these banks. Which is a pity, because all the bailouts so far – including the Spanish one – have been about preventing European banks from collapsing (directly in the case of Spain and Ireland, indirectly in the case of Greece, Portugal and Italy – the LTROs were a bailout of European banks exposed to Italian and Spanish debt, of course). As you know from previous posts I have made, I don’t think this is the right course of action, and on the original of this post I make the same point again. Bailing out the banking system, whether directly or indirectly, without reforming it and clearing out the dead wood won’t solve the problem. In my view Europe will remain in its economic death spiral until this nettle is grasped.

14. Luis Enrique

Frances,

no doubt you are correct to say that more debts need writing-off, but I think I’m right in saying that although the rules say the ECB can’t take a haircut on the Greek debt it holds, it can roll it over forever (monetize it) effectively writing it off. So that might be the way out of this mess.

on the question of whether all these bailouts preserve the status quo of indebted sovereign and insolvent foreign banks as you put it … well according to the OP, the Greeks have been lent 410bn by the troika which has gone straight into the hands of its creditors, or banks as you prefer to put it, so isn’t that helping restore solvency to banks? i.e. the status quo of indebted sovereign is preserved but the solvency of foreign banks is changed.

Now … I don’t know (perhaps Richard W you can tell me) whether that entails buying Greek debt at the prevailing market from banks, or banks holding Greek bonds to maturity which the Greeks are honouring using money borrowed from the troika and I don’t know whether European banks are insolvent with their assets marked to market – but it could be that European banks would only be insolvent in event of default (or maybe some are insolvent with assets marked to market but wouldn’t be if they could hold the bonds to maturity and have them redeemed) so that far from preserving the status quo w.r.t to the banks at least, the bailouts are actually restoring solvency to the banks. Why would any EU bank be insolvent, if we knew it could hold the PIIGS debt to maturity and see it redeemed?

If you want to view PIIGS debt at toxic assets, all those toxic assets are moving from the banks (at no loss) into the hands of the EFSF, IMF and ECB. Now of course the Spanish and Italians haven’t been bailed out yet and maybe the troika lacks the firepower, so maybe the bottom line is that that bank solvency is still rests on PIIGS sovereign solvency. Nonetheless, the headline of this post if about shovelling money into the hands of banks, and when it comes to banks, isn’t that what “clearing out the dead wood” means?

by the way, the above exchange is very puzzling – you “understand perfectly well” that when somebody is lent money to pay off their debts, they remain in debt (to the new lender), you understand that the Greeks had to be bailed out (lent new money) because they couldn’t pay their debts, and that having been bailed-out the money has gone straight into the hands of creditors (paying-off debts), yet you insist the Greeks have not been lent money to pay-off their debts. Weird. I think you are being pedantic about the meaning of the phrase “pay off debt” – it does not mean the debts have vanished – contrast being given money to pay-off a debt with being lent money to pay off a debt.

Also I think by seeing the bailouts solely as things which hurt the Greeks but help the bank you are completing ignoring the question of how much the Greeks would have been hurt if they hadn’t been bailed-out, had to default and so on.

I couldn’t agree more with what Frances Coppola writes.
But John B is right to point to the Greek problems too: there was much profligacy, the economy is far from a modern free-market and efficient welfare state, and the governments (not least the one led by the party that has just “won” the election) fudged when applying for being a eurozone member (with a little help from… the banks!).
EU’s moment of truth is nearing.

16. Planeshift

One of the things that strikes me about the Greek situation is that the menu of options being presented to Greece is very much of the ‘heads I win, tails you lose’ variety.

It’s quite clear that efforts to keep Greece in the euro are not being driven by concern for the poor of greece, but by considerations for the solvency of banks and a political desire to keep the euro-project together. As noted, this is leading to a massive cut to services in Greece that is putting lives at risk and leading to a decade or more of austerity. With no convincing argument that the long term situation will be any more sustainable or lead to a more prosperous future.

But the alternative option of leaving the euro and re-introducing the drachma cannot be regarded as a pain free option either. The price of imports will rise even further, and there will still be the extremely tough process of ensuring the greek state becomes solvent – which it must do even if it defaults on the entirerity of the debt. Furthermore, wealthy greeks will continue to hold assets in euros, and thus see their wealth increase from a devaluation that will enable them to aquire even mroe assets. It’s likely that the euro will also enjoy a staus as a semi-official currency in the same way that it does in croatia and similar places – tourists will be encouraged to use euros and businesses will use it – possibly for tax reasons. The poor will suffer the most here, particuarly when attacks on employment rights and public services continue as part of the process in which the Greek political class make the economy ‘competative’.

Its clear that there are numerous people in both the greek political elite and the financial sector should be carrying the blame – and in a just world many would now be serving lengthy jail sentences. But I cannot honestly see what the solution here is, as all options seem to involve a lengthy period of austerity and 3rd world living conditions.

I’m just wondering whether any economists have developed a practical route map that could see Greece developing a working mixed economy within a few years, and options that don’t leave the poor in Greece facing decades of poverty.

17. Frances_coppola

14 Luis

1) No, the ECB rolling over its holdings of Greek debt wouldn’t solve anything. Greece still has to pay interest on them, which will become more and more difficult as the economy collapses further. Writing them off is the only thing that would really help.

2) No, indirectly bailing out banks while trashing the economies of the countries that issued the debt does not restore banks’ solvency. The value of sovereign debt is related to the economic prospects of the issuing country. PIIGS debt was overvalued in the pre-crisis years and its value is now falling. It will not return to pre-crisis levels. Banks must recognise the fair value of that debt in their accounts: whether they do so by marking it to market or by impairing it is a question of accounting treatment. Therefore as the PIIGS debt simply is not worth as much as it was, the banks that have relied on it for their capital have suffered a real drop in net worth despite the bailouts.

3) “Shovelling money into the hands of banks” and “clearing out dead wood” are NOT the same thing. In the original of this post I suggest that Europe would do well to consider creating an equivalent of the US’s FDIC – this may actually form part of the banking union proposals. Insolvent banks should be RESOLVED – nationalised, broken up, asset-stripped and either sold or wound up. Throwing money at them doesn’t solve their problems.

4) I never said that Greece hadn’t been lent money to pay its debts. Of course it has. That’s the whole point of the post. It borrowed money to pay its creditors but not to mend its broken economy. Consequently its economy is collapsing, it still has unsustainable debt and it will have to keep on borrowing to meet its obligations in future. If someone borrows money to settle a debt, THEY STILL HAVE THE DEBT. The bailouts are a Ponzi scheme.

5) There is no solution to this that doesn’t involve pain for Greece. And they have pain now, and will do for years and years unless a better solution than bailouts and austerity can be found. What is being avoided is pain for France and Germany.

18. Frances_coppola

16 Planeshift

I looked at this a while ago and was appalled. The inflation of Greece’s GDP after it adopted the Euro far exceeded its actual production during that period. Furthermore, it has LOST productivity since adopting the Euro, because it has not been able to compete with Germany or with countries outside the Eurozone. To become competitive again it has to decline right back to BELOW where it was when it joined the Euro. It has to do that whether or not it leaves. If it leaves it will do so quickly and catastrophically. If it stays it will do so by means of a long-drawn-out agony which could last for decades. But decline to third world standards it will.

19. Luis Enrique

Frances

1) Well clearly it’s not as helpful to Greece as a 100% write-off, but that does’t mean it wouldn’t be helpful. Having the ECB roll-over Greek debt will make a big difference to the interest rates it has to pay, and would ease the burden considerably (especially if the ECB effectively lends money to cover interest payments – I’m not sure of the regulatory hurdles here but there are ways and means).

incidentally, if this was the UK, the cost of paying interest on debt held by the BoE wouldn’t matter because the BoE remits profits to the Treasury. I’m not sure how that process works with the ECB.

2) What do you think is happening to all this money being lent to Greece? Your post says 410bn has gone to creditors – how exactly? What transaction do you think has taken place? Yes PIIGS debt ain’t worth what it was. I don’t know what you mean by banks “relying on it for their capital” – but if PIIGS debt made up a large part of their assets, then as the value of the assets fall they head towards insolvency. However if those bonds are held to maturity and redeemed, they are fine and isn’t that’s what’s happening with these bailouts? The whole point is that PIIGS debt is being taken out of the hands of banks and into the hands of the troika. But I have already tried to explain that to you, to no avail.

3) okay, forget the phrase “clearing out dead wood” I don’t want to get into another pointless semantic argument with you. Look, you have banks that are in trouble because they hold PIIGS debt which, if defaulted on (or maybe just if marked to market), means they are insolvent. An IOU for £100 may be priced at £50 if people currently think there’s a risk the £100 won’t be repaid, so creditors holding those IOUs may look insolvent marked to market, but if the £100 is repaid, they are fine. There are two things that can be done to these (at risk of being) insolvent banks – one is wind them up, which I presume is what you mean by “clearing out dead wood” but the other thing you could do is take that PIIGS debt off their hands so that the insolvency (risk) goes away, and you don’t have dead wood any more but solvent banks. That’s what I meant by shovelling money into the banks having the effect of trimming dead wood. I can’t understand how you think the troika lending to Greece and Greece paying off its creditors is having no impact on the solvency of its creditors.

4) I never said that Greece hadn’t been lent money to pay its debts Whoa there! Check first sentence of the second para of your reply to me #6. I’ve repeatedly said that being lent money to pay off debt leaves you in debt, but here you feel the need to say that again IN CAPITALS. puzzling, to put it nicely. n.b. swapping old creditors for new is not really a ponzi scheme.

5) Yes, better solutions are needed. Everybody agrees on that. My point was merely that the beneficiaries of the bailouts are anybody who is better off with the bailouts than without them, and that might include Greece, despite the gruesome time it’s having. Your OP doesn’t make this comparison with the without-bailout scenario but only looks at the pain being currently suffered by Greece. If I knock you to the ground with a flying rugby tackle that will hurt you, but I might have knocked you out of the way of an oncoming car; in your OP I think you are only talking about the pain of being knocked to the ground, so to speak.

20. Frances_coppola

Luis,

I really think you should read the post again. You’re accusing me of all manner of wrong things that I have not said.

1) The ECB is making money from interest payments from Greece. It returns nothing to them.

The solution to a debt problem is not more debt. You seem to think that as long as the Troika carry on lending more and more to distressed sovereigns to enable them to meet their interest payments and refinance their debt then eventually everything will sort itself out. No it won’t. All it will do is make both the sovereigns and the holders of the debt more and more dependent on handouts from supranational institutions.

2) What is it about impairment of sovereign debt that you don’t get? The debt is not worth what it was. It doesn’t matter who is holding it nor how long they hold it for. The assets are either marked to market, or impaired if they are being held at book value. Either way the holder has lost net worth. Arguably that also applies to the ECB’s holdings.

However, the bit you say you don’t understand is the key point here. Sovereign debt was assumed to be risk-free and therefore met the criteria for “safe” assets for investment to increase Tier 1 capital (capital is the gap between assets and liabilities – increase holdings of risk-free assets, you increase shareholders’ funds). Many of those sovereign assets now do not meet those criteria. Therefore the Tier 1 capital of these banks has declined. It was pretty low in many cases anyway. Add that to the impairment and you have a solvency problem. The ECB does not generally buy these assets outright – it bought some under the SMP but is reluctant to buy more. It does accept them as collateral against funding, which obviously raises its risks in providing that funding. There are already question marks over the solvency of the ECB.

At present there is no guarantee at all that these assets will or can be held to maturity, because there is no commitment from anyone to ensure that they will be repaid. The Troika is agreeing bailouts “as required”, and each one is more difficult than the last. Firefighting, I would call it. There is no long-term plan for reducing this debt to a sustainable level and/or restoring the economies of the countries concerned so that they can afford to pay it. It would be foolhardy in the extreme for banks to hold this debt at book value without impairment (though I bet some are), and it is therefore quite wrong to regard the institutions that depend on this debt being repaid as “solvent” even though they are being bailed out.

3) The sovereigns whose banks are exposed to PIIGS debt may choose to bail out their banks. Or the Eurogroup may choose to recapitalise distressed banks directly. Or there may be a mixture of recapitalisations and resolutions decided on a case-by-case basis. None of those is happening at the moment. The present arrangement is dishonest and counterproductive. The bailout of French and German banks is described as “aid” to distressed sovereigns. It is not. It is aid to investors, not sovereigns, and should be described as such.

4) I said Greece had not been lent new money to “pay OFF its debts”. That was a response to this remark from you in #6:

“If Greece hadn’t been lent new money to pay off its debts, what would have happened?”

What I said is completely accurate. Greece has not been lent any money to pay OFF its debts, as you suggested. That would be impossible.

5) I do not ignore the “no bailout” scenario. Nor am I suggesting that there should be no help for Greece. On the contrary, actually. But I object to billions of euros being provided to French and German banks in the name of “helping Greece” when it does nothing of the kind.

21. Luis Enrique

Frances

“You’re accusing me of all manner of wrong things that I have not said.” yeah well I’m not exactly feeling like you’re paying much attention to what I write either – it often feels that way in comment threads. I think the solution is to try and go out of your way to acknowledge your interlocutor’s points, and your own errors and try to clear up misunderstandings. See point 4) … again you say “Greece has not been lent any money to pay OFF its debts, as you suggested. That would be impossible” after I’ve written many times that being lent money to pay off debts still leaves you in debt, and you think I’m not engaging with what you write! I don’t think the word “off” carries the weight you place on it – if I said to you I have borrowed money to pay OFF my credit card debts, you’d understand what I meant perfectly well without thinking I was claiming to now be debt free.

1. well I think that medium-term ECB financing of PIIGS sovereign debts would ease the pressure on them, I didn’t say it would be sufficient to solve the problems. In the case of Greece, if they knew they weren’t going to have to pay down any primary (i.e. reduce the stock of outstanding debt) or even pay interest out of taxes, because the ECB has got their back for years to come, that might give them space to work things out, I don’t know.

2. yeah, I understand impairment, see my discussion of “impairing” IOUs. You haven’t answered my question about what you think has been going on to get this 410bn into the hands of creditors. Greece has needed this money because it has had to repay bonds that have reached maturity – if those bonds are held bank banks, that helps bank solvency doesn’t it? Nor have you paid any attention to the implications for bank solvency for PIIGS debt leaving bank balance sheets and finding its way onto troika balance sheets. In the limit, if 100% of PIIGS debt was taken on by the troika, why would any banks be in trouble? Therefore as the percentage of PIIGS debt held by the troika rises and held by banks falls, the solvency of bank is improved.

[I see what you meant about capital; I just figured crude capital = assets-liabilities and just lumped PIIGS debt in with assets].

3) yeah, recapitalisations are needed and preferable to indirect bailouts. I was merely arguing that indirect bailouts do impact bank solvency. Yes it helps French and German banks, but if Greece is better off with bailouts than without, then it helps Greece too. You say bailouts do not help sovereigns and you say you do not ignore the no bailout scenario but I don’t see any argument that Greece would be better off under the no bailout scenario which is a necessary condition if you want to say the bailouts don’t aid Greece.

5) you don’t think the Greeks should not have been lent money to pay off off their debts. I can’t bear to ask what you think would have happened to Greece in that event.

“The solution to a debt problem is not more debt.”

C’mon. The point of the new policies set out in George Osborne’s recent speech at the Mansion House is to channel low interest funds from the Bank of England to the banks so the banks can lend more to non-financial businesses and to consumers so they can spend more in order to boost aggregate demand.
http://www.telegraph.co.uk/finance/economics/9332318/George-Osbornes-Mansion-House-speech-in-full.html#

Evidently, George Osborne has no objection businesses and consumers taking on more debt. What Osborne objects to is the public sector taking on extra debt to reduce the pace of the public spending cuts.

23. Planeshift

” To become competitive again it has to decline right back to BELOW where it was when it joined the Euro. It has to do that whether or not it leaves”

I’m inclined to agree, with the caveats that this is a process likely to be most harmfall to the poor, and that the wealthy elite will probably see this as an opportunity (hold euros in international accounts, wait for new drachma to devalue, purchase property at rock bottom prices….).

One thing to note is that whilst most informed people continue to speak of long term difficulties, no investment is likely to take place. So the bailout won’t work whilst the markets essentially regard the long term prospects of Greece to be grim. Option 2 of leaving the euro at least has the benefit of enabling the emerging greek state to declare a new start, and thus aiming to rebuild confidence. It’s also obvious, that if we use a business analogy, Greece has been trading insolvently for years – and would have been liquidated a long time ago

I confess I don’t really know how the greek state operates beyond wikkipedia, but one obvious thing strikes me from simply looking at a map – that is that a centralised treasury responsible for the majority of financial management (similar to the UK) is a particularly innappropiate model. Wikkipedia notes that Greece falls into this category, with regions dependant on central government control and lacking a financial base.

It would seem more sensible for Greece to adopt a federal structure (or further) with a great deal of devolution and autonomy for regions and cities – and at this level is where the majority of taxes should be collected and spending should take place, with only small amounts sent upwards to the centre for areas like defence. Sort of like Denmark or Switzerland.

To return to the business analogy, what we really need to be doing is setting up new financial entities for Greece (based on regions and localism) that are free from debt (the markets already seem to regard Greece as having defaulted) and can have a fresh start. Furthermore, by examining things on a regional basis, one would at least expect some parts of greece to be able to recover and attract new investment once this happens. Lenders will not lend to Greece, but would almost certainly be attracted by the prospect of lending to Crete – who have an obvious revanue stream in terms of tourists (tax hotels at 10% vat for example).

So perhaps the starting point in terms of a long term solution really needs to be about regarding old greece as bankrupt and in the past, and establishing new entities that can replace it and look to the future.

24. Luis Enrique

Frances,

I think there are few substantive differences between us – possibly the only ones are that I think indirect bank bailouts have an impact on bank solvency and that I’d be less confident in asserting the bailouts haven’t helped Greece.

Anyway, I came across this interesting discussion of the interaction between sovereigns and national banking systems from INET, thought you might like it:

http://ineteconomics.org/blog/money-view/lethal-embrace-thought-experiment

25. Frances_coppola

22 BobB

Osborne may think increasing debt is the best way of addressing a debt problem. I beg to differ.

25 Hi Frances – I’ve been away as guest of NHS (!)

How is business investment by SMEs going to rise without an increase in bank lending – which has been falling btw?

HMG is looking to net exports, business investment and extra spending by Britain’s heavily indebted consumers to make up for the cuts in public spending in order to maintain aggregate demand – when between 90 pc and 70 pc of public spending cuts have yet to come according to recent IFS estimates. As SMEs account for just over half of all business sector employment, prospects for future GDP growth are pretty bleak without more bank lending to SMEs – and Britain’s GDP is still running 4 pc below its previous peak in 2008.

Do make sure to read Martin Wolf on: A bitter fallout from a hasty union, in Wednesday’s FT. The graphs therein on the extent of government financing needs are very illuminating. It turns out that the financing needs of the UK government are relatively modest compared with a string of other countries.

27. Frances_coppola

25 BobB

Glad you’re back with us!

I would prefer to see elimination of the preferential tax treatment of debt financing and measures to encourage/extend equity financing for SMEs. Both of these have also been recommended by the IMF in its most recent report on the UK. It feels very odd indeed to be in agreement with the IMF on something!

I shall read Martin Wolf’s column with interest – thanks for the tip.

28. Frances_coppola

24 Luis

Yes, we are arguing over minor differences, really. On the major issue, which is the ineffectiveness of current policy in the Eurozone, I think we are agreed.

INET link is interesting – thanks.


Reactions: Twitter, blogs
  1. Toby Britton

    Europe's real bailout: most of the money is still going to banks http://t.co/MyZ6fEpB

  2. Stuart Rodger

    Europe's real bailout: most of the money is still going to banks http://t.co/MyZ6fEpB

  3. themuslimanarchist

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  4. AdrianWindisch

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  5. ? Márcia ?

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  6. Deirdre Mackay

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  7. Lanie Ingram

    Europe's real bailout: most of the money is still going to banks http://t.co/MyZ6fEpB

  8. Lanie Ingram

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  9. Jack Barker

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  10. riazbhatti

    RT @libcon Europe's real bailout: most of the money is still going to banks http://t.co/5CYRu4XU

  11. BevR

    Europe’s real bailout: most of the money is still going to banks | Liberal Conspiracy http://t.co/1IczvLzq via @libcon

  12. Laurence McHale

    http://t.co/nr2HYJse It's not going into the pockets of the working/unemployed Greeks/Irish/ Spaniards.. – Same old pockets same old lies

  13. Owen Blacker

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  14. Mad_as_Hell_UK

    @cka1970 @supajourno "JP Morgan est. only €15bn of €410bn total “aid” to Greece went into economy – rest to creditors" http://t.co/8oQacqa2

  15. Michael Bater

    Europe’s real bailout: most of the money is still going to banks | Liberal Conspiracy http://t.co/jW2J9tn4 via @libcon

  16. Michael Bater

    Europe’s real bailout: most of the money is still going to banks | Liberal Conspiracy http://t.co/jW2J9tn4 via @libcon

  17. Liat Norris

    Europe’s real bailout: most of the money is still going to banks | Liberal Conspiracy http://t.co/jW2J9tn4 via @libcon

  18. Liat Norris

    Europe’s real bailout: most of the money is still going to banks | Liberal Conspiracy http://t.co/jW2J9tn4 via @libcon

  19. Ermintrude

    Europe’s real bailout: most of the money is still going to banks | Liberal Conspiracy http://t.co/8AymkZur via @libcon

  20. Ermintrude

    Europe’s real bailout: most of the money is still going to banks | Liberal Conspiracy http://t.co/8AymkZur via @libcon

  21. David Davies

    The main beneficiaries of Greek bailout money have been French and German banks. “Aid” to Greece? Anything but. ~ http://t.co/VN9KZS7i

  22. David Davies

    The main beneficiaries of Greek bailout money have been French and German banks. “Aid” to Greece? Anything but. ~ http://t.co/VN9KZS7i

  23. Diana MH

    The main beneficiaries of Greek bailout money have been French and German banks. “Aid” to Greece? Anything but. ~ http://t.co/VN9KZS7i

  24. Michael Smith

    No wonder Greeks, Spanish and others are angry: European bailout money is going to banks not people http://t.co/PR3dUMSr

  25. Frank Owen

    Europe’s real bailout: most of the money is still going to banks http://t.co/3QlEtEvP via @libcon #Greece #Troika #Spain #EU #Eurozone





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