Saturday, February 7, 2015

Bail-Out of Greece or Bail-Out of Banks?

The above question is flooding twitter, blogs and newpapers once again. As valid as the question is, the answer is irrelevant for Greece.

My position on the Greek rescue loans has been clear and consistent from the beginning of this blog. I have called them 'the prodigal sin'. I have described them as follows: "The EU used Greece's balance sheet to bail out its banks and they called that 'help for Greece'". The rescue loans violated one of the most important principles in financial restructurings, namely that 'risk takers must remain risk carriers'. To top it off, I once even called for a Nueremberg Trial of EU elites for having committed this prodigal sin.

Having said that, I need to point out another thing, namely that the rescue loans, however ill designed they were, had no bearing on Greece's financial strength. The rescue loans did not overburden Greece with debt, as some think they did. They did not bury an entire nation under debt which was not even asked for.

Just suppose, for the sake of argument, that Greece's debt was 100 BEUR before the rescue. Those 100 BEUR were owed to a multitude of private foreign creditors. Now the EU made 100 BEUR in rescue loans so that Greece could pay off its private creditors. Fine, but at the end of this exercise, Greece had the same 100 BEUR of debt, only that it was no longer owed to private creditors but to the EU instead. It was only a change of creditors which has no bearing whatsoever on the level of debt of the borrower.

Not the Greek state should call for a Nueremberg Trial of EU elites because of this. Instead, it is the tax payers of the financing countries who ought to do that!

Now, what would have happened if the EU had not committed this prodigal sin? The private creditors would have had to write-down a very substantial portion of their Greek loans. Again, this would have had no bearing whatsoever on the level of Greece's debt. Suppose some major banks would have needed to be bailed out because of this. Again, no bearing whatsoever on the level of Greek debt. The tax payers' money would have been invested in those banks and in exchange for that, the tax payers would have received equity in those banks. For the rescue loans to Greece, the tax payers received nothing.

Finally, assume that some of the banks would have failed. Again, this would have had no bearing on the level of Greece's debt. Instead, it could have been quite dangerous for Greece. The liquidator of a bankrupt bank liquidates its assets at firesale prices. Whoever would have purchased the Greek assets would have put the kind of pressure on Greece as the vulture funds put on Argentina.

To summarize, from 2010-12, rescue loans totalled 247 BEUR, of which 206 BEUR went straight back to creditors via Greece's balance sheet. It was simply a change of creditors, no more. Had these 206 BEUR not rescued banks via Greece's balance sheet, they would have been available for direct bail-out's of banks. Personally, I guess that only part of that would have been necessary to bail-out the banks and the tax payers would have received nice equity in exchange.

The 'true help for Greece' was the 41 BEUR out of the 247 BEUR which stayed in Greece to finance the primary deficit, etc. Greece's austerity was due to the fact that the 'true help for Greece' was only 41 BEUR. It is - correctly! - being argued that the adjustment required of Greece was too much frontloaded. Ok, had the 'true help for Greece' been 82 BEUR instead of only 41 BEUR, the adjustment would have required much less front-loading. But it would also have required someone to lend 82 BEUR instead of only 41 BEUR.

To sum up: the myth is that the rescue loans allegedly overloaded Greece with debt. However, about 83% of the rescue loans were not fresh funds for Greece. They only replaced loans which had already been there. The overloading of Greece with debt was not done by the EU; it was done prior to 2010 by private lenders. The EU rescue loans only refinanced debt which had already been in Greece (and already spent, I might add). Those who blame the front-loading should be aware that this was not due to overloading Greece with debt but, instead, due to not providing Greece with enough debt.

At Y/E 2009, Greece's debt stood at 301 BEUR. At Y/E 2013, it stood at 319 BEUR. How did Greece get from 301 BEUR to 319 BEUR? I don't have the exact details but my estimation would be as follows:

301 BEUR + 41 BEUR (see above) + about 40 BEUR for Greek bank bail-out's - 60 BEUR of PSI = roughly 319 BEUR. Give or take a few billion, but what's a few billion Euro these days, anyway?


  1. You can repeat it as often as you like, use bold or hugest letters ;)

    The international opinion made by the international opinion leaders for obvious reasons prefer to neglect clear facts and make a story that serves their agenda.


  2. I feel deeply ashamed for what is obviously the base/part of the base of what is going on now between Europe and Greece. If this what you write, Herr Kastner, is true, and I do believe that, then I understand and support your idea for "a Nuremberg Trial of EU elites for having committed this prodigal sin".

    Do the EU elites of the present KNOW this? WHO knows this in fact?
    Those EU elites who know about and/or are/were a part of 'the prodigal sin' are responsible for all what it caused, and have to pay for it, or to cancel the debts that this criminal act has created.
    May those who know about this stand up and raise their voice, to take their pen, to inform the world. "Je suis Charlie" goes on and does not stop in Paris.

    1. I fully agree with Kastner's analysis of the causes for the whole mess. However, neither the bankers who were silly enough to lend too much money to Greek debtors nor the politicians who aggravated it by their policy will have to feel juridical harm.

      The reason is that the most extreme ignorance even when done fully knowing the consequences, is not punishable.

      Remember: With stupidity the gods themselves struggle in vain.


  3. I am sorry, but this post does not make sense. The whole point is that the European nations transferred the onus of a bailout of their banks who were exposed to Greece onto the Greek taxpayer (who those banks willingly lent to; has there been any reform of the German banking system for its gross incompetence in lending billions of euros to generally unproductive uses? No. Why is Greece only vilified?). Nobody is in any doubt that the Greek governments were incompetent and generally squandered the German Banks largesse on wasteful investment.

    But the reality is that if at the start of the crisis there had been an honest assessment, the debt would have been written down, and Greece would have started with a fresh slate. Instead, we have this current situation, where by moralizing the issue, everybody makes it seem like Greece is only at fault, when the reality is two parties entered into contracts.

    I would recommend reading this post:

    This as well:

    The IMF has also admitted that their projections for the troika plan were woefully off, and should not have entered into the program as it violated IMF protocol.

    1. The first commentator above said: "You can repeat it as often as you like, use bold or hugest letters ;)". You just proved him correct.

      If banks write-down loans on their books (i. e. they make loan loss provisions), that has no bearing whatsoever on what the borrowers owe them. The borrowers owe them the full amount of the loans unless the banks make a debt-forgiveness. To think that private creditors would have agreed to a debt forgiveness back in 2010, only a few months after the crisis broke out, is an illusion. In fact, the private creditors could have made life for Greece much more miserable than the EU did (see Argentina).

      "The whole point is that the European nations transferred the onus of a bailout of their banks who were exposed to Greece onto the Greek taxpayer" --- this is proof that you didn't understand my article and that you do deny reality. The EU transferred the cost of the bail-out's on to the tax payers of the countries which financed the bail-out. I as an Austrian would have a right to bitterly complain because I now have a minute part of the risk which previously banks like Deutsche had.

      What should have happened back in 2010 was a "restructuring/rescheduling" of the debt, i. e. an extension of maturities, a lowering of interest rates and some interest moratorium. That is the standard package for a sovereign financial crisis. For a nation of the First World (and as an EU member Greece IS a nation of the First World), it is inconceivable to expect a haircut after only a few years of crisis and without one-time destruction. Greeks should read up a bit on financial history, particularly its own history. Prior to this present crisis, Greece has - I believe - defaulted 5 or 6 times since independence. The greatest such default was in 1893 when the Greek PM had the honesty to declare in parliament that "regrettfully, we are bankrupt". The current Finance Minister has told everyone outside of Greece that Greece is bankrupt but no one in the present government has had the nerve to tell the Greek people "please understand, we may be a proud nation but we are also a bankrupt nation". Adding up all the years which Greece has been in default, one comes to the conclusion that, since independence, Greece has spent almost half the time in default. During the 19th century, there were years when Greece had to spend up to 50% of its budget on interest. Today, Greece spends about 4-5% of its budget on interest, a percentage which is about the same as in countries like Germany and Austria.

      Just google a bit and you will find confirmation of the above.

    2. Now you are parsing with phrasing, and you contradict yourself in your own response! I also do not need a lecture on Greece's history, as I am well aware of Greece's dire financial record. ☺

      On your third paragraph, this is just musical chairs. Instead of proceeding with a "restructuring/rescheduling" as you suggest a paragraph later (and what should have happened, with some sort of haircut as well), the Troika pursued a policy that substituted insolvent banks as the creditors with official sector creditors. In order to pay these official creditors off, the Troika enacted a series of policy measures that were masked as a bailout (and in the process painted Greece as the villain for its own ends), but merely insured that these monies would be never repaid (way to go Troika!). This created moral hazard as these incompetent financial institutions never had to reckon with the poor financial decisions they made. In addition, these policies destroyed the Greek economy, and dashing any hope of a recovery.

      You say that the private sector would have negotiated more stringent terms for Greece than the official sector did. I find it hard to imagine simply due to where the world was at that point. These institutions, due to their incompetency, were thinly capitalized, dependent on central banks, and following any edicts issued to them. Varoufakis is obviously correct in his assessment that Greece is bankrupt. Unfortunately for people like yourself the Austrian Taxpayer, it is not the Greeks who do not recognize this, but their creditors.

      Eventually these institutions will be forced to reckon with this reality, and a set of policies will be implemented that will be fair to all parties. The Troika clearly did not institute such policies, and it appears that it will not happen just yet. I urge you to read those two prior posts I noted by Pettit (who is excellent, with a novel take), and Mouzakis, who effectively lays out a lot of these matters. I think you will gain from these different perspectives.

  4. Allow me to tell an anecdote which is meant to bring some lightheartedness into the discussion and NOT to blame or make fun of anyone.

    Our son arrived from Zurich last evening to spend the weekend with us. Both of us set out to explain the new iPhone 6 to my wife. My wife suddenly remembered that her niece had told her that, in Greece, 10.000 iPhones 6 were sold on the first day and more than 50.000 in the 4th quarter of 2014.

    My son looked at me with a smile and said: "They obviously need a haircut".

    1. o__O

      I bet the son followed his father working in finance...

  5. I think the reference to the Nuremberg Trials is in rather poor taste, considering the sorts of crimes that were dealt with during those trials. The rescue loans of 2010-2012 could certainly have been handled in a better way, but in the end they were agreed upon by democratically elected governments, so I strongly disagree with your call for some sort of trial.

    The mistake, in my opinion, was that the tax payers of the financing countries didn't get anything in return for assuming the debt exposure of the private lenders. I remember the Finns were originally demanding Greek collateral. They got a lot of criticism for that demand, but one should remember that it was not the Finnish banks that had lent money recklessly to Greece pre-2008. Perhaps they should have demanded equity in the private lenders that were bailed out instead.

    Comparing the exposure to Greek debt before and after the rescue loans, it's quite interesting to see how France and the UK are now much less exposed, whereas Germany has become more exposed. Finland and the Netherlands barely had any exposure pre-2008, so one would think a bit of gratitude towards those nations would be called for. Right?

    "Who are these Dutchmen, who are these Finns?", President Karolos Papoulias, Feb. 2012.

    /Stockholm observer

  6. I stumbled upon an interesting text "The Cost of Servicing Greece’s Debt: A Sisyphean task? by Cinzia Alcidi and Alessandro Giovannini of CEPS.

    It comes to about the same financial conclusions as the owner of this blog, and it supports my opinion expressed on this blog before:

    "The current stance taken by the new Greek government may underestimate the EU’s reaction and the fact that the EU’s position vis-à-vis the country will have repercussions that go far beyond the country’s borders."

    And everybody thoroughly thinking about these consequences must come to the conclusion that the authors also mention: Default and "exit from the E(M)U". That M in between brackets "(M)" is very elegant ;)


    1. The bracketed M is because legally no country can exit the euro. And as I have repeatedly stated, if Greece is forced out of the EU this will create a political crisis not only of the EU but also globally. The USA is very concerned about the situation, and is obviously not going to allow the EU to commit suicide because of some stupid German pigheadedness. Russia is waiting in the wings, and everyone knows it.

      At this time, Germany has never looked so isolated since 1945. I wonder if the arrogant politicians there have worked it out yet.

  7. You're omitting very important details such as the fact of the change of the governing law from Greek to British/English. Even the very fact that now the lenders are the official sector makes things much more difficult for Greece; such devilish details are paramount in cases of e.g. defaults/restructurings...

    You're also omitting that the loans, be it just to roll-over the older ones or the much smaller part that went to cover various deficits etc., were given with the necessary condition of austerity, i.e. for all practical reasons, of inter alia a dramatic fall of GDP, increasing dramatically the debt/gdp ratio.

  8. Your son is right Klaus, it's not cheap to buy Christmas presents, the trade deficit widened by 27% in December 2014.

  9. Of cause they need a hair cut. New car registration only increased 12,8% in Jan as opposed to 69,3% in Dec.

  10. I do not wish to pretend to be an economist. But I submit two ideas. A ) could the Greek government use their vast natural art treasures as an item to joining a Lloyd;'s of London syndicate. I am told that British Nobles with castle,s art, and jewels have done this for years. it becomes almost an annuity. With such money coming in then Geeks can get a new line of credit. or B) if that is not possible can they hire a top notch geology firm to scout natural wealth,e.g. oil,natural gas, and then if this is present use this new money to amortize the debt and get a new line of credit.

    1. My haunch is that the Greeks would crucify you for A, that is for monetizing art treasures. And B is, as far as I know, 'work-in-progress'.