Tuesday, May 19, 2015

The Forgotten Greek Bail-Out

The standard argument of the European hawks is that they have shown extraodinary solidarity with Greece by lending 240 BEUR (or more) as rescue loans. And the standard response by the doves is that this was not a bail-out of Greece but, instead, a bail-out of banks in France, Germany & Co. The latter are more correct than the former but even if only 30-40 BEUR of the rescue loans stayed in Greece, it is still 30-40 BEUR more than zero (not counting the 40 BEUR which served to recapitalize Greek banks).

What is conveniently overlooked is that not the EZ governments are the ones which showed the extraordinary solidarity but, instead, the ECB. My understanding is that the ECB currently has close to 120 BEUR in the 'Greek fire'. Whatever the ECB lent to Greek banks was used by the banks for something. Perhaps some of it was used for making loans which otherwise could not have been made (like loans to the government). But the chunk of it was used for replacing deposits which were withdrawn from Greek banks.

Since December of 2014, Greek banks have lost about 30 BEUR in deposits. But more importantly: at the outset of the crisis, bank deposits were close to 260 BEUR and now they stand around 140 BEUR. When using my calculator, I come to the conclusion that about 120 BEUR of deposits disappeared, i. e. were withdrawn.

Now it could well be that some of these deposits had been held by foreigners in view of higher Greek interest rates and that a good portion of them was withdrawn in order to pay taxes or general living expenses. But I would wager that by far the largest portion was withdrawn to find safer havens, be those foreign bank accounts, foreign securities or the mattresses at home.

ECB loans, conceptually, represent tax payers' money. The only difference is that tax payers do not have to put up the money to fund those loans. Instead, the ECB lends printed money. Even if the ECB were to lose 120 BEUR in Greece, it still wouldn't automatically translate into costs for tax payers because, contrary to a 'normal' bank, the ECB can remain fully operational with a negative net worth. Tax payers are only called upon if the ECB were to require a recapitalization.

But let's now look at the other side of the balance sheet. Let's assume that only half of the 120 BEUR of ECB funding, i. e. 'only' 60 BEUR, were used by Greek depositors to transfer them to safe havens (personally, I would guess the figure is closer to 100 BEUR). That would mean that Greek depositors could 'rescue' 60 BEUR of their savings (or more) during a time when their country was going to pieces. Or to phrase it a bit more provocatively: European tax payers sent - via the ECB - 120 BEUR to Greece so that Greeks could transfer 60 BEUR (or more) into safe havens. Those Greeks may turn out to be very happy campers in the near future while the European tax payers may become very sad.


  1. .....and Europe (EU) does not know this, or neglects this? Then EU is as stupid as I was afraid of already.

    In the last paragraph you write something that makes me really sad: if this is true then I wonder why EU does not decide to go on without Greece, this will create also sad European taxpayers, but I, as a tax paying European prefer to die poor, with dignity, than to be a poor sad slave of Greeks, and they having fun because of EU's stupidity. I would finally turn in my grave, for ever. Who not?

  2. That part of what you also like to call 'bail-out' has intentionally been 'forgotten', together with Target-2 imbalances ...


  3. I mean, one cannot celebrate the fact that the ECB showed "solidarity" to Greece: after all, it's the central bank of all EZ States and thus of Greece indeed. It's like saying that the Fed showed "solidarity" to California in 2009...the ECB did its job under existing treaty constraints - nothing more, nothing less. And I found the ECB far more generous to Spain, Italy & Co when it declared it would do "whatever it takes" at a moment when spreads were going through the roof - thus rendering their debts potentially unsustainable.

    1. I beg to differ. You misunderstand the role of a Central Bank. The Central Bank is indeed a lender of last resort to banks BUT only against first class collateral. The crisis changed all that but before it, every bank made sure that it always had enough first class collateral on hand to obtain last resort financing from the ECB if and when required.

      When Greek bonds were enormously downgraded back in 2010, the ECB should have advised the Greek banks that the bonds no longer qualified as eligible collateral and should have given a deadline by which first class collateral would again be posted or else the funding would terminate. Maybe 3 months, maybe 6 months, but not more. That would have forced the governments to come on scene much more forcefully and with much larger amounts. The ECB would have never been put into a position where an institution formally not accountable to anyone can make or break Greece's future.

      To me, the ECB's becoming 'flexible' as to the definition of eligible collateral was one of the great sins of this entire exercise. It put the monkey on the wrong shoulders --- instead on politicians' shoulders, on ECB's shoulders.

  4. Mr. Draghi assumed that role willingly when he bend and broke his own rules to become a policy maker instead of a central banker. He is still doing it by extending loans to the Greek central bank. He could just shrug his shoulders and the monkey would drop off. I fully understand Jens Weidmann's frustrations.