As Greek politicians in the midst of post-election turmoil are told that they must implement the ‘bailout’ programme agreed with the EU and IMF it may be timely to reflect on that programme. Added topicality arises from the fact that Charles Dallara is speaking at the Institute of International and European Affairs (IIEA) in Dublin tomorrow (16th May). Dallara is Managing Director of the Institute of International Finance (IIF) and is talking about ‘Lessons from the Greek Debt Exchange’, having represented the financial industry during negotiations that, according to the IIEA website, “secured the largest debt restructuring in world history, involving €206 billion worth of bonds”.
The IIF is a lobby group set up by the world’s largest banks and financial institutions and it represents them in negotiations on any restructuring of sovereign debt. In the negotiations on Greece, the IIF actually had people they knew well on both sides of the table: a leading member of the Greek negotiating team had previously worked with Goldman Sachs and the Greek National Bank (a private bank that was part of the IIF ‘task force’ for Greece); the then prime minister’s chief economic advisor was on sabbatical from Eurobank EFG, another member of the IIF Greek ‘task force’. Corporate Europe Observatory has also documented how the IIF had considerable access to other EU heads of state during the Greek negotiations.
The deal that was struck saw creditors getting approximately 50% of the nominal value of their Greek bonds, but this needs to be seen in the context of those bonds trading at around 36% of their face value on the secondary market. In addition, they got €30 billion in cash, another 15% of the total bond value. And the replacement bonds issued to the creditors are to be serviced from an escrow (third party) account and are guaranteed under UK and Luxembourg, not Greek, law – some Greek professors of constitutional law believe the deal to be in violation of the Greek constitution. Deposits held by public companies and institutions were converted by the Greek Central Bank into bonds and obliged to participate in the debt restructuring – universities have lost €87 million as a result and pension funds a staggering €12 billion.
Meanwhile, Greece’s public debt has been increased, as documented by the Greek debt audit campaign. While €105 billion of private debt was written off, new debt of an estimated €137 billion was taken on: €109 billion to eurozone institutions and €28 billion to the IMF, with €37 billion left over from the first ‘bailout’ package. As SOAS economist Costas Lapavitsas puts it, “EU policy has thus succeeded in transforming a debt problem between a state and its private lenders into a debt problem among states and bilateral organisations”, a point recognized by the far from radical Wall Street Journal.
The austerity being imposed on Greek people has not been in any way mitigated, in fact it has intensified: pensions and wages are still being slashed (many people are trying to live on wages of €300-400 per month), 150,000 public sector workers have been or are being made redundant, unemployment is shooting upwards towards 30%, social services are being cut, and state companies privatised. This is the context in which the far right Golden Dawn party could gain 7% of the national vote.
So we have a deal that saw private sector bondholders get off rather lightly, the burden of debt increased (and increasingly socialized) and austerity intensified. It is at the very least understandable that many Greek people are asking why they should be bound by the terms of this deal.
D.Thomas says:
This is a very strong indictment of the Greek bailout. Apart from its potential implications for sentiment in Greece, to which you allude, it makes one think that the infamous anger of German taxpayers should be directed not toward Greece but toward the IMF and especially EU member states who approved this deal. Even the Wall Street Journal is critical (see link below) of EU policymakers’ recent behaviour on Greece!
However, and this is a BIG however, a valid normative analysis of the Greek deal would have to consider the alternatives available at the time and their likely knock-on effects, which this commentary has not done.
To start, one must ask: was this deal better for Greeks and for other Europeans (potentially a different calculation) than a Greek default and withdrawal from the Euro? If various prognosticators are right, we may soon see what Greek default/withdrawal looks like. But whatever we learn from such an event, it would be an unreliable answer to my question. Why? Because the recent restructuring of Greek debt may have provided time for other EU sovereigns and banks to prepare for an eventual Greek default and thus reduced the negative effects this would have across the Eurozone. If so, the deal may have been a pact with the devil. but a necessary one, at least from a Eurozone perspective.
In sum, Andy Storey’s normative critique of the Greek deal is potentially quite damning but it’s incomplete and thus unsustainable without a sober analysis of what information and choices were available to Greek, EU and IMF policymakers at the time.
On WSJ criticism, see “Let’s Toast the Greek Bailout,” at http://blogs.wsj.com/brussels/2012/05/15/lets-toast-the-greek-bailout/?mod=google_news_blog
Andy Storey says:
The deal was certainly better for SOME Europeans i.e., it did reduce the negative effects for them that would have resulted from default in 2010 (which would not necessarily have been synonymous with exit from the euro, at least not in 2010). The question is: which Europeans? The answer is in the Lapavitsas article I link to in the original piece:
“When the crisis burst out in 2010, Greece had €300bn of debt, held overwhelmingly by private creditors and governed by Greek law. It would have been a painful but fairly straightforward exercise to default, putting the country back on its feet. Instead, the EU advanced expensive bailout loans, imposed ferocious austerity, and created the worst depression in Greek history. The result was that by early 2012 Greek debt had risen to €370bn. Of that, however, only about €200bn remained in private hands. In less than two years, the EU had saddled Greece with a massive official debt, much of which had been used to retire old debt, allowing large private creditors to exit without losses.
Restructuring in March extricated the remaining large private creditors with as little damage as possible…
EU policy has thus succeeded in transforming a debt problem between a state and its private lenders into a debt problem among states and bilateral organisations. When restructuring raises its head again, there will be major ructions between Greece, the EU and the IMF.”
Now of course one can make the argument that protecting private sector creditors was a legitimate exercise to prevent the collapse of the European financial system. But any cost-benefit calculation has to differentiate between the actors involved – there is no homogeneous ‘Europe’ here, there are European winners (European banks) and European losers (most Greeks and other European citizens who are now on the hook in the event of a Greek default).
D.Thomas says:
As an aside, the big banks’ economists are all over the map on the consequences for the Euro of a possible Greek exit:
http://ftalphaville.ft.com/blog/2012/05/14/998631/grexit-and-the-euro-an-exercise-in-guesswork/?ftcamp=traffic/email/content/booster//memmkt