A new twist on Greek debt

Greece has been secretly increasing its public debt obligations in 2013 and 2014, While Angela Merkel and the supporters of her austerity policies have been falsely claiming success in their program for Greek recovery.

Landon Thomas, Jr. in A Note of Caution in Greek Banks’ Seeming Recovery New York Times 05/07/2014 and Yanis Varoufakis in How the Greek Banks Secured an Additional, Hidden €41 billion Bailout from European taxpayers 05/07/2014 explain how it has been done.

Varoufakis summarizes:

Athens, Brussels, Frankfurt and Berlin have been waxing lyrical about the success of this ‘recapitalisation’, proclaiming it as the end of Greece’s banking crisis. Alas, they skillfully neglected to inform us that, during the very same period (and continuing to this day), a second, hidden, rolling (and thus potentially never-ending) bailout (based on government guarantees of fresh phantom bonds) is being extended to the same Greek banks! ...

So far, since early 2013, this hidden, second bank bailout has amounted exactly the same value (€41 billion again) as the official, approved by European Parliaments, bailout. This means that, between January 2013 and February 2014, the insolvent Greek state had to add to its liabilities, on behalf of the Greek banks, an astounding €82 billion or 45,6% of GDP! Remarkably, this second, hidden bailout was never authorised by any Parliament, nor discussed in any public forum. [my emphasis]

Thomas describes the arrangements this way:

Perhaps the clearest sign that the finances of Greek banks are more precarious than they may seem has been the record number of government-guaranteed bonds that the banks issued last year — about 40 billion euros, or 22 percent of bank deposits in the country.

Issued by the banks to themselves, the bonds, which tend to have a maturity of about a year, are used as collateral to access short-term funds from the European Central Bank.

Traditionally, banks collect the funds they need to make loans by attracting deposits and short-term term credit lines from bond investors and other banks.

But with Greeks having brought home just a small proportion of the many billions of euros they sent abroad during the euro crisis and with bad loans still a problem, the country’s banks remain more or less dependent on the European Central Bank for their survival. [my emphasis]

Obviously, this seems like a strange arrangement, issuing a bond for which your company is responsible and using that bond as collateral to borrow more money. What makes this work, as Varoufakis explains, is that each bank doing this "took its phantom bond first to the Greek government and had it guarantee it. With the government’s guarantee stamped on it, the ECB then accepted Bank X’s phantom bond and handed over the cash. Why? Because the Greek taxpayer had, in the meantime, unknowingly provided the collateral for Bank X’s loan."

And he cites both the democratic and economic problem with this business:

The above practice raises two concerns; and the reader can decide which of the two is the most worrying.

First, in an open society, whenever the public assumes responsibility for private debts, it should be properly informed. In a democracy this means that Parliament (or Congress) should debate the assumption of such additional responsibilities. It would appear that in the Eurozone such an important principle has been sacrificed on the altar of the bankers’ interests. Is it thus odd to hear that Europe-wide voters no longer trust European institutions?

Second, the above show that the Greek debt is continuing to rise, not fall. With indebtedness being what it is, who can honestly speak of the Greek economy coming out of its black hole? Rather, it seems that this hole is getting deeper and all this to benefit a small section of society which has already received highly preferential treatment. [my emphasis]

Not only does this arrangement make Greece's already crushing and unpayable debt situation worse. It further erodes the democratic institutions in favor of power exercised by the EU (read: Merkel) on behalf of private financiers. The democratic institutions that it is a basic purpose of the European Union to protect, not destroy on behalf of a badly constructed common currency.

Varoufakis is right in saying that "since the Greek taxpayer owes so much already to fellow European taxpayers that a haircut will soon be exacted upon the latter, this ‘small’ matter ought to be a major issue in the forthcoming European Parliament elections. The fact that it will, in all probability, be hushed up is another sad sign of the decline of European democracy."

Tags: angela merkel, austerity economics, eu, euro, european union, greece