At their meeting on Monday, Euro Group finance ministers had some hot topics to stew over. There was the thorny issue of who’d replace Euro Group President Jean-Claude Juncker, who has had it with this zoo—”I no longer have any illusions about Europe,” he’d muttered earlier. The bailout of Spanish banks was finalized; €39.5 billion would be transferred next week, a down payment. Primary beneficiaries: German and French banks.
And the new bailout of Greece got some finishing touches. The mechanics had already been decided. Interest rates would be lowered. There’d be no interest payments for the first ten years. Times to accomplish the austerity goals would be stretched out. Profits on Greek debt held by the “official sector,” as it’s called in the jargon of the euro bailout mania, would be repatriated. And so on. It was one heck of a sweet deal for Greece.
It followed the bond swap last March that had already whacked private sector investors with a 74% haircut on €206 billion in bonds. The first sovereign default in the Eurozone, albeit a “voluntary” one. It set the tone. Greek Finance Minister Evangelos Venizelos proclaimed afterwards in his victory speech: “We owed it to our children and grandchildren to rid them of the burden of this debt.”
Alas, private sector is a rubbery term in the Eurozone. Most of the bondholders that lost their shirts were banks, including banks in Greece, Spain, and Cyprus—and they’re now getting bailed out by the official sector. Their losses from the private-sector haircut are landing on the lap of the taxpayer.
Now the Eurozone’s second sovereign default is underway. The new bailout package for Greece includes a loan of €10 billion with which to buy back some of its bonds at a hefty discount from private sector investors. The process has started. If Greece ends up paying 34% of face value, it could buy back about €28 billion in old bonds. In this manner, it would for all practical purposes default on €18 billion. The deal would also roll €10 billion from the private sector to the official sector.
A few hedge funds that bought this stuff for cents on the euro stand to make a killing. But the Greek and Cypriot banks that are losing a fortune on this deal are the very ones that are already getting bailed out. Hence their private-sector losses from the buyback deal are rolled over to the official sector.
After this transpires, almost all of Greece’s debt will have been transferred to the official sector, spread over the EFSF bailout fund, the IMF, the ECB, the national central banks of the Eurozone including the Bank of Greece, and the EU. And just when the official sector is up to the gills into Greek debt, but not a minute before, German Chancellor Angela Merkel announced the big haircut, the one that politicians have been denying for years: the official sector would write off a big chunk of this debt, starting in 2014. Greece’s default will be complete.
A sweet deal for Greece. And taxpayers elsewhere now know, rather than having to guess. This cements the principle of piling private-sector losses on the public sector, while claiming that it won’t cost anything, or at least not much … until the real costs seep from the woodwork.
Now Portugal wants the same deal. So does Ireland. And Cyprus. Spain is thinking about it. The can has been opened: last week, Portuguese Finance Minister Vítor Gaspar reminded his colleagues of the EU summit in July 2011—when the Eurozone decided explicitly that all countries to be bailed out would be offered equal terms and conditions. That principle of equal treatment, he said, was also valid for Portugal and Ireland. Then during the Euro Group meeting, Portugal presented its demands.
Dutch Prime Minister Mark Rutte wasn’t amused—and made his voice heard in an onslaught of interviews. There should be a way for Greece to leave the Eurozone, he said. And haircuts for official sector creditors? Not a good idea. Out of principle. “That would send the wrong signal to other countries that have debts … like America.”
Juncker too tried desperately to stuff some of the worms back into the can. “I don’t believe that the Euro Group is prepared to let these countries have equal treatment,” he said. And German Finance Minister Wolfgang Schäuble claimed that Greece was a special case. “For Ireland and Portugal, which are in the process of returning to the markets step by step, that would be a catastrophic sign,” he said. That’s how things start out in the Eurozone.