Unintended Consequences Of Bailouts: Greece Gets Slammed

Bailouts, particularly those by central banks, have become known for their so-called “unintended consequences”—however intended they might have been. And now, unintended consequences strike again. The ECB’s massive purchases of decomposing Greek debt—an under-the-radar bailout of banks and insurance companies that were holding it—are making the favorite solution to the Greek crisis, namely another deep haircut, legally impossible, said Bundesbank President Jens Weidmann.

Weidmann, an outspoken opponent of the ECB’s bond purchasing programs who has likened them to a pact with the devil, has seen the writing on the wall. “Apparently,” he said during an interview, “the political world has decided to continue financing Greece.”

In theory, the next bailout payment of €31.5 billion is contingent on the big report that the Troika—the ever so successful bailout and austerity gang from the ECB, the IMF, and the EU—is putting together. They’ve been working on it since June. No money would be transferred to Greece unless the report would show that Greece is implementing to the last iota the agreed-upon reform program.

In practice, Weidmann questioned the independence of the report. Politicians have been dripping with admiration for Greece’s progress and have been expressing their intention to restart the aid flow, though the report isn’t even finished. And he wondered how you could objectively evaluate Greece’s performance in implementing the reform program, “when you’re too afraid of the consequences of a negative judgment?”

Political careers might be at stake, even in Germany, as Greece would be cut loose from the bailout pipeline, if the judgment were “negative.” The country would default and possibly walk away from the Eurozone. It would be messy. And it would happen before next year’s election in Germany. Unthinkable.

But Weidmann, in staying clear of political ramifications, worried about the Euro System—the ECB and the national central banks—that has become “one of the largest creditors” of Greece during the crisis. One of the solutions to the Greek debacle that has recently been pitched in all corners calls for another haircut, but this time on public-sector creditors, namely the Euro System. It would be a much deeper default. But it would grant debt relief to Greece.

Impossible. Weidmann objected to the comparison between the private-sector holders of Greek debt who were arm-twisted earlier this year into accepting a haircut. Banks and insurance companies had originally bought that debt to make a profit, he said, and they had to bear the risks associated with it. But the Euro System bought Greek debt during the crisis in its role as helper. “So the comparison is limping,” he explained.

That was just his warm-up for the unintended consequences of the attempted bailout via bond purchases: “The central banks must not cancel Greece’s debt,” he said, because that would be a “direct transfer and would be equal to the prohibited monetary funding of the government.”

In other words, if the private sector were still holding this debt, the solution would be another bout of arm-twisting, and another haircut. Greece would have gotten rid of most of its debt. That, Weidmann said, is no longer possible. By extension, it would apply to all other crisis states: once the ECB buys their debt to bail them out, any debt relief through a public-sector haircut is out of the question. Watch out, Spain, he seemed to say. You can’t get rid of your debt once the ECB is holding it.

But a haircut wouldn’t resolve the problems anyway, he said. “What good does it do to forgive Athens its debt if in ten years the country is back at the same point where it is today?” No, he said, Greece would have to fundamentally reform itself and become competitive.

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  6 comments for “Unintended Consequences Of Bailouts: Greece Gets Slammed

  1. Rik says:

    1. I seriously doubt that if people like here present would make a serious effort the report would hold. My guess it would not. Which doesnot mean that it won't do the job btw. Only makes it more difficult to do, likley cut off possibilities for the future etc.
    2. Weidmann's resp ECB's legal analysis is simply one that is considerably more practical and convenient than legal. Legally it is simply crap. The real interpretation is likely pure on a legal basis different than the one used. Doesnot mean they will not get away with it. Plus the legal risk management is rubbish. You should try to avoid risky legal areas they simply donot do that.
    3. What does this mean.
    -The ECB can very difficult change it position unless there is a legal event (basically a E-court or similar decision stating otherwise);
    -Facts on the ground are possibly created that nearly impossible can be reversed;
    -If they open their defence the wrong way likley somebody of the opposition will step in. In other words it might be difficult to get away with it. They simply increase considerably litigation risk (both on probablity that litigation will happen as well as that it will be successful).
    4. Re the 'profit' on Greek bonds solution similar. Clearly dealing with people who have no experience in dealing with very complicated international legal issues. This has come up a year ago as well and nobody properly looked into it. Profits (well bookkeeping ones in the real world it are losses) can be distributed to shareholders CBs. Those shareholders can distribute them to their shareholders (Governments). Governments can use it as they please basically. However for all these 3 steps legal rules apply to make them work. The most important one: when there is state revenue (CB dividend) who will decide? Basically in most places that is parliament (for the EZ this means 17 of them). And this is just one of the legal issues.
    So it solves the ECB problem, but does it do the trick? A lot more legal work has to be done.
    5. You nearly always can find a way why things legally this time are different. However demanding seniority here and giving it up for Spain simply looks a very very difficult one. It simply stinks.
    With repercussions how markets will look at things (not favourably my guess) re mainly Spain.
    6. The E-courts can clean up a lot of these issues. And as far as EU powers are concerned they have the reputation of being a sort of kangaroo court just deciding on everything in favour of the EU. However they cannot brush aside everything, they have their limitations (not a complete kangaroo court).

  2. Roger Yates says:


  3. Roger Yates says:

    I was watching an economic video about taxation in America via ZeroHedge. If the facts are right it suggests that if taxation were to be arranged so as to remove the need for deficit the middle class and the rich would be taking home $100,000 and less. There is a great deal of poverty in America too. This must surely tell us that the technological, productive and economic system is not very successful. I mean, surely to a visiting alien, all the talk about cutting spending , increasing competition, encouraging entrepreneurship would look like tinkering around at the edges. Sh/he/it might be forgiven for thinking that we are really not hacking it too well, that if we were, there would be much more room for maneuver, more leeway, that if it were that easy and a real solution we would have done it by now. But SHEIT would notice we are successful in having increased our life expectancy considerably by means of a lot of expense on health science, and have admired the Mars Rover when passing through. However, using up three billion years of carbon fuel accumulation in 5 generations to fire up this rather pathetic system while at the same time melting down the climate might cause SHEIT some not unpleasant melancholia in reflecting on the vanity of Intelligent Lifeforms. Perhaps we could hope to make a better impression next visit by cutting out the carbon and getting used to the idea that if we want to live to be 90 we can't afford a Porch and an iphone too.
    Heres the link http://youtu.be/FC5Gkox-1QY PS $50, 000 BUCKS IS ENOUGH FOR ANYONE.

  4. Wolf Richter says:

    Roger – Poverty in America is a huge issue. The impoverishment of the middle class has been going on since the wage peak of 2000, after which inflation has been stronger than wage increases, and real wages have dropped significantly, a process that is ongoing. After trillions of Fed bailouts of the financial elite, the people earn less money than before on an inflation adjusted bases. Not a surprise that the real economy has trouble taking off…. A long-running theme on this blog.

    Having to compete with China, Mexico, and other low-wage countries is in part to blame, as is the most insidious of all taxes, namely inflation. While inflation could be stopped, competition with other countries is more difficult to stop.

  5. emptyfull says:

    How long before the generals in Spain and Greece ride waves of nationalist rage back into power, missles pointed towards Brussels? 2 years in Greece, 3 in Spain?

    Really, what do the neo-liberal idiots in the EU think they're doing? If the Southern European middle classes are impoverished, we're going to start seeing real political violence in Europe again. To make the dreamed-of U.S.E. will require tremendous military repression. They'll have to "manage democracy to save it." Even without democracy interfering in the glorius plan to Unite Christendom under the "englightened rule of the market," the Germans ain't gonna be happy sending any of their shrinking pie to those lazy, starving Southern Europeans. Can you think of a better recipe for a return to ethnic warfare in Europe than a "federal Europe"?

    Steer away from the charybdis, idiots! The sinking of the middle classes will unleash demons you really don't want to see.

    The most ironic nobel peace prize ever!

  6. Roger Yates says:

    emptyful- I share your fear. The ruling class in Greece are happy for Golden Dawn to capture working class votes from the Left. But is a more integrated Europe a problem per se ? I see the problem lies with the Corporatists who are in control. The banks, of course. Like Assad in Syria, these people would prefer to see the entire system collapse rather than lose their grip on power. Both Syria and Europe could be united under different governance. This is an extreme comparison, of course, but I do think the dynamics of power are always similar. Consider this: China has become more or less a Capitalist country but power is still in the hands of an elite who claim to be Communist. It could be argued that America is now a command economy (arms/finance) but it is run by the old elite who call themselves Capitalist. Forget the Brands. Pull down Power. Power,like butter, is best spread thin……But I share your fears. The speed of the loss of solidarity in Europe is really shocking. Hospitals running out of medicines in Europe? What? WHAT?

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