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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