What if………?

March 20, 2015

The Greek Finance Minister Yanis Varoufakis has posted an interesting short piece on his blog making some very important points about the Greek-Germany debt issue. He raises an interesting ‘what if….” question.

Varoufakis says:

“I opposed the 2010 and 2012 ‘bailout’ loans from German and other European taxpayers because:
▪ the new loans represented not a bailout for Greece but a cynical transfer of losses from the books of the private banks to the weak shoulders of the weakest of Greek citizens. (How many of Europe’s taxpayers, who footed these loans, know that more than 90% of the €240 billion borrowed by Greece went to financial institutions, not to the Greek state or its citizens?)
▪ it was obvious that, at a time Greece could not repay its existing loans, the austerity conditions for giving Greece the new loans would crush Greek nominal incomes, making our debt even less sustainable
▪ the ‘bailout’ burden would, sooner or later, weigh down German and other European taxpayers once the weaker Greeks buckled under their mountainous debts (as moneyed Greeks had already shifted their deposits to Frankfurt, London etc.)
▪ misleading peoples and Parliaments by presenting a bank bailout as an act of ‘solidarity to Greece’ would turn Germans against Greeks, Greeks against Germans and, eventually, Europe against itself.
In 2010 Greece owed not one euro to German taxpayers. We had no right to borrow from them, or from other European taxpayers, while our public debt was unsustainable. Period!”

As Varoufakis points out in 2010 when the Greek public debt became unmanageable Greece owed not one euro to German taxpayers, or to any other EU member state or institution. It owed a lot of money to banks, mostly French, German and Greek banks.

Varoufakis argues, correctly in my opinion, that it was a great mistake to borrow the money from the rest of the EU to pay those bank debts and that Greece should have simply defaulted. If that had happened the IMF would have become involved immediately, as it always does in the case of national defaults, and taken the lead in restructuring the Greek public finances and restructuring the debt. This would have involved, as always does in the case of national defaults, painful costs for the debtor and for creditors. Greece would have undergone a difficult process of restructuring its public finances and the creditors, the banks, would have been forced to accept a signifiant write down on the Greek debt they were holding. With the Greek debt significantly written down, and once the difficult immediate post default phase was over, Greece could have started to recover.

As a result of a default the Greek banking system would have been in a mess but so would the banking systems in Germany and France. Given the scale of the Greek default, and the weak state of the financial system following the credit crisis of 2007, many Greek, German and French banks would have been either insolvent or suffering severe liquidity problems. This would have meant that the European Central Bank would have been forced to extend emergency liquidity support to a large number of banks and that the French and German governments would have had to finance a recapitalisation of big chunks of their national banking system. This sort of direct bank bail out is what happened in the UK. The UK government gave money and guarantees directly to various UK banks, what it didn’t do was give money to the bank’s debtors so they could pay the banks.

If this alternative approach, of a Greek default, had been taken then there would probably have been great anger directed at the banking system in France and Germany and none of this would have involved any financial transfers to Greece by other EU member states. The political situation within the eurozone might have looked very different. European solidarity might not have been poisoned.

The point of all this is not to muse about what might have been but to be clear that the dire current situation in the eurozone, the intense fractious problems embroiling Germany and Greece, the breakdown of European solidarity and transformation of a banking crisis into a crisis of national relationships, are the result of specific political decisions. And that those political decision had very specific consequences.

If Greece had defaulted on its debts then significant parts of the eurozone banking system would have faced collapse. It would have been utterly disastrous and recklessly irresponsible to allow such a collapse to take place so the banks would have had to be saved and that would have involved spending a lot of money. But the difference in a Greek default scenario is that the costs of saving the banks would have fallen across the entire eurozone and would not have been concentrated on the shoulders of the poorest sections of the Greek population.

All financial speculative booms that end in busts involve costs which somebody has to pay. The issue is who pays those costs and what are the political implications. The route that was actually taken, rather than allowing Greece to default, means that the costs are borne by some of the poorest citizens in Europe and the cost mechanism, transfers between governments, is precisely the mechanism most likely to undermine European solidarity and trust.

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