The Great Greek Bank Rob­bery

Financial Mirror (Cyprus) - - FRONT PAGE -

In 2012, the in­sol­vent Greek state bor­rowed EUR 41 bln ($45 bln, or 22% of Greece’s shrink­ing na­tional in­come) from Euro­pean tax­pay­ers to re­cap­i­talise the coun­try’s in­sol­vent com­mer­cial banks. For an econ­omy in the clutches of un­sus­tain­able debt, and the as­so­ci­ated debt-de­fla­tion spi­ral, the new loan and the strin­gent aus­ter­ity on which it was con­di­tioned were a ball and chain. At least, Greeks were promised, this bailout would se­cure the coun­try’s banks once and for all.

In 2013, once that tranche of funds had been trans­ferred by the Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity (EFSF), the eu­ro­zone’s bailout fund, to its Greek fran­chise, the Hel­lenic Fi­nan­cial Sta­bil­ity Fa­cil­ity, the HFSF pumped ap­prox­i­mately EUR 40 bln into the four “sys­temic” banks in ex­change for non-vot­ing shares.

A few months later, in the au­tumn of 2013, a sec­ond re­cap­i­tal­i­sa­tion was or­ches­trated, with a new share is­sue. To make the new shares at­trac­tive to pri­vate in­vestors, Greece’s “troika” of of­fi­cial cred­i­tors (the In­ter­na­tional Mon­e­tary Fund, Euro­pean Cen­tral Bank, and the Euro­pean Com­mis­sion) ap­proved offering them at a re­mark­able 80% dis­count on the prices that the HFSF, on be­half of Euro­pean tax­pay­ers, had paid a few months ear­lier. Cru­cially, the HFSF was pre­vented from par­tic­i­pat­ing, im­pos­ing upon tax­pay­ers a mas­sive di­lu­tion of their eq­uity stake.

Sens­ing po­ten­tial gains at tax­pay­ers’ ex­pense, for­eign hedge funds rushed in to take ad­van­tage. As if to prove that it un­der­stood the im­pro­pri­ety in­volved, the Troika com­pelled Greece’s gov­ern­ment to im­mu­nise the HFSF board mem­bers from crim­i­nal pros­e­cu­tion for not par­tic­i­pat­ing in the new share of­fer and for the re­sult­ing dis­ap­pear­ance of half of the tax­pay­ers’ EUR 41 bln cap­i­tal in­jec­tion.

The Troika cel­e­brated the hedge funds’ in­ter­est as ev­i­dence that its bank bailout had in­spired pri­vate-sec­tor con­fi­dence. But the ab­sence of long-term in­vestors re­vealed that the cap­i­tal in­flow was purely spec­u­la­tive. Se­ri­ous in­vestors un­der­stood that the banks re­mained in se­ri­ous trou­ble, de­spite the large in­jec­tion of pub­lic funds. Af­ter all, Greece’s Great De­pres­sion had caused the share of non­per­form­ing loans (NPLs) to rise to 40%.

In Fe­bru­ary 2014, months af­ter the sec­ond re­cap­i­tal­i­sa­tion, the as­set man­age­ment com­pany Black­rock re­ported that the bur­geon­ing vol­ume of NPLs ne­ces­si­tated a sub­stan­tial third re­cap­i­tal­i­sa­tion. By June 2014, the IMF was leak­ing re­ports that more than EUR 15 bln was needed to re­store the banks’ cap­i­tal – a great deal more money than was left in Greece’s sec­ond bailout pack­age.

By the end of 2014, with Greece’s sec­ond bailout run­ning out of time and cash, and the gov­ern­ment nurs­ing an­other EUR 22 bln of un­funded debt re­pay­ments for 2015, Troika of­fi­cials were in no doubt. To main­tain the pre­tense that the Greek “pro­gramme” was on track, a third bailout was re­quired.

The prob­lem with push­ing through a third bailout was twofold. First, the Troika-friendly Greek gov­ern­ment had staked its po­lit­i­cal sur­vival on the pledge that the coun­try’s sec­ond bailout would be com­pleted by De­cem­ber 2014 and would be its last.

Sev­eral eu­ro­zone gov­ern­ments had se­cured their par­lia­ments’ agree­ment by making the same pledge. The fallout was that the gov­ern­ment col­lapsed and, in Jan­uary 2015, our Syriza gov­ern­ment was elected with a man­date to chal­lenge the very logic of th­ese “bailouts.”

As the new gov­ern­ment’s fi­nance min­is­ter, I was de­ter­mined that any new bank re­cap­i­tal­i­sa­tion should avoid the pit­falls of the first two. New loans should be se­cured only af­ter Greece’s debt had been ren­dered vi­able, and no new pub­lic funds should be in­jected into the com­mer­cial banks un­less and un­til a spe­cial-pur­pose institution – a “bad bank” – was es­tab­lished to deal with their NPLs.

Un­for­tu­nately, the Troika was not in­ter­ested in a ra­tio­nal so­lu­tion. Its aim was to crush a gov­ern­ment that dared chal­lenge it. And crush us it did by engi­neer­ing a six-month­long bank run, shut­ting down the Greek banks in June, and caus­ing Prime Min­is­ter Alexis Tsipras’s ca­pit­u­la­tion to the Troika’s third bailout loan in July.

The first sig­nif­i­cant move was a third re­cap­i­tal­i­sa­tion of the banks in Novem­ber. Tax­pay­ers con­trib­uted an­other EUR 6 bln, through the HFSF, but were again pre­vented from pur­chas­ing the shares of­fered to pri­vate in­vestors.

As a re­sult, de­spite cap­i­tal in­jec­tions of ap­prox­i­mately EUR 47 bln (41 bln in 2013 and an­other 6 bln in 2015), the tax­payer’s eq­uity share dropped from more than 65% to less than 26%, while hedge funds and for­eign in­vestors (for ex­am­ple, John Paulson, Brook­field, Fair­fax, Welling­ton, and High­fields) grabbed 74% of the banks’ eq­uity for a mere EUR 5.1 bln in­vest­ment. Al­though hedge funds had lost money since 2013, the op­por­tu­nity to tak­ing over Greece’s en­tire bank­ing sys­tem for such a pal­try sum proved ir­re­sistibly tempt­ing.

The re­sult is a bank­ing sys­tem still awash in NPLs and buf­feted by con­tin­u­ing re­ces­sion. And with the lat­est round of re­cap­i­tal­i­sa­tion, the cost of the Troika’s de­ter­mi­na­tion to stick to the prac­tice of ex­tend-and-pre­tend bailout loans just got higher.

Never be­fore have tax­pay­ers con­trib­uted so much to so few for so lit­tle.

Since 2008, bank bailouts have en­tailed a sig­nif­i­cant trans­fer of pri­vate losses to tax­pay­ers in Europe and the United States. The lat­est Greek bank bailout con­sti­tutes a cau­tion­ary tale about how pol­i­tics – in this case, Europe’s – is geared to­ward max­imis­ing pub­lic losses for ques­tion­able pri­vate ben­e­fits.

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