Political Economy

The Bizarre World of the Greek Bailout

Simon Leitch*

Brisbane, Wednesday 15 July 2015 (Alochonaa): A few weeks ago, as the supposed deadline for Greece to repay some of its loans or face default approached, someone asked me what I thought would happen. I said, cynically, that Greece would default but also receive a new bailout (I might add that I said that Greece would certainly default as far back as 2009, irrespective of bailouts). It would seem I was right on both accounts but the reason why the outcome was so easy to predict is because the Greek bailout saga is, in fact, a bizarre alternate reality. It is a place where deadlines are meaningless, rhetoric is needlessly insulting, everyone behaves hypocritically and the banks are able to tell the governments how to treat their taxpayers even as those very governments are bailing them out with the taxpayers’ money.

Before going any further, we should be clear about what the bailout is, because in this bizarre world where the ‘Grexit’ is impossible but also inevitable, and Greek debt is both unsustainable and definitely sustainable, things can be confusing. The bailout plan was not a rescue for the Greek economy – far from it. In the now often quoted words of Karl Otto Pohl, the former head of the German central bank: “It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about – namely, rescuing the banks and the rich Greeks.” This is not a conspiracy theory, it is just simple corporate welfare by the neoliberal political elite who think that saving the banks will do most of the work of resolving the economic crisis for them.

For those who followed the financial crisis as it developed between 2007 and 2009, the story of the bank debts and bailouts should be familiar. Cheap credit brought about through a currency union, the structure of European banking and low interest rates in developed countries led to a large financial bubble in the early 2000s. It burst, leaving banks wallowing in debts and in dire need of short-term loans and sellable assets to cover their losses. Unfortunately, with everyone in debt, loans were hard to find, and with everyone wanting to sell some assets to cover losses buyers were few and prices were low. Panic selling and a general collapse of the market loomed as possibilities, and governments moved to avoid it with various bank guarantees, loans and bailouts.

Problematically, Eurozone economies cannot individually control their monetary policies – that is, they cannot print money by themselves. Consequently, their bailouts of the banks required more complicated multilateral efforts to manipulate bond markets and give banks and governments the short-term financing they needed to recapitalise or reform. Thus, we arrive at the ‘Greek’ bailout which was really a French-German bailout, according to Karl Pohl.

Who Received a Bailout and Why?

When debating the merits of the bailout plans, we tend to hear the usual accusation that Greece wasted the bailout money. Europe has loaned Greece a combined total of around 230 billion Euros, so, logically, they aren’t entitled to any more free money to run their government or services because they are wasting it. On the surface, this is a good point, but even if you got a D+ for economics in high school or university you should be deeply sceptical that dispersing 21,000 Euros per person in Greece would result in a recession as deep as the Great Depression.

Only a fraction of the bailout money, perhaps around ten percent, has actually been used to run Greek government services. There is a good reason for this too – Greece’s government was actually running a surplus from 2013 onwards, so it didn’t ‘need’ the financing as such to continue to run as it was (the fact that people weren’t happy with the services being delivered is irrelevant to the point I am making here).

So who got the money? My spoilers above should be adequate enough but just in case there is any confusion the answer is that the large multinational banks received the money to cover their balance sheets and prevent losses. The funds were never meant for Greece as such. Instead, what we had was a scheme whereby European taxpayers and central banks would transfer money to Greece which was earmarked for the banks in those countries where the taxpayers were providing the money. Instead of the French and Germans simply saying that they were bailing out their own banks, they said they were bailing out Greece. There was a half-truth to this because Greece did need assistance and it had certainly piled up far too much public debt – in other words, Greece is ultimately responsible for its circumstances – but pretending the bailout of the banks was a bailout of Greece and then complaining that the Greek people are intransigent or ungrateful is bizarre and unhelpful.

Whilst we are on the subject of the bizarre and the unhelpful…

Rhetoric, Rules and Self-Righteousness

As Greece’s situation worsened the crisis was more and more described in terms of morality. Some charge that Greece has the moral obligation to pay money back or effectively face punishment, whilst others see the rich bully Germany, personified by Chancellor Merkel, as the heartless ogre crushing poor little Greece. The rhetoric that has ensued has been destructive, pointless, hypocritical and, yes, bizarre. Take Greece’s insistence that they didn’t have to pay their debts under international law because they were created by a previous government. One wonders how a financial system will operate in the future if every three or four years in a democracy we can repudiate our debts because the government has changed. Similarly, we have those Greeks saying that the problem lies with irresponsible lending. That’s right, if you loaned money to Greece and you don’t get it back then that is your problem as you should have known Greece couldn’t pay. By the way, can someone lend Greece some money? After all, if you don’t your violating their human rights or you are a terrorist.

Then, of course, there was the Nazi rhetoric, as Greece claimed Germany owed it money from World War Two. Coincidently, the figure amounted to something strikingly similar to Greece’s current liabilities. Finally, Angela Merkel, along with many other pundits, have occasionally cried that the breakup up of the Euro might lead to Europe returning to some bygone age of war and imperialism. Yes, that’s right folks – the great European project is so fragile that a few billion dollars owed to rich bankers can push us into genocide and presumably send the Wehrmacht traipsing through Poland.

This kind of rhetoric has created an alternate reality where the Germans and Greeks are squaring off, apparently with the fate of the world and the financial system in the balance, because of debates about nine, ten, or eleven percent budget deficits in a country that is 1.7 percent of the Eurozone GDP. For those who didn’t dwell on the maths of that equation, that would mean something around 0.3 percent of the Eurozone GDP is a threat to European peace. Why? Because, don’t you see? It’s a moral question about the Nazis or human rights or some other such thing, I assure you, and not simply the profit margin of a major multinational firm.

Tsipras – Very Stupid or Very Cleaver?

Greek Prime Minister Tsipras, along with his some of his left-wing associates, have aggravated the situation and picked some of these rhetorical fights unnecessarily. Some commentators, however, think that Tsipras has been trying to manoeuvre Greece into an impossible position and create a ‘Grexit’ in which the other Europeans look responsible. If that is the case, he has handled that badly too. The supporters of Tsipras and his party expected him to end the austerity measures imposed on Greece as a condition for the alleged (French) bailout. Instead, we now find him shuffling about apparently agreeing to bailout terms fairly similar to the ones he encouraged his voters to reject. His actions appear incoherent, not left-wing, and he seems incompetent, not brave or daring.

It shouldn’t be surprising that he failed to get a major alteration to the bailout deal. Tsipras’ main option was asking nicely and repeatedly for a better deal, whilst his secondary option was to not pay, run out of money in the financial system and see the people on the street divide their time between starving and burning effigies of Angela Merkel (I sense an untapped bull market for that commodity). What is surprising is that he appears to have thought he could alter Greece’s non-existent bargaining position, or that he might be entertaining the prospect that what he has been doing was the neatest way possible to leave the Eurozone.

To be clear, Greece should never have joined the currency union, and I don’t believe any country should give up control of its currency – ever – but leaving the Eurozone will now be terribly painful, and more than it had to be. If that is Greece’s choice, so be it, but perhaps it would have been best to do it with some sympathy and political capital in the bank, rather than through insults and prolonged uncertainty.

*DrSimon Leitch is the Editor in Chief,  Foreign Policy and International Affairs, Alochonaa. He taught International Relations and Security Studies at Griffith University.  His research interests are in foreign policy and strategy with a particular interest in the interaction of the great powers.

** Alochonaa.com is not responsible for any factual mistakes (if any) of this analysis. This analysis further is not necessarily representative of Alochonaa.com’s view. We’re happy to facilitate further evidence-based submissions on this topic. Please send us your submission at alochonaa@gmail.com

Categories: Political Economy

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