No analysis of 'Greeks bearing debts' story

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Facing a major crisis, the European Union and the European Central Bank (ECB) have combined to support Greece and other southern European countries under attack from speculative finance. In an unprecedented move, the ECB has agreed to guarantee the value of debt issued by euro-zone members, and to intervene in bond markets as necessary. The EU has mobilized loans and credit facilities of nearly 1 trillion euros to support the European bond market.

For weeks, world finance had been calling on Greece to make public servants pay for the debt crisis hitting the euro-zone. The culprits for sky-rocketing interest rates on Greek government debt were supposedly pensioners, welfare recipients, the sick, students, the unemployed, and public services delivered by government workers. The standard solution was on offer: cut government spending, and raise taxes on workers and their families.

The story widely propagated by the mainstream media was a morality tale. Greedy workers had led another country into spending beyond its means, and now it had to pay the price in higher taxes and reduced services. There was to be no cheery ending.

This version of the Greeks bearing debt story was devoid of analysis, and omitted to mention the major players in the ongoing drama. The story of Greece (and the PIIGS: Portugal, Ireland, Italy, Greece, Spain) making the rounds did not include the bankers who created the problem, and the bail-out, not of Greece, but of the Greek bondholders, who happen to be ... the bankers.

What had got world financiers in a sweat was the investment and loan portfolios of the major European banks. With the creation of the euro-zone the Southern European countries could all of a sudden borrow money at reasonable rates of interest. Greece in particular took on new debt, and put it to good use. Its economy grew at about four per cent a year from 2000 (it joined the euro-zone, ditching the drachma on Jan. 1, 2001).

Sovereign borrowers like Greece found banks eager to arrange for national borrowing in the form of Euro bonds purchased by European banks for their portfolios.

At the heart of Euroland is both the euro itself (the common currency of 16 of the 27 European Union members, with coins and banknotes entering circulation in 2002), and the ECB. Each country was borrowing on its national credit (that is to say its ability to pay interest on the bonds because it could tax its residents) but it was also borrowing on the credit of the ECB, and commitments made under the treaty of the European Union that established the ECB.

Banks holding the debt of Greece or any other Euroland member, could use these national bonds as collateral to borrow money from the "repo" (or repossession) window of the ECB. These repo loans were then used to buy the kind of derivative products Goldman Sachs liked to sell (things may have changed since they were charged with fraud): synthetic CDO's (collateralized debt obligations, like the infamous sub-prime loans), and credit default swaps (insurance in case a bank you do business with goes bankrupt). By using the repo window to make excess profits, or cover losses from the 2008-09 fiasco, the banks got themselves in trouble.

All of the European banks hold sovereign euro bonds. The announced bailout means bankers will no longer be looking at each other and wondering how they can sell what no one wants to buy. The Greeks will no longer have to pay horrific rates of interest (12 per cent) just to roll over existing debt, and finance the ongoing budget deficit.

The lesson the fiasco is that national governments should first sell debt to the public; relying on saving bonds is the best way to finance needed public investment. The Greek government thought that because it was borrowing in euros, it did not matter that all the bonds were being held abroad. It turns out it mattered a lot.

The post-bailout solution is to re-structure the Greek debt, forcing the banks to take a head shave, not just a hair cut, and regulate access to the repo window of the ECB.

Effective taxation of banks that continuously get bailed out is obviously needed, and should be on the agenda at the upcoming G8/G20 meetings in Ontario. The Canadian banks are coming out publicly against it, and have managed to convince one person they are right: Finance Minister Jim Flaherty.

The coming G8/G20 meetings need to focus on bringing world finance under control. How long can the host country oppose what other countries think needs to be done?


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