The bailouts for Greece go mostly to Greek creditors (photo: Will Spaetzel, flickr)

There’s something to keep in mind when we talk about “bailouts” and rescue packages for European sovereigns. I know I’ve covered this subject before, but it’s worth repeating, plus the New York Times finally managed to cover it today. The money from these bailouts to Greece, for example, inevitably goes right into the banking sector, particularly German and French banks. So they really should be described as back-door bank bailouts. After all, I’ve never heard of a loan with one participant. You need a borrower and a lender. And if the borrower was “irresponsible,” well, the lender was too by not properly managing the risk. But instead, it’s only the Greeks who get punished for these activities.

In this case, the main agencies monitoring the bailouts have absorbed the risk from those banks, and when they “pay” Greece for the bailouts, they’re really just paying themselves.

If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Commission — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has afflicted Athens and clouded the future of the euro zone.

As they pay themselves, though, the troika members are also withholding other funds intended to keep the Greek government in operation […]

In an elaborate payment system that began after the May 6 election that brought down the Greek government and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payments on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

About three-quarters of Greece’s debt, or $229 billion, is now effectively owned by one of the three troika members, according to estimates by the investment bank UBS.

The European Central Bank in particular wants their money back, out of an oversized concern over inflation risks. The entire enterprise is simply insane, and yet it continues.

Robert Kuttner just visited Greece, and he writes that the complexity and decentralization of the Eurozone project is hampering any actual solutions. But he also chalks up the crisis to ideology:  [cont’d.]

But dysfunctional EU institutions are only part of the story. Looking back to the beginnings of the sovereign debt crisis in late 2009, when speculators began making bets against Greek government bonds, it is clear that European national leaders and the ECB completely mishandled the challenge because of their conservative, free-market ideology.

The ECB and national central banks might have intervened decisively on the side of Greek government bonds, and caused the speculators to take a financial bath. Europe might have given Greece a relatively modest amount of budgetary aid. Both actions would have nipped the crisis in the bud.

Instead, the European powers allowed speculators to rule. And in exchange for relief that proved far too modest, they demanded two rounds of budget austerity. The government of George Papandreou managed to cut the deficit by five percentage points, at the behest of the ECB and the EU. The target had been 5.5 points. Papandreou was judged to have failed. In a second round of austerity measures demanded by the European powers last September, pensions were slashed, more layoffs were ordered, taxes were raised and further budget cuts were ordered.

As any economics student could have predicted, the result of these cuts was a deeper recession and a worsening debt ratio. As an indication of the sheer incompetence and perversity of the IMF and ECB team, one senior Greek official told me that these officials suddenly demanded that that the privatization program be increased from 15 billion Euros to 50 billion Euros, not because it made economic sense or that there were buyers for that scale of Greek government assets, but because the deficit reduction targets had a 50 billion Euro hole that needed to be filled.

This has all the makings of a disaster. I feel like most of my writing on the subject only ever gets to one corner of the problem, when coordinated policy at all levels is what is needed. And that’s simply not going to happen with any kind of thrust.

There’s something to keep in mind when we talk about “bailouts” and rescue packages for European sovereigns. I know I’ve covered this subject before, but it’s worth repeating, plus the New York Times finally managed to cover it today. The money from these bailouts to Greece, for example, inevitably go right into the banking sector, particularly German and French banks. So they really should be described as back-door bank bailouts. After all, I’ve never heard of a loan with one participant. You need a borrower and a lender. And if the borrower was “irresponsible,” well, the lender was too by not properly managing the risk. But instead, it’s only the Greeks who get punished for these activities.

In this case, the main agencies monitoring the bailouts have absorbed the risk from those banks, and when they “pay” Greece for the bailouts, they’re really just paying themselves.

If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Commission — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has afflicted Athens and clouded the future of the euro zone.

As they pay themselves, though, the troika members are also withholding other funds intended to keep the Greek government in operation […]

In an elaborate payment system that began after the May 6 election that brought down the Greek government and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payments on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

About three-quarters of Greece’s debt, or $229 billion, is now effectively owned by one of the three troika members, according to estimates by the investment bank UBS.

The European Central Bank in particular wants their money back, out of an oversized concern over inflation risks. The entire enterprise is simply insane, and yet it continues.

Robert Kuttner just visited Greece, and he writes that the complexity and decentralization of the Eurozone project is hampering any actual solutions. But he also chalks up the crisis to ideology:

But dysfunctional EU institutions are only part of the story. Looking back to the beginnings of the sovereign debt crisis in late 2009, when speculators began making bets against Greek government bonds, it is clear that European national leaders and the ECB completely mishandled the challenge because of their conservative, free-market ideology.

The ECB and national central banks might have intervened decisively on the side of Greek government bonds, and caused the speculators to take a financial bath. Europe might have given Greece a relatively modest amount of budgetary aid. Both actions would have nipped the crisis in the bud.

Instead, the European powers allowed speculators to rule. And in exchange for relief that proved far too modest, they demanded two rounds of budget austerity. The government of George Papandreou managed to cut the deficit by five percentage points, at the behest of the ECB and the EU. The target had been 5.5 points. Papandreou was judged to have failed. In a second round of austerity measures demanded by the European powers last September, pensions were slashed, more layoffs were ordered, taxes were raised and further budget cuts were ordered.

As any economics student could have predicted, the result of these cuts was a deeper recession and a worsening debt ratio. As an indication of the sheer incompetence and perversity of the IMF and ECB team, one senior Greek official told me that these officials suddenly demanded that that the privatization program be increased from 15 billion Euros to 50 billion Euros, not because it made economic sense or that there were buyers for that scale of Greek government assets, but because the deficit reduction targets had a 50 billion Euro hole that needed to be filled.

This has all the makings of a disaster. I feel like most of my writing on the subject only ever gets to one corner of the problem, when coordinated policy at all levels is what is needed. And that’s simply not going to happen with any kind of thrust.

David Dayen

David Dayen