Days after the July 22 deal on a second
bail-out package for debt-strapped Greece, the full import of the package
is still being unravelled. There are two basic messages that seem to be
emerging. First, the banks, which were initially seen as having been forced
to take a well-deserved hit for their lack of diligence as lenders, have
got away with a good deal. Second, as a result, while European governments
have staked a lot of their money in the hope of saving the eurozone and
preventing another crisis, and so have governments elsewhere through the
involvement of the IMF, the crisis has not been even partially addressed,
but merely postponed.
The second bail-out package is worth Euro 109 billion, just a billion
euros short of the 110 billion provided in the first bail-out more than
a year ago. According to observers much of this money, will come from
eurozone governments in the form of new 15- to 30-year loans carrying
an interest rate of 3.5 percent. The IMF, which provided €30 billion in
the course of the first bail-out is expected to provide around that much
this time too, if Christine Lagarde, its new European head has her way.
And private creditors will swap or roll over 135 billion euros of existing
loans into new, longer-term instruments.
This split, it is now estimated lets the banks off very lightly. This
should have been expected when The Institute of International Finance,
the Washington-headquartered association of leading international banks,
emerged an important player in the negotiations. According to the IIF,
as a result of the deal the banks are set to lose a possibly overestimated
€54 billion. But that is far short of the more than €200 billion they
would have lost if Greece was allowed to spiral into total default.
It was clear that eurozone governments were keen to avoid that outcome
because it would have meant the break up of the zone and a devastating
hit for the euro. But so were governments elsewhere scared of the consequences
for a financial world that has been just bailed out of a crisis at huge
cost and for a real economy that is still limping back to recovery. Using
this fact, finance first mobilised the much-discredited rating agencies
to hold all to ransom by declaring that any debt restructuring would force
them to declare ''selective default''. That did not prevent restructuring
but was enough to persuade the others involved to soften the hit that
finance capital would be required to take. In this effort, another member
of the ''epistemic community'' that finance has built to validate its
demands, the European Central Bank (ECB), also played a role. The ECB
too opposed any restructuring on the grounds that it would reduce the
value of the collateral that Greek banks provide for the support it provides
them. This combined effort, orchestrated by the IIF, allowed banks to
substantially lighten the loss they would have to suffer.
But eurozone governments and the IMF are paying a much higher cost for
the deal. According to an analysis by Breakingviews reported in the New
York Times (propping-up-banks-as-well-as-greece.html),
this loan-tranche of €109 billion euros they are providing would be worth
only 54 billion euros when discounted, implying a 50 percent haircut.
Not surprisingly, emerging market directors on the board of the Fund have
objected to the IMF's involvement in the deal. According to the Financial
Times, Paulo Nogueira Batista, who represents Brazil and eight other
countries on the IMF's executive board, declared in an interview that
since this is the ''first big decision'' that Lagarde is taking as head
of the fund, she has an ideal opportunity to dispel suspicions of bias
towards European bondholders. ''The community of fund-watchers around
the world will be looking to see if she can transcend her European origins,''
he reportedly said.
What is galling to most is the fact that at the end of all this, the problem
remains unresolved. Greek public debt is still in excess of its gross
domestic product. Servicing that even on slightly lighter terms seems
near impossible in the midst of austerity that spells recession. Another
bail-out is inevitable. The danger is that next time round governments
across Europe and elsewhere may be overcome with bail-out fatigue and
just risk wholesale default. The banks and private creditors would then
get their due. But that is small comfort, since the fall-out for the rest
may be too much to bear.