In other words, a write-off of all Greek government debt would have been a deep flesh wound for the German and French banks (around 6-7% of total capital), but a complete wipe-out for the Greek banks (just under 100% of capital and reserves).ĭon’t take the calculations in point 4 above too seriously. Probably better to just check out the dataset at the link rather than suffer this adventure in Microsoft Paint. So we can say the following things, just from the data:ġ) The majority of Greek government bonds were held by non-Greek residents - Merler & Pisani-Ferry reckon about 72%.Ģ) However, the Greek domestic banking system was far and away the largest single holder, almost as much as French and German banks put togetherģ) French banks, in particular, had a lot of their Greek government exposure through subsidiaries, and could at least in principle have reduced their losses in the event of a Greek government default by taking advantage of limited liability.Ĥ) When we compared the GGB exposures to total capital and reserves, we can see that the Greek domestic banking system in April 2010 had EUR39.1bn of reserves, while the French system had EUR463.9bn and the German had EUR368.4bn. It is not clear - and probably impossible to know - to what extent this EUR40bn figure double-counts the government bonds held by Emporiki and Geniki, but for reasons to be discussed below, I don’t think that matters so much. If the debts had been smaller or larger, that wouldn’t have changed the number EURxbn. The creditors effectively agreed to roll over their outstanding debts, and to provide EURxbn of additional financing. It’s the nature of debt crises that they tend to happen to countries with big debts, and countries with big debts have creditors. This is just missing the concept of a debt rollover. Second, let’s not make mistakes based on dividing the deficit financing by the total size of the package, and getting results that “x% of the financing went to Greece, all the rest went to creditors”. If the people negotiating the package had unlimited money, they would have agreed a larger primary deficit in 2010, but they didn’t - the 2010 package was the largest amount of financing that was available. (Olivier Blanchard makes this important point clearly). It was the outcome of a genuine, albeit politically driven, budget constraint. In Greece, though, in 2009–10 at least, the fiscal deficit was not, in my view, chosen as a policy. In my view, the real definition of austerity is a tightening of the fiscal stance *as a policy choice*. I’m going to be using a couple of key concepts quite a lot, so it’s best to spell them out ahead of time rather than introduce them at the same time as a bunch of other complicated stuff.įirst, I think we need to make a distinction between two kinds of “austerity”.
#Greek private debt writedown series#
This is going to have to be (at least) a two-part series because I want to get quite detailed - this part deals with point 1 above and the question of “Who was the 2010 bailout meant to benefit?”.Ī couple of conceptual primaries.
It’s worth relitigating in detail though, because in going through the choices made in 2010 we can learn a lot about how bailouts in general operate, and how the development of the programs since 2010 could end up generating serious errors going forward. There’s some truth in these points - as I say, it’s the most intelligent critique of the Eurogroup - but in my view the conclusion is wrong and the 2010 bailout was not a mistake. So, most of Greece’s economic problems today would have been better if it had defaulted in 2010 rather than accepting the Eurogroup’s program. Greece would have benefited more in the long term from a program with the same deficit financing but a face value debt writedownģ. The actual amount of financing available for the Greek fiscal deficit was smaller than it might otherwise have been, orĢb.
The 2010 bailout was mainly directed at stabilising European financial markets, so eitherĢa. Triangulating between Karl Whelan, Mark Blyth, Simon Wren-Lewis, Steve Waldman and Martin Sandbu, for example, we can identify the following argument (which of course doesn’t do justice to any of them - do please read the links rather than assuming I’ve summarised anything accurately!):ġ. It’s becoming a common theme of the more intelligent end of criticism of the Eurogroup to identify the 2010 bailout as the real error. 2010 and all that - Relitigating the Greek bailout (Part 1)
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