Saturday, July 11, 2015

Moral Hazard

Somebody got "bailed out" via Greece. It wasn't the Greeks, though.
In other words, the Greek deficit was a rounding error, not a reason to panic. Unless, of course, the folks holding Greek debts, those big banks in the eurozone core, had, over the prior decade, grown to twice the size (in terms of assets) of—and with operational leverage ratios (assets divided by liabilities) twice as high as—their “too big to fail” American counterparts, which they had done. In such an over-levered world, if Greece defaulted, those banks would need to sell other similar sovereign assets to cover the losses. But all those sell contracts hitting the market at once would trigger a bank run throughout the bond markets of the eurozone that could wipe out core European banks.

Clearly something had to be done to stop the rot, and that something was the troika program for Greece, which succeeded in stopping the bond market bank run—keeping the Greeks in and the yields down—at the cost of making a quarter of Greeks unemployed and destroying nearly a third of the country’s GDP. Consequently, Greece is now just 1.7 percent of the eurozone, and the standoff of the past few months has been over tax and spending mixes of a few billion euros. Why, then, was there no deal for Greece, especially when the IMF’s own research has said that these policies are at best counterproductive, and how has such a small economy managed to generate such a mortal threat to the euro?

Part of the story, as we wrote in January, was the political risk that Syriza presented, which threatened to embolden other anti-creditor coalitions across Europe, such as Podemos in Spain. But another part lay in what the European elites buried deep within their supposed bailouts for Greece. Namely, the bailouts weren’t for Greece at all. They were bailouts-on-the-quiet for Europe’s big banks, and taxpayers in core countries are now being stuck with the bill since the Greeks have refused to pay. It is this hidden game that lies at the heart of Greece’s decision to say “no” and Europe’s inability to solve the problem.
Euro speculation led banks in France and Germany to become "too big to fail."   They were over-leveraged in Greece. So that's where the money went. It didn't stay there.
The EFSF was a company the EU set up in Luxemburg “to preserve financial stability in Europe’s economic and monetary union” by issuing bonds to the tune of 440 billion euro that would generate loans to countries in trouble.

So what did they do with that funding? They raised bonds to bail Greece’s creditors—the banks of France and Germany mainly—via loans to Greece. Greece was thus a mere conduit for a bailout. It was not a recipient in any significant way, despite what is constantly repeated in the media. Of the roughly 230 billion euro disbursed to Greece, it is estimated that only 27 billion went toward keeping the Greek state running. Indeed, by 2013 Greece was running a surplus and did not need such financing. Accordingly, 65 percent of the loans to Greece went straight through Greece to core banks for interest payments, maturing debt, and for domestic bank recapitalization demanded by the lenders. By another accounting, 90 percent of the “loans to Greece” bypassed Greece entirely.
Banksters take enormous risks. Banksters make enormous profits. Until the risks start to fall through and the banksters demand to be paid out of people's retirement funds. In the end there's really no such thing as a risk as far the banksters are concerned.  So this is a story of moral hazard. It's just not the moral hazard story our political scolds would like us to believe it is. 

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