The two-pronged Greece bailout

By Felix Salmon
June 1, 2010
the Bundesbank isn't happy about that:

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When the Greece crisis first erupted, the choice facing European policymakers was clear. Should they bail out Greece, giving it all the money it needs to pay its debts as they come due, or should they let the Greek chips fall as they may, and then bail out their national banks instead to the degree those banks lost money on their Greek bonds? Some kind of bailout was inevitable; the only question was whether it would be a sovereign bailout or a bank bailout.

It’s now becoming clear that the choice that the Europeans plumped for was “both of the above”. And the Bundesbank isn’t happy about that:

Greece received a financial rescue from other European countries and the International Monetary Fund of up to €110 billion ($135 billion) last month, ending its reliance on capital markets for funding until at least 2012.

Since the European Central Bank began purchasing government bonds three weeks ago, it has spent about €25 billion on Greek debt, according to a senior Bundesbank official who declined to be named.

When the ECB buys up Greek debt in the secondary market, it doesn’t help Greece very much, since Greece no longer requires market access to roll over its debts. Instead, the main beneficiaries of this operation are European banks:

Selling the Greek debt would likely be an attractive option to banks eager to avoid a debt restructuring which would force them to book losses. French banks are the largest holders of Greek debt, according to Bank for International Settlement estimates, followed by German banks.

Europe, here, is setting itself up for a double whammy if and when the Greek default finally happens: it’s going to take losses on its own loans to Greece, and it’s also going to take losses on the Greek debt that it’s currently hoovering up at or near par. All of which might be manageable in the case of Greece, but this strategy doesn’t scale to Spain and Portugal and Ireland as well, lest the sovereign debt crisis become a fully-fledged EU solvency crisis. All of which signals to me that Europe’s reaction to the Greek crisis is looking panicked and ad hoc. And there’s no sign of anything more strategic coming down the pike.

4 comments

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The French banks and insurance companies have 80 billion euros worth of Greek bonds on their books, while
the German institutions have committed to keep these bonds on their books until the end of the bail-out

http://www.spiegel.de/international/euro pe/0,1518,697680,00.html

has a Part II devoted to ECB as Eurozone’s Bad Bank, an
unexpected and potentially threatening evolution for the
Germans

Posted by amsterdammer | Report as abusive

Alphaville on what amsterdammer is saying: http://ftalphaville.ft.com/blog/2010/06/ 01/248121/le-smp-le-bailout-francaise/

A Franco-German rift on the horizon?

Posted by lemarin | Report as abusive

Most of the fussing about this seems to come from anticipation that every bailout everywhere else in the world has to follow the same scandalously craven bank-beholden mockery of that in the United States, by rewarding bad banks for having done bad business with weak clients. I submit that it need not.

Scenario: the ECB options the bad debt, then tells the shyster creditors on what terms (if any) they may expect to be repaid, but not in full and not on any old terms that suit the culprits. It’s not like ECB can literally come out and say this before going va banque but, if that’s their play, it would be game-changing.

Posted by HBC | Report as abusive

Every plan so far in these crises seems two-pronged. I wonder if it has something to do with people hedging their bets, and trying to place themselves in position to change views and their version of history depending upon how the crisis breaks. You see this a lot in op-eds about these crises as well. There will be a very strong condemnation of some person or view, followed by an extremely qualified view put forth by the critic. There must be some kind of Game Theoretic explanation of this.

Posted by DonthelibertDem | Report as abusive