The two-pronged Greece bailout
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.