We got ourselves a new twist on an old-fashioned bank run! By gum, it’s been a while.
The story notes that since the start of 2010, Greek banks lost nearly 30 percent of their total savings amounts, with September and October seeing a combined loss of 14 billion euros.
Greeks are either living off those savings or sending it out of country.
- Bloodletting begins: anxious Greeks emptying their bank accounts (theextinctionprotocol.wordpress.com)
- How the ECB could be forced to print money (blogs.reuters.com)
- European Bank Runs And Underestimated Physical Gold Demand (citizeneconomists.com)
In 1999, the euro became official. A year later, Greece joined up. The Big Shared Illusion was that once countries adopted the euro, they wouldn’t default. They would limit their deficits. Every country would become like Germany, where debt was highly secure. So Greek debt, Irish debt and Spanish debt began to trade as if they were super-safe German or French debt. Countries like Greece that had been considered dicey investments then became overconfident, based on this Big Shared Illusion (BSI). The European Central Bank would take care of inflation, investors thought. And surely no one could then go bankrupt. The Greeks, once forced to pay high interest rates (as high as 18 percent in 1994), could now borrow at low interest. Happy days were here again!
The second stage of folly, based on the BSI, was that the conservative Greek government went on a reckless borrowing spree, and the banks went on a reckless lending spree. Big European banks were delighted to lend Greece money. And, sinking deeply into the BSI — or was it just selective inattention? — more than a few banks eventually began helping the Greeks hide evidence that all was not well. With the evidence kept hidden, more bonds could be sold to more investors, and that meant more commissions. Alice had quite profitably stepped through the looking glass.
But then, as early as 2005, many of these big banks began to wake up — they began to realize that the Greeks wouldn’t be able to pay the money back. But so what, some of them said. It’s called moral hazard: you know your risky behavior is not going to be punished because somebody else is going to have to pay for it. That’s what the banksters counted on in the case of Greece, and accordingly they kept the rivers of money (generated from selling secretly-risky Greek bonds) flowing. They were just making too much money at it, and couldn’t stop themselves — not when they knew they could get off, in the end, with little more than a slap on the wrist, while others would take the real hit for them.
So the Greek government was given the green light to borrow boatloads of money for their Olympics, which cost twice as much as projected. Magician-bankers at Goldman Sachs obligingly helped the Greek government disguise the danger of the debt — we’re talking billions — with clever little financial instruments called derivatives. The public hadn’t a clue what was going on, but who cared? — Goldman was making commissions hand over fist on all these bond and derivatives sales. So, all the southern countries on the euro-teat continued to borrow heavily (by way of these bonds that were being sold like hotcakes with Goldman’s help) — and spend heavily — and for a while these little countries boomed, while all this newly borrowed money was being spent, and then spent again. God bless the multiplier effect, and God bless banks like Goldman Sachs for helping make all this magic happen! .
The sh*t hit the fan when the Greek government changed hands in October 2009. The books were opened to the light of day, and it became obvious to one and all that there was a much bigger deficit than anyone thought. Investors then ran for the hills. Interest rates shot up. In November, just three months before the Greeks became the epicenter of the European economic crisis, the wizards of Wall Street (a.k.a. banksters) were back on the scene in Athens, frantically trying to peddle still more derivatives deals, so that the appearance of the debt would magically vanish. The New York Times summed up the banksters’ role in the crisis this way:
“As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase, and a wide range of other banks, enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.”
In dozens of deals across the Continent, banks provided cash upfront (i.e. loans) in return for government “payments in the future,” with those liabilities then left off the books. Example: For big fat loans (i.e. bonds that were sold to investors), the Greek government traded away such things as the right to collect fees at airports, and the right to collect lottery proceeds (i.e. “payments in the future”) . . for years to come. In other words, Greece traded major sources of future government revenue, for big money NOW. And banksters like Goldman encouraged this foolhardy undertaking because they were making so much money off of keeping the Big Shared Illusion going. And damn the final outcome when the house of cards finally collapsed. Others would pay the price, not banks like Goldman.
But with potentially destructive financial winds gaining hurricane force, it became clear that Greece would need a whole lot of money if investors in their bonds were ever going to get paid back. So the government jumped on the austerity train to nowhere — making draconian cuts in services, pensions and wages, which only increased their deficits. And then they had to ask the EU for more money. Public workers were fired in order to pay the banks their pound of flesh. Then pensions were slashed to pay the banks still more. But there still wasn’t enough money to pay the banks all that they were owed.
If you’re a country that has your own sovereign currency — like the U.S. — then you have some options in such a situation. You can do monetary expansion to head off deflation, for example, and devalue your currency. But once Greece went on the euro, it said good-bye to such options. So it cut, cut, and cut, but is now going bankrupt anyway. The country is mired in falling incomes (that reduce consumer spending, thereby leading to layoffs and ever lower average incomes) and is also mired in rising deficits, and is therefore sinking ever further into what might be called the Herbert Hoover death spiral.
Meanwhile, members of the EU are flipping out. Contributions to the bailout agreed to in July . . are supposed to be proportional to a country’s economic status, and thus the Germans have the biggest chunk to fork over. But most Germans are not keen on the notion of doing this just so that the Greek and French banks can get paid. Hey, they’re thinking, wouldn’t it be cheaper to recapitalize our own banks directly?
The French are really flipping out, because after the Greek banks, their banks ended up holding the biggest hordes of Greek debt (i.e. bonds). So they’re worried about their credit rating once it is widely realized that the bonds they are holding are essentially “toxic waste” that’s worth maybe half of its nominal value, if that.
So the bailout decision has been postponed until mid-November.
The realization is dawning that this sh*tstorm is too big, and that the Greeks can’t fix themselves. So they may have to go bust. And if Greece goes bust, that means the Greek debt will be written down, way down, to maybe half its initial value, or less. Which means the Greeks would then only owe half the money they currently owe to the banks and other bond holders. Thus all banks and other investors in these junk bonds will take it on the chin. Hard. And because these banks were in crappy shape anyway (despite their phony stress tests), the possibility of cascading bank defaults arises.
Thus the proposal to build a firewall around Greece, so that if it does go bust, everybody else will be protected. (Good luck with that.) And then wait “til the same thing happens in Portugal, Spain, and maybe Italy.
In a nutshell, Europe is in the process of deflating and collapsing, in order to protect banksters.
Sadly, this doesn’t have to happen. The big banks could be taken over by the government, recapitalized, and their management fired — FDR-style and S&L style. Admittedly, this is unthinkable in the world of bank-centric, neoliberal economics, in which the banks essentially own the governments. On the other hand, the anti-bank constituencies, on both the left and the right, are much bigger now than they were when the financial crisis began, and with the Occupy Wall Street movement spreading around the world by leaps and bounds, the banksters might be taken down after all. So, will the banksters prevail, or will their victims, who are building their forces at warp speed?
In a way, the Greek crisis is a chance to do things right: take the big banks into receivership, reorganize them, let their investors take a major haircut, and then sell them back into the private sector once their toxic assets are sold off. But that proly ain’t gonna happen. Therefore, because there’s not enough money in the EU for a bailout, the International Monetary Fund will likely have to step in. And guess who’s the major member of the IMF? The United States! That’s right, there will be smoke, and there will be mirrors, but there will be no one warning the American taxpayer to “Get ready to hand over some more money to the banksters.” Yet that’s what’s likely to happen: The bailout will come from the United States — even though right now Treasury Secretary Geithner is denying it.
What you have just read is my interpretation and synopsis of an article written by Lynn Parramore at Alternet.
- Greece’s Situation (by Daniel Jianu in Athens) (deindc.wordpress.com)
- EU Officials Said to See Risks Amid Call for Talks on Debt Swap (businessweek.com)
- Greek’s 2nd rescue deal not enough, creditors say (usatoday.com)
- Understanding the European debt crisis (theglobeandmail.com)