Unintended Consequences Of Bailouts: Greece Gets Slammed

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Bailouts, particularly those by central banks, have become known for their so-called “unintended consequences”—however intended they might have been. And now, unintended consequences strike again. The ECB’s massive purchases of decomposing Greek debt—an under-the-radar bailout of banks and insurance companies that were holding it—are making the favorite solution to the Greek crisis, namely another deep haircut, legally impossible, said Bundesbank President Jens Weidmann.

Weidmann, an outspoken opponent of the ECB’s bond purchasing programs who has likened them to a pact with the devil [Monetary Schizophrenia in Germany], has seen the writing on the wall. “Apparently,” he said during an interview, “the political world has decided to continue financing Greece.”

In theory, the next bailout payment of €31.5 billion is contingent on the big report that the Troika—the ever so successful bailout and austerity gang from the ECB, the IMF, and the EU—is putting together. They’ve been working on it since June. No money would be transferred to Greece unless the report would show that Greece is implementing to the last iota the agreed-upon reform program.

In practice, Weidmann questioned the independence of the report. Politicians have been dripping with admiration for Greece’s progress and have been expressing their intention to restart the aid flow, though the report isn’t even finished. And he wondered how you could objectively evaluate Greece’s performance in implementing the reform program, “when you’re too afraid of the consequences of a negative judgment?”

Political careers might be at stake, even in Germany, as Greece would be cut loose from the bailout pipeline, if the judgment were “negative.” The country would default and possibly walk away from the Eurozone. It would be messy. And it would happen before next year’s election in Germany. Unthinkable.

But Weidmann, in staying clear of political ramifications, worried about the Euro System—the ECB and the national central banks—that has become “one of the largest creditors” of Greece during the crisis. One of the solutions to the Greek debacle that has recently been pitched in all corners calls for another haircut, but this time on public-sector creditors, namely the Euro System. It would be a much deeper default. But it would grant debt relief to Greece.

Impossible. Weidmann objected to the comparison between the private-sector holders of Greek debt who were arm-twisted earlier this year into accepting a haircut. Banks and insurance companies had originally bought that debt to make a profit, he said, and they had to bear the risks associated with it. But the Euro System bought Greek debt during the crisis in its role as helper. “So the comparison is limping,” he explained.

That was just his warm-up for the unintended consequences of the attempted bailout via bond purchases: “The central banks must not cancel Greece’s debt,” he said, because that would be a “direct transfer and would be equal to the prohibited monetary funding of the government.”

In other words, if the private sector were still holding this debt, the solution would be another bout of arm-twisting, and another haircut. Greece would have gotten rid of most of its debt. That, Weidmann said, is no longer possible. By extension, it would apply to all other crisis states: once the ECB buys their debt to bail them out, any debt relief through a public-sector haircut is out of the question. Watch out, Spain, he seemed to say. You can’t get rid of your debt once the ECB is holding it.

But a haircut wouldn’t resolve the problems anyway, he said. “What good does it do to forgive Athens its debt if in ten years the country is back at the same point where it is today?” No, he said, Greece would have to fundamentally reform itself and become competitive.

The Eurozone has bigger problems than Greece: it seeped out that the German Finance Minister Wolfgang Schäuble broached an unprecedented topic with Germany’s Council of Economic Experts. Could they produce a reform concept for the troubled French economy? It revealed a threat that terrorizes the German government. Read..... Germany’s Fear And Desperation Leak Out.

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Mad Mohel's picture

Another Greek slamming? The outcome will be shitty.

OneTinSoldier66's picture

All your bailout belong to us. All your bank belong to us. All your sovereignty belong to us.


Meanwhile, the debasement of paper money continues.

Harbanger's picture

Grammar check, it's  "All your....are belong to us."

OneTinSoldier66's picture

Arrrghh! Right you are. Thank you!

Peter Pan's picture

I do not know whether history repeats or rhymes but it definitely must be laughing with the hare brained attempts to prop up a rotten to the core structure.

Nussi34's picture

Let´s just have a tsunami that wipes out Greece. At least less paper will be used in the future writing about this hopeless place.

Winston Churchill's picture

Better yet:

Outdoor souvalaki restaurant.

Cooking is the only thing Greeks work at.

Greek food in Greece still tastes like shit though.

Harbanger's picture

I don't know where you live, but I live in the US and all the Greeks I ever met were hard working and 90% of them owned a business.  I guess the reason a person leaves their country is what matters, if they left to get a better handout ,then you're going to get the bottom feeders.  That's where the US is right now with immigration, and the Democrats have a monopoly on the vote from bottom feeders.

I am Jobe's picture

Christmas is gonna be very very depressing in Europe and USSA.

No Euros please we're British's picture

Don't forget that now the election is over, Obama may not let the IMF pump any more money down the Greek drain.

The IMF may demand this "illegal" haircut, Lagarde may be French but she's an American poodle.

ebworthen's picture

If someone suggested that every citizen of Greece recieve half a million Eruos it would be called insanity; a debasement of the rule of law, or morality, of the social contract.

But...give half a billion Euros to each bank and a 25 million Euros to each bank Executive and it's a rescue plan to preserve society.

It's bullshit there and it's bullshit here.


falak pema's picture

ah but the trick is that the Cbs pay their crony buddies in USD and Euros, in other words in money of continuously receding value.

But that's the beauty of the scam; nobody knows that, or more precisely nobody wants to believe that!

Everybody thinks that we live in first world behind Constantinople's impregnable walls. We are in 1452. 

Oh ephemeral paradise; when you have it all and before the inevitable fall. 

As then, topic of the day in the imperial city : how many angels sitting on a pin head? Aka, what is Apple stock doing?

In the world of Oligarchs today we can summarise the creed :

One God : The Greenback

One religion : Crony Oligarchy Capitalism

One Church : WS/City

One Devil : Austerity and market collapse

unirealist's picture

What the heck is that book promotion doing at the end of the post?


WaEver's picture

It's kinda weird how much the greek tragedy resembles the position of Germany after WWI : how to repay a debt that is essentially unrepayable and puts a yoke around the future of a whole generation. History indeed doens't repaet itself but it rhymes.

dunce's picture

Greek debt is in two parts . private and public but i believe Germanys WWl was nearly all repartions imposed by vindictive winners. It might fairly be argued that both debt mountains were thre result of bad political decisions and thar debt is debt no matter how it was incurred. Even many other countries were involved in starting the war by political bungling. Eventually debt that can not be paid must be written off no matter how unpleasant that is for all concerned and that can be delayed but not avoided. Politcians are great at spending other peoples money, but paying off debt ,not so much.

sunnyside's picture

Owing monies to JPM or GS is much more important (and dangerous) than owing it other sovereigns or your own citizens.  Y'all think Dimond, Blankfein, and friends will go down in history as just as big of bastards as some of the 20th century despots?


cdude's picture

If the likelihood of a potential "consequence" was know then (in retrospect) it cannot be considered to have been unintended. Lets call it what it is- Coldly accepted Machiavellian malfeasance for one's own gain and preservation.

lasvegaspersona's picture

obviously waiting for the great reset which would make all of this business go away as the world would be awash in dollars and the Euro would be lookin gut...

AynRandFan's picture

"Legally impossible" is an oxymoron.

Zero Govt's picture

Yep, anything is possible in a legalistic world

the EC and ECB can break every constitutional rule in the book, America and Britain can flout all international Law on waging murderous war and Japan can piss over every Law on safety and environmental protection

nobodies a bigger criminal in the world than Govt without it ever being illegal

"That'll be a $50 on-the-spot fine Mr Citizen for 6 minutes over-parked. Our Lord State demands instant justice and fines for your terrible behaviour."

Joebloinvestor's picture

The EU is afraid of the bogieman.

He is still there even when you turn on the light guys and he isn't going away.

If they had let Greece go BK in the first place they would be six years into a recovery.



lolmao500's picture

No money would be transferred to Greece unless the report would show that Greece is implementing to the last iota the agreed-upon reform program.

No money then.

Zero Govt's picture

stupid compounds on stupid 

..that'll be Govt then

it is the "Birthplace of democratic Govt" (ie. born stupid) so not exactly a shocker

DeadFred's picture

The obvious answer is for the ECB to sell all its debt to investors then do the haircut thing. I meant this as a joke at first, as in, who would buy the bonds, but this might work. Promise a 70% haircut but sell at a price for a steeper haircut. Investors would jump at the opportunity and the ECB would bear the cost of bailing out Greece but it wouldn't be DIRECT funding for Greece. This plan is twisted, devious and stupid enough that Draghi will love it.

disabledvet's picture

actually that i think is the plan for the USA...

dunce's picture

I think you have spotted their plan, and the private "investors" are the German taxpayers. There is a line in a popular song "money for nothing" and that is the most likely outcome. I expect we will be on the hook through the IMF and world bank.

Western's picture

No, actually the only investors would be the printers themselves. The jig is up.

DeadFred's picture

Crazy plans don't deserve double posts