John Taylor: IMF Loans To Greece Bailed Out Banks And Worsened The Situation

Two weeks ago, in "The Unspoken Tragedy In The Upcoming Greek Bailout", we showed that for all the talk of Greek profligacy and corruption (and there certainly has been a lot of that since Greece adopted the Euro in 2001), the reality is that of the €230 billion in Greek bailouts 1 and 2, only 11% of this amount trickled down to the Greek population.


We followed up earlier this week with "The Biggest Winner From The Greek Tragedy" in which we explained that while Greek debt has risen consistently to a record highs of 175% of GDP even with the PSI aka private creditor debt restructuring which took place in 2012...


... the vast majority of that debt has gone to cover repayments to banks exposed to Greece:

Now, as a result of yet another imminent bailout, #3, the Greek people are about ot be hijacked by their government which explicitly asked them if they agree with said bailout to which 62% said no, and stick them with tens of billions more in debt, debt which will push the total debt/GDP to over 200% and without a trace of doubt, lead to the complete collapse of Greece. Worse, virtually all of thise debt will again be used as funds to repay exiting creditor claims.

Then again, Greece has already collapsed, and the only real question is whether the ECB will give Greek depositors time to withdraw some of the €120 billion in deposits it holds hostage with the frozen ELA, or if the ECB will admit the truth about the Greek insolvent banking system risking Eurozone contagion.

Perhaps a better question is just what is the purpose of the IMF (besides being the source of much humor with its "forecasts") whose intervention in Greece can be described in one word: disaster.

It can also be described in eleven, as the creator of the Taylor Rule, John Taylor, has done in a blog post which can be summarized as follows: IMF Loans To Greece Bailed Out Banks And Worsened The Situation.

Here are the key excerpts:

I make the case in this Wall Street Journal piece and in more detail in Congressional testimony that there’s an opportunity for a deal between the Congress and the Administration on international monetary reform.  The case starts with perhaps the most obvious lesson from the Greek crisis: The IMF should not make loans to countries with unsustainable debt. Such loans bail out banks and often worsen the situation.


The IMF learned that lesson more than a decade ago and in 2003 adopted an “exceptional access framework” enshrining the rule of no lending to countries with unsustainable debt. There were few crises in emerging markets in the years following, and it seemed to work well.


But the rule was broken in 2010 when the Greek crisis came along.  Even though Greek debt was unsustainable, the IMF lent 30 billion euros anyway.  It wrote in an exemption to the rule for systemic risk, perhaps under pressure from private holders of Greek debt.

Here replace "perhaps" with "most certainly"!

Following this 2010 decision, the Greek economy has deteriorated sharply and many private creditors were able to get out of Greek debt leaving the public sector holding the bag, as Benn Steil has dramatically shown.

Taylor goes on to demand that the IMF's systemic exemption be repealed, as per his WSJ Op-Ed:

New loans, it said, could be made in unsustainable situations so long as there was a “high risk of international systemic spillover.” The IMF claimed, with very little evidence, that this was true in Greece’s case and approved an exceptionally large loan of €30 billion. But it did not require any restructuring of the debt, which was held largely by European banks.

Therein lies the fault of Taylor's thinking: whether it is the IMF, or just any other central bank, the largest commercial bank equity holders will always find a way to transfer their risk exposure to that of the general public: it happened in the US in 2008 (with no referendum), it has kept happening in Greece for the past five years. Private banks don't need three-letter acronym organizations to do it (three page blank check proposals work just as well) but they will use them if they are around.

As long as commercial banks are in control of entities such as central banks, the policy of privatized gains and socialized losses, aka the "global central bank put", will never change.

And as long as private banks also get to determine policy, which they do thanks to thir pervasive domination of all the world's politicians, the bailouts of these monstrous entities at the taxpayers' expense will continue.

Incidentally, for those still dubious about how just one bank, in this case FDIC insured hedge fund (why is it still FDIC insured - because it has so many ATMs probably) Goldman Sachs, can control the world, here is a reminder.