The troika saved the banks and the creditors, not Greece


Alexis Tsipras speaks at Syriza’s latest campaign rally. Michael Debets/Demotix. All rights reserved. Alexis Tsipras’ decision to put the cancellation of a large part of the nominal value of Greek public debt and a moratorium on the repayment of the remaining part of the debt at the center of his electoral platform has sparked a heated debate. on whether Greece “deserves” debt relief or not. It is a mistake. As Paul Krugman has often pointed out, “economics is not a morality play…in which virtue is rewarded and vice punished”.

The question is not – and should never be – whether a country deserved see his debt canceled or not, but only if he Needs it or not, as Jeffrey Sachs recently wrote in The Guardian. And when it comes to Greece, “the answer is unequivocal,” says Sachs. “Anyone who does Greek debt arithmetic (and sometimes it seems like no one in Berlin actually does it) knows that they cannot repay their external debts, today around 170% of GDP, without a level of pain that is simply beyond the tolerance of democratic societies’.

There is an almost unanimous consensus among economists on this point (with rare exceptions, such as Andrew Watt and Lorenzo Bini Smaghi, whose attempts to prove that Greece’s debt is indeed sustainable are not convincing in my view); see for example Paul de Grauwe, Simon Wren Lewis, Thomas Piquetty, Philippe Legrain, Dani Rodrick and Wolfgang MunchauJust to name a few.

In other words, there is little doubt that from a purely economic point of view, Greece needs debt relief. But unfortunately, economics is never just about economics: like it or not, morals and culture shape people’s attitudes to economic issues, and this is nowhere more clear only with the issue of debt (private or public). It would be fair to say that the dominant position of the common man on the matter is that debts incurred must be repaid, whatever the cost.

This is especially true for Germany, where the word “debt” – “schuld” – also means “guilt”. The fact that Germany is the hegemonic power in Europe means that the profoundly moral interpretation of the euro crisis by its leaders – which has pitted the profligate and indebted malefactors of the periphery against the virtuous and responsible countries of the center – is quickly became conventional wisdom. among European politicians, commentators and bureaucrats.

Politically, this proved very effective for Germany (and European elites in general), as it provided powerful ideology and perhaps more importantly. moral rationale for the brutal austerity policies prescribed to the countries of the periphery (and in particular Greece) in recent years.

As David Graeber writes in his book Debt: the first 5,000 years“If history shows anything, it is that there is no better way to justify relationships based on violence, to make them moral, than by reframing them in the language of debt – especially because it immediately makes people believe that it is the victim who is doing something wrong”.

This means that if we want to challenge the dominant narrative, it is not enough to issue rational and economically watertight critiques of current policies; we also need to question the “moral game” that underlies these policies (and the public response to them). Which, in the case of Greek debt, also involves asking whether or not the country “deserves” debt relief, regardless of whether the issue is economically moot.

Today, it is widely believed that the €226 billion troika bailout of Greece was primarily aimed at keeping the bankrupt Greek state afloat, maintaining its basic operations and paying salaries of its overpaid civil servants. Given that the lion’s share of lending came from the rich core countries (first and foremost Germany), one could be forgiven for viewing this as lending countries extending a helping hand to their struggling brethren, albeit only reluctantly; and for understanding Germany’s outraged reaction to Tsipras’ refusal to repay the debt. But where did the money go? And who was really bailed out, the debtors or the creditors?

A recent study by Greek economist Yiannis Mouzakis, based on European Commission review documents, IMF assessment reports and Greek government budget documents, revealed that only €27 billion – a measly 11% of total funding – was used for the operational needs of the Greek State. This corresponds to the fact that the Greek government, following the brutal tightening imposed by the troika, has been running a primary surplus (i.e. its income has exceeded its expenditure) since 2013.

And the rest of the money? Well, it went to domestic banks and foreign creditors, mainly French and German banks. In other words, more than 80% of the rescue funds were used to bail out, directly or indirectly, the financial sector (Greek and foreign) – not the Greek state. In the process, the overwhelming majority of Greek public debt was transferred from the private to the public sector, with other eurozone governments now responsible for around 65% of Greek debt (and a further 20% in the hands of of the ECB and the IMF).

This is the same conclusion reached an Attac Austria report 2013 and by a more recent Jubilee Debt Campaign Analysis (both are worth reading, as is Mouzakis’ article). Interestingly, the same dynamic also applies to other sovereign bailouts (see here
for an overview of the different cases and here
for an in-depth analysis of the Irish case). In this light, the Troika bailouts can be seen as the “second phase” of the bailout of the European financial sector.

The first, simpler step took place immediately after the crash of 2008, when governments stepped in to guarantee bank debts and provide loans to their banks. In the second, more subtle stage, which began in 2010, the EU establishment and core countries stepped in and “strongly encouraged” peripheral countries to take public loans from the troika rather than from the troika. consider alternatives such as debt restructuring, which would have ensured that the banks paid part of the price of their excessive lending.

The funds were then, to a large extent, redirected to creditor countries. This has resulted in a double shift of liabilities: from banks in the periphery to governments (and citizens) in the periphery; and from the core banks to the governments (and citizens) of the Eurozone as a whole, since most of the Troika rescue funds came from EMU countries.

It irrefutably shames the claim that “European taxpayers’ money” was used to save Greece and the other reckless and debauched countries on the periphery; the truth is that these bailouts actually amounted to “a backdoor bailout of irresponsible German loans”, inasmuch as International Funding Review the article put it, relieving German lenders while exploding the level of public debt of the “bailed out” countries. Philippe Legrain, former adviser to Barroso, then President of the European Commission, writes that “To avoid losses to German and French banks, Eurozone policymakers, led by German Chancellor Angela Merkel…lent European taxpayers’ money to the insolvent Greek government, ostensibly out of solidarity, but in fact to bail out the creditors”.

Greece’s reckless borrowing was financed by equally reckless lenders, but “the European Union chose to solve the debt crisis by punishing the Greeks and rescuing the banks of the North”, is the unequivocal conclusion of Paul De Grauwe. Interestingly, the same opinion is shared by Peter Böfinger, economic adviser to the German government, who declared in 2011 that the Greek bailouts “do not primarily concern the problem countries, but our own banks, which hold significant credits there”.

Moreover, to add insult to injury, the so-called troika “aid” was then used as an excuse to impose a brutal austerity cure on Greece which further increased the country’s public debt, destroyed a quarter of its economy and caused a real social and humanitarian crisis.

Classified documents leaked reveal that even some IMF member states had serious doubts about the true objectives of the program. As the Brazilian representative stated uncompromisingly, the bailout “can be seen not as a bailout of Greece, which will have to undergo a harrowing adjustment, but as a bailout of private Greek creditors, mainly European financial institutions.”

Moreover, the Fund itself had serious reluctance to offer Greece such a huge loan relative to the size of its economy (in just a few years Greece took out loans equivalent to almost 125% of the economic activity in 2014), insisting that this would make Greece’s public debt – which the report said was still sustainable at the time – ultimately unsustainable.

Apparently, the Fund argued for a rapid depreciation of Greek debt, but the other two members of the troika – the European Commission and the ECB – vigorously opposed any loss to bondholders. When the European Union and the ECB were forced to accept a haircut in the summer of 2011, the damage was already done. As a result, almost all analysts agree that the Fund’s predictions have painfully come true.

All this leads to a simple and unequivocal conclusion: Greece does not only need debt relief, it deserves it.

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