Big Finance and the Greek Drama

C.P. Chandrasekhar

The Financial Times reports that banks in Europe have appealed to the European Central Bank to become a “buyer of last resort” of eurozone government bonds, to prevent another financial crisis. Though the European Central Bank (ECB) is yet to take a decision on the matter, the option has not been ruled out. The ECB is also planning on launching a loan facility which will offer funds to the tune of €600 billion to banks at a one per cent rate of interest to tide over the current funds crunch.

If true, these moves reflect an effort to provide cheap liquidity and take over currently doubtful (sovereign) assets, in order to keep credit moving. That is, the authorities concerned want to do in Greece precisely what was done during the 2008 crisis to banks overexposed to opaque assets that turned toxic. The argument then was that the presence of these assets had frozen the credit pipe, and if the flow was not restored the real economy would experience seizure. To prevent that, the government and the monetary authority should take over doubtful assets, pump in cheap liquidity and buy into bank equity. This time too, the reason being offered is that Greece could be the world’s new Lehman, inasmuch as its default could damage systemically important banks.

Such concern is not surprising. Barclays Capital has estimated that French and German banks and insurance groups hold close to €80 billion in Greek sovereign debt. Besides, there is substantial exposure to private Greek debt of various kinds, which is also in threat of default if the economy slips. Many of the banks exposed heavily to Greece are international giants and their collapse would have repercussions across the globe. Therefore, the desire to bail-out the banks seems perfectly reasonable.

There are, however, two differences between the current conjuncture and that which preceded the 2008-09 bailout. First, the assets under question today are sovereign debts. With governments having the right to tax and the ability to persuade lenders to restructure debt, dealing with sovereign assets should be easier than handling privately generated toxic junk. So rushing in with public money to bail out banks may not be the easy option.

Second, in 2008-09, there was a fair degree of consensus that the banks that were being bailed out were among those responsible for the crisis. So the bailout was presented as an unavoidable temporary measure that would have to precede initiatives to change the nature of the banking system.

In the case of the current “crisis”, the banks are not being seen as responsible. The fact that the banks had willingly lent huge sums to governments that were supposedly profligate is hardly seen as reflective of bad judgement. And the fact that they were otherwise overexposed in countries that were unstable is ignored. So in the current round of discussions on bailing out the banks, the issue of restructuring the banking system is missing. The argument seems to be that the banks should not be allowed to go under for doing their job, just because their services were being misused by governments.

For developing countries that have been through a series of debt and financial crises, especially since the Mexican debt crisis of 1982, this attitude towards the banks is not new. Even since the late 1970s, global banks have reached out to emerging markets in search of new investment avenues and pushed credit that encouraged the latter to over-borrow. But whenever a developing country found that it was caught in a debt trap, the adjustment had to be only on the borrower’s side, barring a few exceptional cases. The banks were bailed out and the country concerned was burdened with austerity measures that set back growth. Greece is seeing a repeat of that experience.

If the initiatives under consideration are indeed implemented the banks are bound to laugh their way back to their own vaults. It is now not news that the easy liquidity offered during the 2008-09 bailout was used to borrow cheap and invest in ventures that were as risky as the investments that generated the crisis. That speculative surge yielded the expected results and the profits of some banks swelled. This drama is likely to be repeated, with the liquidity from the ECB and elsewhere being used to invest in a similar basket of assets, including, perhaps, new Greek debt placed at extremely high interest rates!