Greece’s underlying systemic bankruptcy has been apparent for some time.
By PINCHAS LANDAUGreece protesters flags 311 (R)(photo credit: Yiorgos Karahalis/Reuters)
You may be fed up with Greece and its wretched crisis. The drama surrounding whether Greece will be saved (from defaulting on its huge debts) may leave you cold. But if all that has to do with YOUR money in what you fondly regard as YOUR bank then, by golly, you’ll pay attention. And if it’s all Greek to you then, by Zeus or Apollo, you’ll master Greek too.Not surprisingly then, last week’s column that sought to explain how and why the Grecian agony would seriously endanger the well-being of the European and ultimately the global banking system, generated reader response. No one asked what would become of the Greeks; rather, the concern was about the banks.Specifically, why did I suggest that if the banks went kaput, not only would their shareholders be wiped out – that is what is supposed to happen under capitalism, although the Americans conveniently forgot that bit in the great bailout of 2008 – and not only would the bondholders suffer heavy losses, but depositors would also not come out whole? The unspoken assumption is that depositors who put their money (usually that’s written “their hard-earned money,” or “their life savings,” for dramatic, tear-jerking effect) in the bank are protected from the threat that their money will be lost if the bank fails. That salvation will come, they believe, via one of two channels – both of which lead to their country’s Treasury.The first is the direct route, whereby the government guarantees the depositors’ money. This is what the British and Irish did in 2007/2008. The second is the indirect route, wherein the bank pays an insurance premium to a government agency (in the US this is the Federal Deposit Insurance Corporation), which is then able to step in when a specific institution fails and use the accumulated insurance premiums to prevent that bank’s depositors from being damaged.Each system has its pros and cons, but we can skip that discussion because it is no longer relevant. These approaches work when you are dealing with small-town banks in America, or even with something as big as the British building society Northern Rock, which collapsed in September 2007. However, when a major bank fails, it creates a system-wide collapse, which requires a systemic response.The Irish banking system had to be bailed out by the government, but this entailed the state assuming so much debt that it, too, went bust – and had to be bailed out by the EU, under such onerous terms that the Irish economy is effectively crushed for years to come and everyone who can is emigrating, ensuring that things get even worse.Had matters stopped with Ireland, the EU would have been fine and the Irish would have eventually recovered. However, Ireland was followed by Greece, then Portugal, and soon Spain and eventually Italy. Why? Because these countries are all buried in accumulated debt, which they can either nationalize and then go bust at the sovereign level, or leave in the banks and let them go bust at the institutional and systemic level.The advantage of pushing the debt upward – from small banks to big banks, from big banks to small governments and from small governments to big governments – is that it extends the period before the entire system collapses and life becomes much more difficult for everyone – especially elected politicians and senior bankers. At that point, governments will have to admit that they cannot repay all depositors – and the illusion of safety will be destroyed. However, the underlying systemic bankruptcy has been apparent for some time, allowing the financial markets to adjust accordingly the prices of the assets traded in them. That is why two-year Greek government bonds yielded over 25 percent per annum last week. The market works faster than the ratings agencies, but even they adjust eventually, which is why Moody’s downgraded Greece’s rating by another three notches this week (the latest in a string of rating downgrades), putting its credit on a par with that of Cuba.The political system, however, has the great advantage of being able to conjure money out of nowhere; in reality, out of the citizenry’s future earnings via higher taxes. Its goal is to deny and delay. This is the essence of the complex maneuverings in Europe this week, which has resulted in another bailout package paid for by European taxpayers, to which American taxpayers will unknowingly contribute via the IMF involvement in the bail-out.The key requirement from the politicians and bankers has been for this package not to involve any move (such as rescheduling, restructuring, etc. of existing debt) that could be construed as a “credit event,” a legal term for default – because that would bring the whole house of cards down at once. If this can be done – and the financiers and their lawyers are capable of virtually anything – more time will have been bought, unless the citizenry reject it.
There are indeed increasing rumblings of revolt across Europe, with people in the rich countries unwilling to continue paying for the rescues, and people in the rescued countries unwilling to endure the austerity being demanded of them.But until this unhappiness goes beyond demonstrations and protest votes, the system is safe, and so is depositors’ money in the banks. How long that might remain the case is an open question, but few depositors realize that they are gambling daily on the answer to it.landau@netvision.net.il
