European banks saved first before Greece

European banks saved first before Greece

Everyone is curious how the crisis in Greece will unfold. 

Greece left the table, refusing the conditions of the troika, composed of the European Union (EU), the International Monetary Fund (IMF) and the European Central Bank (ECB). The Greek government decided to hold a referendum on the debt terms, with the aim of getting a decision from the people in the form of a “make or break” decision. İncapable of taking that decision, the Syriza government opted to ask the people with the hope the voters will say no.

In other words, it said: “There should no further tightening policies; we should go on our own way.”

Four years ago, economist Carmen Reinhart, who had seen the future in the early day of the crisis, had defined this process as a “train crash in slow motion.”

The foresightedness of Greece

When the crisis erupted in Greece the very first one to start analyzing the outcome and consequences was Germany. The German Finance Ministry was pondering which would be better; a default by Greece staying in Europe, or by exiting it.

Turning around today and looking back, it becomes crystal clear that this was a well-administered process. If a country quits common currency, it is clear management of a process was done in order to minimize the damage. Look how:

In the middle of 2009 before the crisis erupted, Greece’s debts to European banks were $254 billion. The lion’s share of the debt belonged to France with $76 billion and Germany with $38 billion. By the end of 2014, Greece’s debts to European banks had dropped to $32 billion. 

Greece’s debt to French banks dropped to $1.6 billion and to German banks it dropped to $13 billion. But what happened that enabled this outcome?

Simple, Greece got some $240 billion in financial aid from the EU and the IMF via two packages in 2010 and 2011. As a result, Greece became indebted to international institutions like the EU and the IMF. 

The latest picture of Greece’s foreign debts is like this:

As of March, it totaled 312 billion euros, of which 205 euros belonged to the EFSF (European Financial Stability Facility), created as a temporary crisis resolution mechanism by the euro area member states in June 2010, and the IMF. Of that, 81 billion euros were bonds.

As a result, there is no debt provided to 

Greece via the private sector. In the course of the past five years the structure of the debt has changed. 

European banks received what Greece owed them. This was made possible thanks to aid packages 
given by the IMF and the EU to Greece. The money for the loan packages was provided by EU countries’ budgets.

At the end of the day, European leaders gained time by slowing down the train crash. They made a debt transfer by making the liability of their private sector a debt of EU institutions.

The banking system which had already been harmed by the 2008- 2009 crisis was saved from an additional Greek wreck.  While loan packages were labeled as saving Greece, in fact it was European banks and the European private sector which was saved. 

The sources of the bonds given to Greece as debt are in a large degree the budgets of member countries, therefore the tax payers.