The headless chicken brigade, the eurogroup, announced today, that the Euro 7bn bridging finance is now available in principle, and that we will have one EU institutions (creating 7bn Greek debt) fund another EU institution (to repay 7bn Greek debt). Let us not bother with the details, the EU is moving money from one account to another. Why is this a big deal in the first place? Money moving from one account to the next, happens millions of times each day.
Please note, everybody, this “negotiation” about bridging finance had nothing to do with Greece whatsoever. Once Greece agreed to the terms of the agreement, Greece was outside the loop in negotiating it over the last few days.
Now, even when the full agreement is in place, and that 7bn bridging loan is not necessary any more, (it will be repaid from yet another account of the EU, of course), that shuffling of money will continue. So how much money will be shuffled, or rolled over, and how much money will be new? Will Greece be involved, or is it just internal account operations? How much money will actually arrive in Athens?
The headline figure reported for the agreement is 86bn Euro, which Greece now requires, all of a sudden.
The two questions must be:
1. How much is for the government of Greece?
2. And how much is for private sector banks in Greece?
Because the previously solvent banking sector magically appeared to be out of money, too, just after Greece applied for the 53bn 3rd bail-out agreement!
Now luckily the German magazine Spiegel gives us a detailed breakdown of the funding required.
So Greece needs
35bn to repay loans outstanding
18bn to pay interest on its debt
25bn to “rescue Greek banks”
14bn to add to Greek government reserves, such as social security, and money from embassies
92bn is the total, but Der Spiegel says that 6bn of interest payments will be paid by Greece itself in the next 3 years
-6bn interest paid by Greece itself
86bn Bingo, that is how they came up with 86bn.
Now how much is new money for Greece? How much arrives in Athens
is purely a roll-over operation, shuffling money as set out above, Greece does not get a cent.
NO NEW MONEY.
interest is of course the cost of borrowing all the outstanding money. We always knew that this interest will be due. NO NEW MONEY
is apparently needed to private sector recapitalise banks in Greece THAT IS NEW MONEY FOR THE BANKS
is money depleted when Greece tried to repay its creditors. It did not pay its bills, it raided its long term social security funds, it asked Greek embassies to send money to Athens, so that Greece could repay its debts to the EU.
So what the EU is saying, that Greece, having just repaid the EU with 14bn in the last months, has now try to borrow it again. “You repaid us a few months ago, now please borrow it again!” If you think that sounds a bit stupid, you would be right.
The facts are as follows. Greece raided the savings accounts, to pay money back ro the EU. There is absolutely no point of borrowing the money now again to fill up the savings accounts. Period, that 14bn is just nonsense, it is not needed by Greece.
If I raid my “car-purchase” savings account, to pay for an unexpected car repair bill, do I then borrow money and use that to pay into my car savings account? Of course not.
Social security payments will have to be added to over time by taxes, and so have the embassy money accounts. Suppliers will have to wait a bit longer. Or, at a push, Greece could arrange an overdraft somewhere, in case of need. But no 14bn is needed. NO NEW MONEY
So we now have the following situation:
GREECE DOES NOT NEED NEW MONEY.
In fact in the next three years, Greece is to repay 6bn in interest
Lets just get this straight, SO GREECE DOES NOT NEED NEW MONEY BUT PAYS BACK 6bn
Greece and its parliament are voting on an agreement for further austerity on its population, so that Greece is allowed to repay 6bn in the next three years to its creditors in interest!
Is there any new money?
Yes, there is. The private sector banks are due 25bn to add to their capital.
So of the 86 bn we calculate the total for Greece
86bn total minus
53bn repayment and interest is just roll-over money
14bn is not really necessary
25bn is for the banks
-6bn is the result, meaning of course, that 6bn will be repaid by Greece to its creditors.
So it is not a bail-out of Greece, but a bail-out of EU/IMF/ECB/EFSF!
The Headline is “Greece receives 86bn”, in reality it pays 6bn back!
So not so much #ThisIsACoup, rather than #ThisIsSomeKindOfFinancialScam which Greece signed up to.
Or some Kafkaesque distortion of the truth.
So all this deal is really all about getting Greece to pay 6bn interest. And save the Banks with 25bn.
It is private sector bank rescue with taxpayers’ money which governments said would not happen any more after 2008. Prudent regulation was in place to deal with it now. The financial regulators would make sure it did not happen again.
Well, the politicians obviously did not envisage the destructive force of the ECB in this debacle, refusing liquidity to solvent banks. The refusal to fund at the required level closed Greek banks, leading to further losses in the banking sector. So the institution which was in charge, making sure that banks do not need further taxpayers’ money, worked against the taxpayers interest!
The ECB’s actions are responsible for the hole in Greek banks’ balance sheet. Before the ECB closed the banks (or rather forced the Greek government to do so), everybody said Greek banks were solvent. After they restricted liquidity, there is all of a sudden a hole of 25bn.
Here is Prof Charles Wyplosz, of the International Centre for Money and Banking Studies (ICMB’s president: Governor of the Swiss National Bank)
Why the ECB did it
Why did the ECB freeze its Emergency Liquidity Assistance (ELA) to Greece? The ECB will undoubtedly come up with all sorts of legal justifications. Whether true or not, this will not change the outcome.
If the ECB is truly legally bound to stop ELA, this means that the Eurozone architecture is deeply flawed.
If not, the ECB will have made a political decision of historical importance.
Either way, this is a disastrous step.
Whether it likes it or not, every central bank is a lender of last resort to commercial banks.
By not keeping the Greek banking system afloat, the ECB is failing on a core responsibility.
One explanation is that the ECB fears losses. This is partly incorrect, partly misguided. It is incorrect because the ELA loans are provided by the Central Bank of Greece. It is the Central Bank of Greece, and therefore the Greek people, which stands to suffer losses from defaults by commercial banks. It is misguided because central banks are not commercial entities.
Accepting losses is part of its public service mission. Keeping the banking system afloat is part of its core mission.
Did you hear that, Mario Draghi? Prof. Wyplosz says you failed in your core mission!
Tsipras, when he gets a minute, should get one of the big London law firms involved immediately, and threaten to sue the ECB for the full amount of the 25bn losses incurred.
It should be clear that the ECB should pay for the cost of the actions.
But what does the EU say?
It makes that 25bn part of the “3rd bail out of Greece”, when it should be clear that #ThisIsYetAnotherBankBailOut
The Greek taxpayer should take on 25bn new debt to put in 25bn to the Greek private sector banks which have been made insolvent by the ECB!
(Restructuring of banks can be done much cheaper, and Greeks should take note. (Definitely in the next post))
So 25bn for banks, due to ECB failure, and nothing for the Greek State (it repays 6bn in interest) are the real numbers behind this 3rd bail-out “Greece needs 86bn” deal.
#ThisIsYetAnotherBankBailOut , pure and simple, and everybody should tell the truth.