Hedge funds come under the category of shadow banking. Close to three quarters of that debt is held by foreign institutions, the majority of them European. According to Varoufakis, once they felt sure countries of the Periphery would not leave the Eurozone, French and German bankers started treating all borrowing countries as presenting exactly the same level of risk, or of solvability, which was nonsense.
Committee for the Abolition of Illegitimate Debt
Varoufakis relies on information gathered during a conversation he had in with a man called Franz, who worked for a German bank. Its new business plan was straightforward: to secure a higher share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner a shareholder is entitled to receive an equal distribution of any profits distributed a dividend and to attend shareholder meetings. The interest is determined by the interest rate, which may be high or low.
Over 10 years, the total amount repaid will come to The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher… The nominal interest rate is the rate at which the loan is contracted.
The real interest rate is the nominal rate reduced by the rate of inflation. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. A private credit bubble caused by Greek and foreign banks with government complicity.
The Greek banks pushed their customers to borrow massively to finance their consumption. As the graph in Fig. On the other hand, over the same period, Greek banks reduced their loans to public administrations. The big increase in Greek household, business and financial company debt is visible in Fig. Table 1. Table 2 shows that the increase in deposits was much inferior to the increase in credit shown in Table 1.
Who’s to Blame for Greece?
Table 2. Deposit and repurchase agreement tendencies of households and businesses in Greece between December and December in million of Euros. In , deposits on bank accounts were more than twice the amount of the loans that banks had granted to private-sector activities, an indication of a healthy situation. By the situation had seriously deteriorated: deposits were far less than the sums on loan.
In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds.
This short-term profiteering attracted the attention of French banks, which took over Greek banks in order to facilitate and stimulate their investments in what they considered to be a new Eldorado. The announcement by the government, at the beginning of , that construction resulting from building permits issued after 1 st October would no longer be exempt from VAT, created a building boom accompanied by an explosion in the number of mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages: 1 the most common form where the property that the loan is used to purchase is used as the collateral; 2 a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
This contributed to the private-loan speculative bubble Speculative bubble An economic, financial or speculative bubble is formed when the level of trading-prices on a market financial assets market, currency-exchange market, property market, raw materials market, etc. The banks weakened during because of the excessive risks they took and the credit bubble they caused. In September-October , following the failure of Lehman Bros. The Greek banks only survived thanks to liquidities Liquidities The capital an economy or company has available at a given point in time. A lack of liquidities can force a company into liquidation and an economy into recession.
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The same practice is followed by the Fed, the Bank of England and the Swiss central bank. In the following graph Fig. Figure 7 — Exposure of Greek banks to the government and liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company equity provided by the partners, provisions for risks and charges, debts. Nevertheless, changing the principal sources of funding is not particular to Greece — the same phenomenon has been noted in most Eurozone countries and beyond.
Central banks became the favourite money supplier to private banks through A distinction is made between real guarantees lien, pledge, mortgage, prior charge and personal guarantees surety, aval, letter of intent, independent guarantee. At the same time depositors were reassured in order to avoid a run on the banks massive withdrawals that could cause banks to fail. These policies are not exceptional. As much in the US as in Europe, including Switzerland, governments have been providing massive capital and guarantees that have greatly increased public debt without durably improving the health of the banking sector.
In , the Greek banks, along with their Cypriot, Portuguese and Spanish counter-parts, were not considered to be under threat, because unlike the banks in the US and the most developed European economies, they had not taken massive positions in the structured financial products that shook the US and Northern and Western European banking system to its foundations. However, the banks in the peripheral Eurozone countries, too, were actually on the verge of defaulting and their governments did not have the resources needed to come to their rescue as effectively as the governments of the central economies and the United States had.
One of the particularities of the Greek banking situation is the combination of weak equity Equity The capital put into an enterprise by the shareholders. The insufficiency of assets was caused by paying oversized dividends to private shareholders between and see above.
According to a memo in the European Parliament, bad debt risks had increased to The amount of dubious debt in the Eurozone on 30 September The international crisis that badly hit the Greek economy in fragilized households and small businesses in particular to point where more and more fell into debt repayment arrears. This was the consequence of the dangerous adventures that the Greek banks had entered upon with the complicity of the Greek government and under the laissez-faire attitude of the European regulatory authorities.
The reaction of the Greek banks to the crisis, which they had largely provoked themselves, and to the international recession affecting the Greek economy, aggravated the situation. Whereas the Central Bank made liquidities available to Greek banks under the pretext that they would be made available to households and businesses in order to stimulate the economy, the banks used these sums in entirely different ways, as the following graph, in Fig. Figure 8. Greece, domestic credit growth, — Source: Bank of Greece.
Of course, it must not be forgotten that the austerity policies imposed by the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty. The criminal practices of the Greek banks were even worse than those of the Northern and Western European banks.
Here are a few noteworthy examples brought to light by Daniel Munevar:. At the time, Alexis Tsipras denounced the bank scandal as a triangle of corruption involving leading companies, banks and political parties that exchange favours. As scandalous as the above examples might be, probably the most iconic case of the corruption and excesses that characterized the Greek banking system before the crisis was that of the Marfin Popular Bank MPB.
After this transaction was completed, Laiki was transformed into a new entity, MPB. By the time the Cypriot authorities took over the bank in it was estimated that MPB had a loan portfolio in Greece of 12 billion euros, most of it of dubious quality. Dramatizing public indebtedness and the deficit protects the interests of the private Greek and foreign banks who are responsible for the crisis.
For these facile moralizers, it was irresponsible public expenditure that supposedly led to a dramatic increase in public debt and the deficit.
Michael Mitsopoulos (Author of Understanding the Crisis in Greece)
Following that refusal, the narrative goes, the European governments, the ECB, the European Commission and the IMF decided, in a burst of generosity, to join together to come to the aid of the Greek people, even though they did not deserve such generosity, and at the same time defend the permanence of the Eurozone and the European Union.
In reality, as the Preliminary Report of the Truth Committee on the Greek Public Debt showed, the real cause of the crisis was the private banking sector, both domestic and foreign, and not public debt. Private debt was much larger than public debt. Remember that starting in September-October , interbank lending had largely dried up. The Greek banks were able to continue to repay their external creditors at least in part thanks to the line of credit extended by the ECB and the Central Bank of Greece see Figure 7 above — Exposure of Greek banks to the government and liabilities to the BoG, in billions of Euros The directors of the ECB implied in Autumn that they planned to end that line of credit.
Should the Greek banks not be able to continue repaying their debts to the foreign banks, a serious crisis could ensue. According to the major private foreign creditors of the Greek banks, the only solution that could avoid a failure of the Greek banks and the losses that would have caused for the foreign banks was for the State to recapitalize them and grant them guarantees for an amount well in excess of what was made available beginning in October That also implied that the ECB would maintain the line of credit it had extended them.
George Papandreou, who had just handily won the legislative elections on 4 October , realized that the Greek government alone would not have the resources to save the Greek bankers despite his good will towards not to say complicity with them. His opponents in New Democracy, who had just lost the elections, felt the same. Instead of making those who were responsible, both in Greece and abroad that is, the private shareholders, the board members of the banks, and the foreign banks and other financial entities who had contributed to generating the speculative bubble bear the cost of the banking crisis, Papandreou dramatized the public debt and the deficit in order to justify an external intervention aimed at bringing in sufficient capital to face the situation the banks were in.
He wanted to spare the foreign principally French and German banks heavy losses and protect the private shareholders and top executives of the Greek banks. Repayment of the bail-out of bankers, then, would be done on the backs of the Greek people and the peoples of the peripheral countries who would get caught up in the same system. The Truth Committee on the Greek Public Debt, in its Preliminary Report of June , threw light on the mechanism that was put in place starting in see in particular Chapters 2, 3 and 4.
Greece was never bailed out. So they did the next best thing: they went to their parliaments invoking the cherished principle of solidarity with Greece, then Ireland, then Portugal and finally Spain. Yet an alternative was possible, and necessary.
Banks are responsible for the crisis in Greece
Following their win in the elections thanks to a campaign during which they denounced the neoliberal policies of New Democracy, the Papandreou government, had it wanted to make good on its campaign promises, would have had to socialize the banking sector by organizing an orderly failure and protecting depositors.
Several historical examples demonstrate that organizing such a failure and then starting up financial services again to operate in the interests of the population would have been quite possible. When in fact what was needed was to go even farther than Iceland and Sweden and completely and permanently socialize the financial sector. The foreign banks and private Greek shareholders should have been made to bear the losses stemming from resolving the banking crisis and those responsible for the banking disaster should have been prosecuted.
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That would have allowed Greece to avoid the successive Memoranda that have subjected the Greek people to a dramatic humanitarian crisis and to humiliation, without any of it resulting in truly cleaning up the Greek banking system. The chart below shows the evolution of payment defaults on credits and throws light on why the situation of the Greek banks remains highly precarious, whereas their directors have faced no legal consequences and most of them have remained in their positions since the crisis began.
In Iceland, remember, several bankers went to prison. The fable according to which the weakness or crisis of private banks is brought about by too high a level of public debt and the risk of suspension of payment by States does not hold up against the facts. Since the EU has been in existence, not a single member State has gone into payment default, despite the fact that the list of banking crises gets longer every day.
Added to that is the fact that the more sovereign debt Sovereign debt Government debts or debts guaranteed by the government. That point requires a technical explanation. But, as said earlier, in March their equity only totalled 6. Sovereign debt held by banks is considered less risky than debt with private individuals or companies.