The sovereign bail-outs of Greece, Ireland, Spain and other countries are often framed as loans handed out to the poor, irresponsible countries of the periphery by rich, responsible countries like Germany. They might come with very harsh conditions attached, but their aim is nonetheless to help the recipients. But is that really the case? A closer look actually reveals a more disturbing side to the bail-outs, which begs the question: is it the debtors or the creditors that ultimately are being rescued?

It’s a well-known fact that in the years that followed the introduction of the euro, Germany developed an increasingly large current account surplus, while periphery countries saw their current account deficits soar in an equally impressive manner. This was due to a number of reasons, such as Germany’s decision to pursue an aggressive policy of wage moderation which emphasised the export sector as the main motor of the economy. In any case, the European Monetary Union’s (EMU) current account imbalances, and how they came about, are not the subject of this article. For the sake of our argument, it will suffice to acknowledge that within a monetary union the surpluses of certain countries are necessarily mirrored by the deficits of others. Simply put, it is economically impossible for all European states to be in surplus unless the EMU as a whole runs a huge, constant trade surplus with the rest of the world – which raises a whole set of other problems. Countries that register a current account deficit – meaning that their imports exceed their exports – have to import capital from foreign countries to finance their deficits.

The terribly reckless…Germans

In fact, with the notable exception of Greece, the build-up of debt in the countries of the periphery in the run-up to the crisis was caused by an accumulation of mostly private – not public – debt. The banks in these countries borrowed huge amounts of money from foreign banks, encouraging massive debt-fuelled booms (while earning the foreign banks a nice profit). Most of this money flowing into the periphery came from the banks of just four countries: France, Germany, the United Kingdom and Belgium (in that order). German banks alone had loaned $720 billion to Greece, Ireland, Italy, Portugal and Spain by the end of 2009 – much more than the German banks’ aggregate capital. This was certainly far more than was prudent. Two of Germany’s largest private banks, Commerzbank and Deutsche Bank, together loaned $201 billion to these countries. Irresponsible borrowing, in short, was made possible by irresponsible lending. The result was that consumers in periphery countries were able to import an ever-growing amount of German goods, leading to a dramatic increase in the country’s trade surplus. In finance this is known as ‘vendor financing’, whereby a company lends money to be used by the borrower to buy the vendor’s products. It basically means that, to a large extent, ‘Germany self-financed its own so-called economic miracle’, as the American banker and economist Daniel Alpert put it.[1]

Following the subprime crash, German banks found themselves dangerously exposed to the banks of the periphery – if the latter failed, the former would have been on the hook for huge losses. As we know, that didn’t happen. Between 2008 and 2009 European governments committed a total of €3 trillion in ‘guarantee umbrellas, risk shields and recapitalisation measures’ to bail out their over-indebted banks – and their creditors, of course. We know that in at least one case, Ireland, this happened under direct pressure from the ECB, which within a few months was advocating that other Member States do the same (as attested by an October 2008 ECB paper). This allowed Ireland’s creditors – which included Allianz, Credit Suisse, Deutsche Bank, Goldman Sachs, HSB and Société Générale – to safely exit their positions, while leaving the country saddled with a colossal debt that by 2011 had surpassed 100% of GDP, up from just 25% in 2007. Of course, Ireland wasn’t the only country to see its public debt go through the roof as a result of as a result of bailing out its banks (and their creditors). The same goes for Spain, which saw its debt-to-GDP ratio shoot up from 40% in 2007 to 69% by 2011, and to a lesser extent Portugal. As we know, the effects of the bail-outs – and more in general of the economic crisis (also caused by the banks, of course) – on the public finances of these countries were so devastating that shortly thereafter all three, after Greece, were forced to go cap in hand to the EU-ECB-IMF troika. But where did the ‘rescue’ money go?

Who is rescuing who?

Let’s take Ireland, which recently became the first country to exit a troika ‘rescue’ program, and is currently in the process of being sold as a success story by Europe’s political elites. As revealed by a recent investigation by Attac Austria, while Ireland received €67.5 billion in bail-out money since the end of 2010, funds amounting to €89.5 billion were transferred from the country to the financial sector during the same period. €55.8 billion went to creditors of the Irish state (including German and other core country banks). Germany’s Finance Minister, Wolfgang Schäuble, recently stated that ‘Ireland did what it had to do, and now everything is fine.’[2] Lisa Mittendrein of Attac Austria begs to differ: ‘The only ones who are fine are the European financial elites. It was the Who-is-Who of the banking sector that got rescued, not the Irish people. This is not a success story.’[3] The report is especially critical of the troika’s decision to force the nationalised Irish banks to repay all their creditors, including those not covered by the state guarantee. As mentioned already, the ECB forced the Irish government to take this step by threatening to withhold emergency funding from Irish banks. This was done even though the full repayment of unguaranteed bonds is not part of the bail-out memorandum and despite the IMF’s advocacy of a ‘haircut’ for these bondholders. The report concludes that the ECB possibly overstepped its mandate and recommends not to include it in future troikas. ‘Through blackmail and coercion, the ECB ensured that after five years of bank bail-outs, speculators are handed another €16 billion of public funds’, Mittendrein says.[4]

And what about Spain? In mid-2012, the year of its €100 billion bail-out by the European Stability Mechanism (ESM), Spanish banks owed their German peers more than €40 billion. Add in the exposure of German banks to Spain’s corporates and governments (national and local), and the total debt amounted to €113 billion. So it is quite realistic to see the bail-out of Spanish banks – backed initially by the Spanish taxpayers, and then by the ESM – as effectively ‘a back-door bailout of reckless German lending’, as an International Financing Review article put it.[5] It took Spain’s German and other creditors off the hook, while sending Spanish public debt levels through the roof. Jens Sondergaard, former senior European economist at Japanese investment bank Nomura, makes much the same point. ‘The Spanish bailout in effect is a bailout of German banks… If lenders in Spain were allowed to default, the consequences for the German banking system would be very serious.’[6]

Much the same as applies to loans to banks also applies to loans to periphery country governments. According to another study made by Attac Austria, at least 77 per cent of the €200+ billion disbursed by the troika as part of the two ‘rescue packages’ for Greece went to the country’s banks (€58 billion) and creditors (€101 billion), mostly foreign banks and investment funds. Only €43 billion went into the national budget. At the same time, more than €34.6 billion were yet again paid to creditors as interest payments for outstanding government bonds. As the report states: ‘These findings refute the position publicly taken by European politicians that it is the Greek population who benefit from the so-called “rescue packages”. They are rather the ones paying for the rescue of banks and creditors by suffering from a brutal course of austerity and its well-documented catastrophic social consequences’.[7] The same opinion is shared by Peter Böfinger, member of the German Council of Economics Experts, who stated in 2012 that the Greek bail-outs ‘are first and foremost not about the problem countries but about our own banks, which hold high amounts of credit there’.[8] Recently leaked classified documents and notes from a dramatic meeting of the IMF on 9 May 2010 – when the governing board of the Fund approved the first Greek bail-out – reveal that some member states had serious doubt about the real aims of the programme. As the Brazilian representative uncompromisingly stated:

The risks of the program are immense… As it stands, the program risks substituting private for official financing. In other and starker words, it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions.[9]

Germany also benefited from a more subtle (and mostly ignored) form of bail-out by its European partners, in what amounts to yet another shift in liabilities from banks to taxpayers. Because of the way in which the eurozone’s TARGET2 interbank payment system works, when German banks pulled money out of Greece, the other national central banks of the EMU collectively offset the outflow with loans to the Greek central bank. These loans appeared on the balance sheet of the Bundesbank, Germany’s central bank, as claims on the rest of the euro area. This mechanism, designed to keep the currency area’s accounts in balance, made it easier for the German banks to exit their positions. The Bundesbank’s claims were now only partly the responsibility of Germany. If Greece defaulted on its debt, the losses would be shared among all euro area countries, according to their shareholding in the ECB, and Germany’s stake would be about 28 per cent. As a result of this, Germany succeeded in reducing its exposure to Greece by almost 80 per cent between mid-2010 (when Greece entered the first ‘rescue programme’) and mid-2012.

As the Italian economist and banker Antonio Foglia concludes in a recent article published in the Corriere della Sera: ‘It’s about time we acknowledge the fact that one of the unforeseen consequences of the flawed architecture of the eurozone is that all European member states have effectively bailed out the German banking system from the credit risks accumulated as a result of the country’s persistent trade surplus.’[10] Not exactly the story we’re used to hear, is it?



[1] Daniel Alpert, ‘Challenge to austerity deepens, the handwriting is on the wall’, ?EconoMonitor, 6 May 2012.
[2] Quote in Attac Austria, press release, ‘Irish “rescue”: 67.5 bn of bail-out loans, 89.5 bn to banks’, 27 December 2013.
[3] Ibid.
[4] Ibid.
[5] Gareth Gore and Sudip Roy, ‘Spanish bailout saves German pain’, International?Financing Review, 29 June 2012.
[6] Quote in Gore and Roy.
[7] Attac Austria, press release, ‘Greek Bail-Out: 77% went into the Financial Sector’, 17 June 2013.
[8] Quoted in Stefan Schultz and Philipp Wittrock, ‘Bedrohte Wirtschaftsunion: ?Aufmarsch der Ego-Europäer’, Spiegel Online, 12 May 2011 (author’s translation).
[9] IMF, ‘Greece: ex post evaluation of exceptional access under the 2010 stand-by arrangement’, June 2013.
[10] Antonio Foglia, ‘Quei 500 miliardi dei Paesi deboli che hanno salvato le banche tedesche’, Corriere della Sera,  12 January 2014.

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