Greek debt restructuring and the reason Germany's banks are delaying it

Why is the inevitable Greek sovereign restructure being delayed? Who is playing King Canute?

The German banks, is the three word answer. Why do they care? Is it because they are so terribly exposed to Greek sovereign debt. No, that is not it. All up, German banks are owed around €20 billion by the Greek state. A 50% a haircut (that might be necessary to render the Greek debt situation sustainable) would mean a loss of €10 billion; a sum that is worrying but (in the context of the telephone-number-banking-losses of the post-2008 era) manageable.

Quite a few readers pointed this out to me, in response to my piece on the German banks here. And quite right they were. So, if it is not the German banks’ exposure to Greek government debt per se that explains the procrastination, then what is it?

It is, I wish to argue, the fear that any sovereign debt restructuring anywhere in the eurozone will shine a bright light on the German banks’ books. And that, under this light, their zombie state will become apparent. It is this unintended consequence of a Greek debt restructure which threatens German banks with a degree of transparency that makes them recoil in horror. The mechanism by which a Greek restructure will reveal awful truths about Germany’s banking system is easy to foreshadow:

If nothing else takes place in mitigation, a 50% haircut on Greek sovereign debt will be catastrophic for the Greek banks. Thus, the Greek banks will require a serious dose of re-capitalisation, e.g. from the EFSF. But if the EU decides to do this (under pressure from the complete lack of viable alternatives) the pressure will be on to do the same for Ireland’s banks (rather than to keep re-capitalising them indirectly, by having the Irish state borrow from the EFSF to give the money, without any serious strings, to the Irish banks). And then, of course, Portugal’s. Then again, re-capitalising so many eurozone banks will make (political) sense only if Europe’s taxpayers (and the German ones in particular) are offered something in return for their money. What? Shares in the banks that they are re-capitalising, naturally (not dissimilarly to how TARP worked in the USA). But this comes with a prerequisite: A proper assessment of the banks’ assets and liabilities. Like any business in which one is intending to invest must be made transparent, the banks to be re-capitalised must open their books to public scrutiny. And here is the rub: For such an assessment cannot stop at the German borders, particularly since so many Landen Banks are in serious need of re-capitalisation themselves.

In short, the Greek debt restructure will end up forcing upon a reluctant Europe a reality check regarding the true state of the continent’s banks. Judging by the dragging of feet, and the failure to miss an opportunity to do something effective about the crisis, Europe’s leadership (and in particular those of a Germanic disposition) seems not quite ready for such a reality check.


  • I agree that the German Banks are a major issue. Too bad there isn’t a narrative or stereotype that describes German bankers as enjoying frappes or the Mediterranean sun. You know, something to envy.

    These bankers are made of teflon. Nothing sticks, and the Greeks have no idea about the irresponsible German Banker so they continue to self-flagellate themselves by only focusing on their own shortcomings.

    But there is another issue – I can not see Greece being the only country to be allowed to default. Others will follow. And so the risk of contagion, in my opinion is equally high.

    Austerity is only making things worse. Net private sector savings are affected by net government spending and foreign investment. Net government spending is being cut, tax collections are increasing, and Greece is still a net importer. (A huge net importer)

    The math doesn’t add up. Austerity is killing the economy. Is it any surprise that the new deficit to GDP figures were worse than expected? You can’t cut government spending and expect GDP to remain or not be as affected if a nation is a net importer and also is trade constrained by having one of the stronger currencies in the world. Greece is bleeding money. And it won’t be the only one.

  • Christos Anesti, Yanis.
    You hit the bull’s eye with the banks’ loathing for ‘transparency’.
    But I’m not sure that even a total takeover by the state could possibly arrive at a full “assessment of the banks’ assets and liabilities”.
    I remember reading a book about the US Fed which enumerated quite a few clauses in the supposedly “public” central bank’s charter prohibiting access to sensitive Fed accounts linked to its limitless money-printing powers or its fiduciary obligations to private shareholders.
    But why go that far away from home?

    Do you remember the Koskotas Scandal which heralded the Greek banking “deregulation” drive in the late 1980s?

    The fat strawman was jailed for a “hole” in Creta Bank assets to the tune of 30 billion euros, supposedly “embezzled” to fund his extra-banking media activities.

    But a few days after the first state receiver (Papadatos) was installed in the bankrupt bank, it was revealed that an additional 120 billion drachmas were missing from the bank’s dollar-denominated OFF-BALANCE-SHEET liabilities, including open contracts of Creta’s “coded” wealthy customers (George’s “young businessmen” buddies) illicitly dodging the country’s exchange controls to “play” their pocket money in Wall Street though a back-door terminal linking Creta to the Athens office of a notorious US investment bank.

    Papadatos conveniently died of a heart attack two days after the bombshell news of a hidden “superhole” appeared in Sunday’s To Vima and we never heard about it since.

    The great taboo of the current quagmire in the eurozone banking sector also has to do with the collossal leverage exploits of 50-to-100 times the mega-banks’ capital base “invested” in speculative derivatives (CDOs, put options, CDS’ etc) and shoved under the carpet of off-balance-sheet accounts by the tens of trillions.
    The zombie bank or vulture-fund magnates still hope to recover some of those “assets” in the future, after drawing enough blood from recurrent attacks on the world’s extremely liquid currency markets by betting against the solvency of eurozone (or US) “weak links”.

    The Fed knows there’s no alternative to TARP in satiating some of the zombies’ appetite for fresh money replacing their toxic holdings, with or without a “reality check”.
    Can the ECB (and its paymasters in Berlin) learn the same lesson on time to save the EU weaklings from oblivion?

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