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.