What the EIB makes the ECB unmakes: The latest from the Greek front

“We just showed that good news is possible in Greece”, said a beaming Greek minister the other day when it was announced that the European Investment Bank (EIB) was about to start funding investments in Greece again, after it withdrew toward the end of 2011 (in fear of losing its triple-A rating by associating itself with investments in an economy due to be thrown out of the Eurozone). Surely this is good news. Nonetheless, as is Europe’s wont, what one arm makes the other destroys.

Let’s begin with what the EIB’s ‘reactivation’ in the Greek context means, in terms of euros and cents. Around 600 million euros will be channelled into Greek SMEs (small and medium sized firms) during the remainder of 2012 (if all goes well and the transmission mechanism miraculously, in view of past failures, works). Then, during 2013 another 400 million will be added to the SME-reinforcement program, with a further 400 million to be disbursed over the two year period of 2014-5. Additionally, 500 million worth of guarantees will be offered to infrastructural projects that have ceased up over the past two years, courtesy of the collapse of private investment and bank credits.

Of the above figures, the very first one is the one that matters: the 600 million that was announced for the coming autumn. The reason I am saying this is that the Greek economy is in turbocharged meltdown and autumn will prove particularly trying and cruel. It may very well be the turning point, involving a truly awful ‘turn’. Let us now juxtapose this figure, of 600 million euros to be provided by the EIB, to some other telling numbers.

The first figure is 12 billion euros. It represents the monies due to Greece by Brussels – as part of the structural funds that Greece was eligible for for the period 2007-2013 and which were not spent as a result of (a) bureaucratic failures and (b) the ongoing Crisis that prevented the Greek state and Greek private companies from putting up their share of the funding. More precisely, Greece was eligible for 20 billion of which only 8 billion were disbursed. Now, of the 12 billion unspent funds the EIB has been given the go ahead to disburse 1.44 billion – a pittance by comparison.  In summary, 10.56 billion euros earmarked for investment spending in Greece by Brussels back in pre-Crisis 2007 has boiled down to 1.44 billion at a time when the Greek economy has not only been starved of investment but has lost its credit market to boot.

The second figure is 900 million euros. It is the sum of money that the bankrupt Greek state must borrow by 20th August (2012) to hand over to the ECB as profit. As profit? Yes, as profit. Here are the details. In the summer of 2010 the ECB began purchasing in the secondary market Greek, Irish and Portuguese bonds in a failed attempt to avert the three member-states’ bankruptcy. Now, some of these bonds are maturing. The 3.2 billion bundle of Greek government bonds that expires on 20th August was purchased by the ECB at a 30% discount. However, the ECB is expecting the bankrupt Greek government to redeem at par these bonds (even though Greek banks, individuals and pension funds sustained a haircut of 75% on these same bonds). In effect, the ECB is demanding that the Greek government borrows during this hot and brutish summer 900 million euros to hand over to ‘our’ Central Bank as profit!

And as if this were not enough, the other day the ECB announced that it will no longer accept the new (haircut) Greek government bonds as collateral for the provision of liquidity to Greek banks; thus, pushing them into the arms of the Greek Central Bank’s ELA (a move that is destabilising further the European Central Bank System and, additionally, increases the cost of funding of the already distraught Greek banks; at a time when the circuits of credit in Greece and dead and buried).  

When all is said and done, the picture that emerges is one of a Europe with an arm that is meekly trying to fix things while the other arm is violently destroying whatever the benign limb is putting together. The EIB announces a 600 million euros of SME funding from 1st September (tiny compared to Greece’s unspent structural funds) at the same time that the ECB (a) pulls the remaining piece of the rug from under the Greek banks and (b) demands of the Greek state that it borrows from the EFSF 900 millions so as to hand them over to it on 20th August as a pure profit payment. Does this sound like sensible policies of a currency union in trouble? Or does it look like the last stages of a currency union that has lost the will to live?