So what is it that we need to know about this particular situation? What would help to explain it and go to inform the Greek people when they make a decision about what to do? I have no idea about what other people understand: so I can only explore my own ignorance: which is extensive. There are a number of basic questions which arise and some of them can be answered: so I decided to look at those one by one.
First: Who does Greece owe money to?
That should be easy, shouldn't it? It is reported that Greece has 270 billion euros of debt. If we can get a total we must know who is owed, yes? But that is not so simple as it should be.
On a site called "Insider Monkey" I got the following breakdown
www.insidermonkey.com/blog/2011/06/...the-greek-debt/I have no idea of the status of this site but the information comes from Bank for International Settlements. That body seems to be respected and their annual interim report for this year makes interesting reading. The figures are net of collateral and guarantees. For sovereign debt the chart shows:
Greek banks 50 billion euros
Foreign (mainlyGerman and French) banks: 50 billion euros
Insurance companies: 35 billion euros
Pension and mutual funds 55 billion euros
US banks (recorded separately) 2 billion euros
Total: 192 billion eurosThere are other small debts which are not itemised
One of the interesting things to note is that the graph breaks this down by country. But much of this debt is not nationally held: it is in the hands of private banks, and other companies. So it is obvious that how you choose to characterise this is itself based on a political analysis. It would be true to say that the banks are guaranteed by the nation states: but that is not a fact of nature: it is how we have chosen to do things, rather. Not saying that is wrong: but it is not the only way to look at this.
The figures do not actually add up to the total of 270 billion, either. No explanation is given for the shortfall which seems to be about 78 billion: that is quite a big hole in the picture, and I have no information about where that is held. Perhaps the headline figure does not include guarantees and collateral: it does not say. Maybe the difference is what is actually held by nation states directly through central banks: I do not know. But the fact there is a big hole like that does ilustrate the point that this is not easy to follow.
Other debt is owed by greek banks but there is no breakdown of where those are held, except by nation. As we have seen, to say that the debt is held by nations is not true: much is held by private companies. We are only nations when it suits them. When there is no problem, the money is not held by nations: it makes profit for banks and private finance. But when there is trouble it is a natonal problem. I do not like this skipping about, but it seems to be the mechanism for "private profits and socialised loss": and that is why the figures are presented in this way, I think
But maybe this is just a crap site. There are others. Again I cannot judge the status of them but this one is interesting because it says that the bail out in 2010 transferred a lot of the private debt to the international bodies, mainly IMF and ECB.
www.leimonis.com/2011/05/mainholdersofgreekdebt/The figures come for BIS, as before. According to the report 70% of greek debt was held by foreign banks and institutional investors in 2010: but that was much reduced by the intervention of the bail out. Reading the press one would get the idea that the bail out went to Greece: obviously much of it did not: it went to the banks.
The table nows shows total greek debt as 310 billion euros: a rise of 40 billion over the previous year if the first table is to be believed. So we spent 110 billion in bail out and gained nothing in terms of debt reduction: curious. The debt is now said to be held like this:
Greek banks: 56 billion euros.
Other european banks: 50 billion euros
ECB direct holdings: 50 billion euros *
Greek central bank 10 billion euros **
Greek Social securities/other government 30 billion euros***
Other Investors 120 Billion euros
Total Government Bonds 260 billion euros+ EU/IMF loans already disbursed 53 billion euros
Total debt 310 billion euros.* noted as "nominal". What this means is that is the face value of the holding: they actually bought it for 40 billion euros. So this in itself overestimates the debt by 10 billion euros, so far as I can see. It is true that the greek government owes the face value: but since this is supposedly part of rescue package the impact of the normal accounting practice employed needs to be noted. If Greece does not default then ECB makes 10 billion profit on this transaction alone.
** Central bank is presumably the government bank and I do not know why it is separated from other greek banks in this table, and not in the earlier one.
*** Seems that this is the government owing money to itself. I am presuming that is the net liablity for provision of goverment services, but I am not sure: if that is correct that is the net current account deficit in year. If so it is interesting to note that the estimate for unpaid tax which I have read elsewhere is 20 billion a year: and that would presumably be higher following the demands for increased tax attached to the 2010 bail out. There is not much evidence that Greece is living much beyond its means if this is correct. Except, of course, for interest on the debts.
As already stated, the bail out was 110 billion euros. Although the debt has risen to 310 billion, some of that is from the bail out itself: 53 billion which has already been disbursed, according to this table. That is presumably because the money is paid in tranches dependent on Greece implementing the austerity measures imposed. Without that liability the debt has fallen to 260 billion Euros: so for 53 billion in payments we have achieved a reduction of 10 billion. Since there had been a huge cut in jobs and wages in the public sector in greece some of that reduction presumably comes from that: no idea how much. But I don't see that this bail out has done anything very effective so far.
It should be noted that these figures do not seem to be net of guarantees and collateral: so if those were included we might see some significant changes in the table.
There are other things hidden in these figures which are also significant. For example: in table one the greek banks are shown as being owed 50 billion euros. And in the second the figure is 56 billion. But, as noted in the discussion of the first set of figures, the greek banks also owe money directly and these are in significant amounts. The ECB lent the greek banks 91 billion euros. Do you recognise that figure? I don't. I hear an awful lot about 110 billion euros in the bail out: apparently that bail out gives the eurozone politicians rights to tell the greeks how to manage their affairs, because they have to be responsible and pay their debts. And it is true that 91 billion euros is less than 110 billion euros. But given that one sum goes to a whole country, and the other goes to private banks I cannot see that makes much difference in the scheme of things.
The 91 billion given to the greek banks is secured, in theory. The banks pledged assets worth 144 billion to get that money. Those assets were:
Greek government bonds held as assets by the banks: 48 billion euros
Bonds issued directly by the banks and guaranteed 55 billion euros*
by the greek government
Zero coupon bonds issued by the greek govt in 2008 8 billion euros **
Greek Asset backed securities 33 billion ***
Total 144 billion
* 25 billion of that is new bonds issued at the end of 2010 to meet EU requirements for bank collateral. Those requirements were imposed by the ECB itself. Since the banks are private there is no reason at all in principle why the government should guarantee those bonds: they are intended to increase the capital held by the banks, only. Once again the government involvement is predicated on the idea that private banks are not private when it comes to losses or failures.
** zero coupon bonds are bonds issued at a price below face value: they don't pay interest but they do pay face value on maturity. This issue was related to debts owed to international pharamceutical companies in 2010 but I am not able to follow how it actually works: the press statement issued at the time is online: but it is not detailed enough to show who lent what to whom. Perhaps one of you can follow the money better than I can.
***We have already seen how asset-backed securities may or may not be asset-backed in reality: no information is supplied about the nature of these assets.
What all this means, so far as I can see, is that the ECB has given the banks 91 billion euros in return for assets worth 144 billion euros if the obligation to pay is met. The vast majority of those assets are Greek government debt of one sort or another. They have been transferred from private banks to the ECB.
But that raises another problem. In the first table the greek banks held 50 billion of greek sovereign debt. In the second table they held 56 billion of greek sovereign debt. But in between they transferred 48 billion of direct greek sovereign debt to the ECB. And that just does not work arithmetically. So what happened? I have no idea. But it seems to me that the banks must have bought more greek debt than they sold. That makes sense if you understand that the bail out money did not go directly to Greece: instead it went through the banks.
If that is the case then this happens: Greek debt to greek banks at 2010: 50 billion euros. Transfer to ECB from banks 48 billion euros, in return for cash. The cash from ECB in return for the assets transferred averaged 68% of face value. So the cash would be in the order of 32 billion euros, if all assets were discounted by the same amount.
At the outset:
The banks had assets relevant to this transaction of 144 billion euros, made up as described in the tranfers outlined above. They had liabilities of 55 billion in the form of the bonds they issued directly (which were guaranteed by the greek government, but seem to me to be a direct liability of the banks).
Net is 89 billion euros. [I am excluding the 33 billion of asset-backed securites, on the assumption the security is real - not a safe assumption but it makes this simpler. ]
The ECB had 131 billion of assets in cash relevant at this time: no relevant liabilities.
Net is 131 billion euros The greek state had no relevant assets: it had liabilities of 50 billion in direct sovereign debt to the banks: 8 billion in the zero coupons (probably): and a provision (which is not a direct liability, but a potential one; which represents their guarantee of the banks' bonds) Such provisions are not above the line in most balance sheeets (depends on how much risk is attached) so we will leave that out for now. So
net is -58 billion euros. After the transfers:
The banks had 91 billion of assets in cash from the ECB: and since they only sold 48 billion of the direct greek sovereign debt it is reasonable to add 2 billion they did not sell (since they had 50 billion). So assets of 93 billion, of which 91 billion is cash: Liabilities are their own issued bonds of 55 billion, as before:
Net is 38 billion eurosThe ECB now has assets of 144 billion in the transferred assets: and it also has 50 billion in direct holdings as shown in table two. The liabilty side of their account shows the 91 billion euros it paid for the banks' assets: and 40 billion it paid for the government bonds.
net is 63 billion eurosThe Greek government has received 50 billion euros direct from the ECB in exchange for bonds: This is a direct swop, so far as I can see. So the net position does not change: the cash received is an asset and the bond issued is a liability. But let us assume the cash is for current expenditure: in that case the money cannot be an asset and the net position is a 50 billion increase in liability: so the position is Net -108 billion euros
But the final position is not that, As table two shows:
The banks end up with:Assets: 56 billion in direct greek sovereign debt. I will assume that the excess debt was bought out of the cash from ECB: they already had 2 billion in sovereign debt so the cash assets end up as: (91-54)= 37 billion euros. So now the banks have assets of 56 billion in sovereign debt: 37 billion in cash; and liabilities of 55 billion.
Net is 38 billion euros, as before: but differently constituted.
The ECB's position does not change:
Net is 63 billion eurosThe Greek government now owes a further 54 billion euros, however, because the banks have bought more bonds from them. So the position is
Net -162 billion eurosOn the face of it everybody loses. But there is a further step we must take here: the current account.
Let us imagine that the original bonds issued by the greek government attracted 4% interest. At the outset the current account position wrt the direct sovereign debt was: Debt owed to the banks 50 million euros: interest paid per annum 200 million euros. That money was paid directly to the banks.
After all the transfers are made the greek government pays that 200 million euros to the ECB instead. The bonds transferred on the same terms.
But the banks bought new bonds and they factored in the risk: now the interest due on the new loans is much higher: 20%. So in addition to the 200 million paid to the ECB: and the interest on the 50 billion lent directly from the ECB (let us say this is low cost and so it is only 2%) of 100 million: the greek state now also pays the banks 80 million euros on the original 2 billion bonds retained: and 1.08 billion interest on the new 54 billion liability. Per year.
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The ECB is a peculiar institution, largely because EU member states will not agree to a proper central bank. To do so would mean political union almost certainly: and they are not ready for that.
If Greece defaults the ECB will make losses. A default of about 30% would let them break even on these transactions: but any more would be loss. That is because the amount actually paid out is less than the face value of the assets, leaving some room for profit if the obligations are met: and some margin before actual losses are incurred if the debt is written down.
But the ECB only has money from the member states, ultimately. Its sole remit is to keep inflation down (well actually it is price stability, but they focus on inflation rather than deflation: this is largely due to german concerns, I think.). The way they do this is by control of the money supply: only the ECB can authorise the issue of euros. It is set up like a corporation: member states buy shares in it according to a calculation based on population. So that is the capital it holds. Those shares cannot be traded, however. The shares are owned by the national central banks and thus the countries are effectively the shareholders.
Monetary policy is implemented through a repurchasing system. The central bank gives the eligible banks money for a short time (two weeks to three months) and the eligible banks give them a note promising to repay in that time. The note is an asset on the ECB account and the cash is a liability: and of course the opposite is true on the eligible banks' accounts. The notes are repaid at more than the cash obtained: and that is the interest. The amount of money in the eurozone is therefore wholly under the control of the ECB, because they are the sole supplier of that money and they decide how many notes to accept. As noted in other threads that does not work, because of the privatisation of the money supply through the issue of credit against unrealistically valued assets: that affects the ECB just as it affects national central banks, I think. On paper it should lead to stability: in practice it cannot because this bank is no more in control of the money supply than anybody else.
So the greek debt, which was 70% private last year, is now much more public: and that has been achieved partly by the bail out, but also by transfer of the privately owned debt from the banks to the ECB. It is true that the ECB bought at a discount: so on paper those banks made a loss on the transactions. But the important point to note is that they took that loss as a direct consequence of investment decisions. Risk is the justification for large rewards in the private sector: but these losses have been significantly capped by the transfer. And that is before we get to talking about Credit Default Swops and other insurances which actually make money if, and only if, the debtor defaults. So there are large players in the system who are actively working for default.
Edited by FionaK - 3/11/2011, 16:05
