30 June 2015

If Greece now leaves the euro, it will be because it was bailed out in 2010


Greece is now very likely to leave the euro, as a consequence of defaulting on its debts to its Eurozone partners and the ECB.  That exit will be a direct consequence of the repeated attempts to bail Greece out from 2010 onwards.

In 2010, Greece faced having a bad recession, a budget out of control and a level of public indebtedness that it could not service.  At that point, however, its debts were to private sector lenders — especially banks, in particular German and French and other Eurozone banks.  There is no reason why its defaulting on those banks should have meant its exiting the euro.  Those banks would have suffered, of course, and some might well have gone bust in the distressed market conditions of the time.  The best thing to have done, then, would have been to impose losses on the creditors of those banks (particularly the bondholders) – as per the new banking resolution and recovery rules that have been introduced in the past few years.  But if Eurozone governments did not want to accept their banks failing, they could have bailed them out.

And now we come to the real nub of the Greek bailout issue.  For everyone at the time understood that the bailout of Greece occurred because German and French and other Eurozone governments felt that their citizens would not accept yet another bank bailout if their banks failed because of a Greek default.  So instead of bailing out those banks directly, the Eurozone governments decided to bail out the Greek government so that it could repay their banks — an indirect instead of a direct bank bailout.

And that’s all very well, but it did not come without consequences.  Because what it meant was that instead of Greece owing money to banks that it could default on without calling its Eurozone membership into question, it now had loans to other Eurozone governments that it simply could not default upon and expect to stay in the euro.

The Greeks and the Eurozone governments have tried to fudge the issue for the past few years.  The interest rates on the Greek debt have been cut (though of course the interest rates on almost all government debt has fallen dramatically in recent years, so that was less generous than it might at first appear).  Repayments have been delayed to 2020 and beyond and it will now be many decades before Greece pays all the debt off.

But extensions and delay-and-pretend have created another issue: the longer Greece is totally dependent upon the Eurozone because of these loans, the longer the Eurozone will tell Greece how to run its economy.  If Greece stays in the euro it could now be decades before Greeks have any semblance of economic autonomy.

If Greece has been left to make its own decisions in 2010 — to default or not on various private sector creditors who were paid interest because they were taking a risk by lending — and other Eurozone governments had bailed out their own banks or (better) accepted that their bank bailout strategy had failed and forced losses upon their banks’ creditors, there is no reason why Greece would now be being forced out of the euro.

As some of us said at the time, it was always the bailouts that were the threat to the euro, never the lack of bailouts.

Andrew Lilico is Chairman at Europe Economics.