Who pays?

25 Jul

Reaction to the second Greek bail-out plan has been largely positive. Most commentators have described it as a step in the right direction. Critics of the EU in the financial press have been cautiously optimistic about the plan. Politically, a key component of the plan is its inclusion of private investors. This had been the basis of a long struggle between Eurozone member governments, with Germany in particular insisting that any solution needed to involve the private sector. This reflected the German government’s belief that not only taxpayers should be left shouldering the burden of dealing with the Greek debt crisis. Lying behind the inclusion of private sectors was the hope this might lessen some of the populist critiques of the existing bail-out strategies: not only the people have to pay, but the bankers too. When German leader, Angela Merkel, has to defend the plan in front of German parliamentarians after the summer break, this will no doubt figure as part of her argument.

Looking at the figures of the proposed plan, it is clear that private sector involvement only represents a very small part of what is still overwhelmingly a government-backed plan. The precise nature of private sector involvement is unclear as the EU’s final communiqué pointed to a variety of different options. The FT breaks down the plan in the following way. Of the 109 billion Euros plan, 34 billion Euros will be of the traditional bail-out kind, as offered to Greece, Ireland and Portugal in earlier bail-outs. The remaining 75 billion Euros will in various ways be directed at encouraging private sector involvement. 20 billion Euros will be used to buy back Greek bonds on the open market. Another 35 billion Euros will serve as a pot of money to guarantee the new bonds being offered to private investors. In order for them to give up their existing and more immediate claims on Greece, in exchange for claims with a much longer maturity, private investors are being offered gold-plated, triple A-rated debt.  The last 20 billion Euros, writes the FT, will be used “to repair damage of buy-backs, swaps and roll-overs”.

Overall, it is estimated that private bondholders will be encourage to accept a loss of around 20% in the current value of their loans, relatively little as defaults go. The main provisions for Greece come overwhelmingly from other Eurozone member governments. Much of the political discussion has been around sharing the burden of support for Greece across both Eurozone publics and those private investors who saw in Greece in the 2000s an opportunity for making money. This battle pitched Germany against France, with the ECB a virulent opponent of any kind of private sector involvement tantamount to a default of some kind. The current plan suggests that for all the talk of burden-sharing, the picture remains one of private losses nationalized through pan-European bail-outs. An unsurprising result that reflects the particular configuration of economic and political power which prevails today across the Eurozone.

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