Monetising the…ECB: The latest insult to be added to Greece’s multiplying injuries
Last week another installment of the cruel theatre of the absurd, also known as the ‘Greek Rescue’ (and more recently re-released as ‘Greece’s success story’), was delivered silently: Not for the first time, the bankrupt Greek state borrowed from one arm of the Eurozone to give to another, with massive interest to boot. To be precise, the Greek government borrowed €4.2 billion from the European Stability Mechanism (ESM) in order to repay the… European Central Bank (ECB) €5.6 billion, leaving the ECB with a profit of €2 billion plus from this hideous transaction. Re-pay what exactly?
You may recall that between Greece’s first bailout (in May 2010) and Portugal’s collapse almost a year later (June 2011), the ECB tried, in the clumsiest of manners, to stop the contagion by buying Greek, Irish, Portuguese, Spanish and Italian bonds in secondary markets. As was expected, that ‘program’ (known as SMP) failed for the simple reason that the then President of the ECB, the hapless Mr Trichet, had pre-announced that the ECB would not spend more than €200 billion in that effort: an open invitation to speculators to short these bonds until the ECB’s €200 billion was exhausted, cashing in massively once the ECB withdrew with its tail between its legs (which is precisely what happened).
Still, during that yearlong folly, the ECB accumulated a large number of peripheral government bonds, which it purchased at so-called ‘distressed’ prices; i.e. at a large discount. In the case of the Greek bonds that were thus purchased (and which matured last week), even though the ECB does not tell us how much it paid for them, my information is that it paid less than 64 cents to the euro. In other words, the Greek government bonds that matured last week, owned by the ECB, had a face value of €5.6 billion but cost the ECB only €3.6 billion. Which means that, last week, the Greek government handed over to the ECB €2 billion plus 55.6% interest for two years in addition to the monies that the ECB spent in order to purchase these bonds. If this is not usury, I know not what is.
ECB defenders may say that these ‘profits’ will eventually be returned to Greece, assuming that the Central Banks of the surplus states agree. Perhaps they will. What they forget, however, is that had the ECB not purchased these Greek bonds, they would have been haircut last year, with the so-called PSI of early 2012, and then again last December with the so-called ‘debt buyback’. In short, the bonds until recently held by the ECB of €5.6 billion face value would have shrunk to less than €1 billion (the rest constituting the haircut). Noting that the ECB’s purchase of these bonds did nothing whatsoever to help Greece, the end effect of the ECB’s action was to put the Athens government in the situation it found itself last week: of having to borrow €4.2 billion from the ESM and to add to this pure blood money (i.e. the savings it made by cutting savagely on health, education, pensions, disabled people’s benefits etc.) equal to €1.4 billion in order to redeem the ECB owned Greek government bonds to the full, thus creating the aforementioned €2 billion profit for the ECB. In total, the cost to the Greek state of the ECB’s intervention (taking into consideration the extent to which this debt would have been haircut without the ECB’s intervention) comes to a staggering €4.6 billion. Money that is now being taken out of the Greek economy in ways that crush Greece’s society.
In short, had the ECB not tried to ‘help’ Greece during 2010/11 (by buying these bonds secondhand), the Greek government would now be able either to avoid borrowing the last tranche of €4.2 billion from the ESM or to borrow it in order to invest in our suffering people and/or economy.
Many lament that the Eurozone is a perverse economy in that it has a Central Bank without a state to direct it and states without a Central Bank to back them up. In fact, the situation is worse, as the above tale demonstrates: The Eurozone has a Central Bank that, even when it tries to help its weakest members in the midst of a vicious crisis, it ends up weakening them further; operating unwittingly as a giant squid on the face of their societies.
Pieria: If the purpose of these programmes is to maintain market access for the periphery doesn't forcing haircuts on the private sector while refusing to participate actively conflict with the intended message?
Yanis: Indeed. This is why they did what they did with Cyprus - shifting the haircuts from bonds to bank deposits and proclaiming that this will be the 'new' normal for bailouts. As for the OMT, it only works as long as it does not have to be used. So far not one bond has been purchased. To activate OMT, the ECB requires that Rome and/or Madrid sign a Memo of Understanding with the troika that would bring these governments down. For the time being bond dealers are just happy to accept the ECB threat (that it will buy unlimited quantities of bonds to burn them). But the moment they choose to test the ECB, the ECB will be found wanting.