The Euro, German and French banks did Greece in

How the heck could Greece, a nation of just 11 million souls (probably Metro Manila’s daytime population), rack up total foreign debts of €320 billion ($352 billion), or $32,000 per Greek, so that the country’s default now threatens the stability not only of Europe but even the world financial system?

To put that amount in perspective, when we defaulted on our foreign debts in 1983, our loans stood at just $25 billion, for a country with 50 million — that’s just $500 per Filipino.

Mainstream western media explain it as a tale of a Mediterranean nation (read: lazy, sun-loving, partying country, like us) spending more than it can afford, especially in building the best infrastructure for its 2004 mega-fiesta called the Olympics. (Indeed, I got hooked to motorcycle-riding when on weekends in Greece, where I was ambassador there, I could get out of Athens in 15 minutes, get on a huge Ro-Ro ship to go to an island in the Aegean, tour it on a six-lane highway, and see only an occasional car.)

Or of a nation (like us) that had four centuries of colonization by a foreign power (to them, Ottoman Muslims, very bad for a Christian nation, Catholic Spain to us) that created an anti-government, anti-tax culture. Of decades of socialist government, led by the Pasok (Panhellenic Socialist Party) that tried to create a welfare state, a paradise for pensioners.

These may all have figured in creating the Greek quagmire.

You may not believe it, though, that the Greek debacle in structure and essence may have more in common to the 2007-2008 global financial crisis that started in the US, and which was essentially due to the greed of America’s biggest banks.

The build-up of French and German debts started right after Greece joined the eurozone. Source: Bank for International Settlements
The build-up of French and German debts started right after Greece joined the eurozone. Source: Bank for International Settlements

In Greece’s case, the fault really is mainly on German and French banks that got the Greek government and companies to be debt-addicts in the last decade, when its currency became the euro, especially as the euro interest rates seemed so cheap. Interest rates on euros after all, were the same, either lent to less developed Greece or to highly developed Germany.

These are, in fact, the same “usual-suspects” banks in debt crises anywhere in the world: BNP Paribas SA, Credit Agricole, Commerzbank AG’s 3 billion euros, Societe Generale, ING Groep, and Deutsche Bank AG’s 1.6 billion euros.

In our case, we got to be credit addicts in the years to the debt crisis in 1983 when dollar rates were cheap because of the glut of petro-dollars in the mid-1970s.

The Greek roof started to crash, though, when it was discovered in 2010 that its debt stock was understated. And who was responsible? That bank which figured in the US financial crisis, Goldman Sachs, whose derivatives sold to the Greek government were structured that allowed Greek debts to be reported below their actual levels.

Too bad for the Greeks, though, their government didn’t have the tools like the US had to resolve the debt crisis.

First, France and Germany were determined that their banks don’t get their balance sheets hit with loan defaults, which led to a solution worse than the problem. And most importantly, they don’t have a currency they can control. What they use is the euro, which bureaucrats in Brussels control.

The accompanying chart shows dramatically how German and French banks’ loans got bloated right after Greece adopted the euro in 2002. The level of such loans peaked in 2009 at €120 billion.

If you’re wondering why German Chancellor Angela Merkel whom you see more often in TV news on the crisis, rather than French President Francois Hollande, it is probably due to the fact that the French proved to be smarter. By 2014, French banks’ debts had gone down from their 2009 peak of €75 billion to just €1.85 billion. German banks, on the other hand, still have €28 billion in debt, which is obviously why Merkel has been very passionate for another Greek bailout plan.

How they pared their debts to Greece is half of the story – a scandalous one – of the Greek tragedy, one which makes you understand why Greeks now are so angry that graffiti (popular in Athens) in the capital portray Merkel with a Hitler moustache and a swastika on her sleeves.

It would make you understand why the country’s political leadership had moved from the conservative New Democracy Party of the early 2000s, to the center-left Pasok, and finally to the Syriza, which is a backronym for the Greek words that mean “Coalition of the Radical Left.”

When world interest rates rose and panic broke out in the wake of the 2008 global financial crisis, the tap for foreign loans started to close for Greece, and by 2010 it couldn’t pay off interest on its foreign, mainly French and German, loans.

If Greeks defaulted on these loans, the French and German banks’ balance sheets would have gone into the red. A contagion effect was feared: that the rest of Europe’s so-called PIGS (Portugal, Italy, and Spain) would fall into default like dominos, and the banks would go deeper into the red.

Rather than allowing the German and French banks to write off their debts, the so-called Troika – European Union, the European Central Bank, and the International Monetary Fund – which the two countries obviously control, put together “bailout programs,” basically their own loans to Greece so the country can pay its creditors, and for the creditor-banks to convert their exposures into Greek and European bonds.

Protecting the banks

Karl Otto Pöhl, a former head of the Bundesbank, was quite frank in describing the bailout, that it “was about protecting German banks, but especially the French banks, from debt write-offs.”

Since 2010, the Troika has lent €252 billion to the Greek government. Of this, €34.5 billion involved sweeteners for the European banks for the 2012 restructuring of their debts. Some €48.2 billion was used to bail out both and foreign private Greek banks following the restructuring. Some €149.2 billion has been spent on paying the original debts and interest from lenders. This means less than 10 percent of the money was used directly for the Greek’s welfare.
How much does Greece owe? (In billion euros)

German Banks 28.4
French Banks 1.90
Bailout Funds 246
Others 44
TOTAL 320
Out of Bailout Funds:
European Central Bank 20
Germany 56
France 42
Italy 37
Spain 25
Other Eurozone 34

Out of Greece’s current €320 billion debts, €247.8 billion – 78 percent of the debt – is now owed to the Troika. Debts to private banks, mainly French and German, were converted to debts to governments and the IMF, plus costs of the conversion.

If you’re wondering how a bailout fund could grow that big, remember the episodes in your life when you failed to pay on the due date your credit card bill, with interest charges and penalties eventually becoming bigger than what you originally owed. The financial world just has its own versions of those penalty charges.

The cure — the bailout funding of €247.8 billion — proved to be worse, much, much worse than the disease. It buried Greece in a much bigger debt that would take them decades to pay.

Worse, the two bail-outs had its “conditionalities,” a term that became well known here during our own debt crisis from 1983-1984, when the IMF required government to undertake such measures as increased taxes, reduce government spending, and issue high-interest Treasury bill to contain inflation.

As in our case during our debt crisis, and Greece’s, these were designed to assure the creditors that the government manages to generate budget surpluses so that its debts could be repaid in an orderly manner.

The bailout program, however, didn’t, couldn’t work for one major reason: the “Greek currency” was of course, the euro of the European Union, which does not reflect its economic situation, but that of all Europe, which is dominated by the huge and robust economies of Germany and France.

Peso depreciation

In our case, the peso depreciated steeply from P8 to the dollar in 1982 to about P18 by 1984, and P20 by 1986. The peso’s rate, therefore, served as an automatic mechanism of sorts to adjust the economy in crisis. For instance, it cheapened the peso, therefore, making our exports more competitive, while discouraging more imports. In Greece’s case, the euro remained strong, which didn’t bring in more dollars for its tourism industry, a pillar of its economy.

Without its currency as a mechanism, Greece had to resort more and more draconian ways to try to produce budget surpluses in order to pay its debts, such as higher taxes, reducing pension payments, and even paring its government staff.

The result has been near catastrophic. Greece’s GDP has contracted continuously for four years form 2010 to 2013 for a total decline of 30 percent. In our case, our GDP shrank only for two years by 14 percent, and it took us 10 years to get back to when the economy collapsed in 1983. It probably would take Greece double that, a generation even, to recover. Unemployment rose to 25 percent of the working force, with half of the youth jobless.

On June 26, Greece missed the scheduled payment of €1.55 billion ($1.73 billion) to the IMF — the largest, single missed repayment in the IMF’s history. That put it officially on default, not only for its loan to the IMF, but because this triggers cross-default provisions on nearly all of its debts; all have become due, and Greece doesn’t have the euros to pay for them.

The Greek tragedy is really mind-boggling, if you think about it.

Logically, a nation-state has its own currency, which is essentially, “merely” a social artifact invented to facilitate the exchange of goods within its borders. But Greece doesn’t have its own currency, and is now running out of it. It has to beg a super-organization of states — the EU — to provide it with the currency it uses , the euro, so its people can undertake such basic transactions as buy coffee and sugar in the supermarket.

Can you believe that? A world crazier than ours.