Originally published on The Agonist
The mountains look on Marathon - / And Marathon looks on the sea; / And musing there an hour alone, / I dreamed that Greece might yet be free. - Lord Byron
The Greek parliament voted to approve this week what might justly be titled “The Debt Enslavement Act of 2011”. Under this act, everyone in Greece gets to be a helot, and how bad could that be? It’s not like the old days. In ancient Greece the youth of Sparta participated every autumn in the Krypteia, a sort of military training exercise in which Spartans would hunt down and kill helots without fear of legal reprisal. The helots were Greeks too, just the wrong kind of Greeks – lower class, servile, tied to the land. Slaves, in effect.
Modern day slaves aren’t tied to the land anymore – they are tied to their bank. So are governments, for that matter. How often have you read in the past few weeks that unimaginable economic consequences await us if Greece defaults? Angela Merkel said so. So did Nicolas Sarkozy, and now the new IMF head, Christine Lagarde, has said that the Greek opposition party needs to unite with the majority Socialist party to approve new tough austerity measures for the country. If they do, the IMF, the European Union, and the European Central Bank will release the last tranche of a previously-agreed loan. These three noble institutions, called “the Troika” by the press, are basically telling Greece “We are going to default on our loan commitments to you if you don’t deliver even more cutbacks, tax increases, asset sales, and unemployment than you previously promised.” The Troika, no doubt, does not enjoy trafficking in pain and suffering on a national scale, but apparently it is the only collateral they can get. The irony is, if Greece agrees to deliver more collateral – maybe we should call it collateral damage – they don’t really get any money. It just passes through Greece straight to the banks.
Oh, to Be a Bank!
What a fortunate thing it is to be a bank these days. You make a mistake lending money to the Greek government – lots of money, actually (Greek debt totals €340 billion). When it first looks like the Greeks can’t pay on time, you get taxpayers around the world to step up and lend money to the Greek government so that you get paid. When a second time around, it looks like the Greeks still can’t pay on the renegotiated loan package – because the country has fallen into a steep depression and there is no Greek drachma anymore that can be devalued to help raise money through exports – then the Troika steps up to act as your extortion agent. Even more debt gets thrown on the Greek people, and now the debt might get pushed out to 30 years, but you’re okay. You’ve got all the major governments of the world protecting you and making sure you get paid no matter what the cost to anybody else. And here’s a delicious irony. Who gets to broker those asset sales mandated by the Troika? You!
How did Greece get to borrow so much money in the first place? It was a new member of the euro club, giving up the drachma for the privilege of joining Europe’s currency. That gave it the stamp of approval, since everyone knew that Greece had to meet very steep EU guidelines for fiscal prudence, including evidence that its public debt was kept at minimal levels below the EU ceiling. Except, it was all a lie. Goldman Sachs, and maybe some other banks, secretly engaged with the Greek government in a deception. The bank entered into off-market foreign currency derivative transactions that made it look like Greece’s debt repayments were within EU requirements. They weren’t, because hidden from the public eye, and even from the EU regulators, were billions of dollars of long term FX contracts that would have blown through the EU guidelines if they had been counted as debt obligations, which is what they really were.
Greece got into this mess through massive deception, conniving with major global banks. And when the deception was unveiled a few years ago, the details were suppressed by Greece, by the EU, by Goldman Sachs, by US regulators – by every government that had any information about it. The Greek people have had to pay for this deception – they are paying for it even today – but no one in government or the banking industry involved in the fraud has been disciplined or fired or even publicly identified. When fraud of any sort, much less on this scale, is allowed to succeed, you must conclude that the system is rotten at the core.
You can see, then, why the drama surrounding the Greek debt situation appears manufactured, since the problem was the result of a deceit in the first place. When governments talk about terrible consequences, they are really talking about the terrible consequences to themselves if a corrupt, secretive, and predatory financial system is allowed to collapse. The important thing for them is to keep the system going. If you want to see this principle in action, take a look at the recent proposal from the French banks to “help” Greece roll over its debt.
The press made this sound like a real breakthrough occurred – the French banks had agreed to share in some of the pain in order to help Greece to a debt solution. That would have been the first time banks, or investors in Greek paper anywhere, agreed to take a “haircut” resulting in a loss to themselves.
Except it wasn’t true. Think about it for a minute. Is it at all possible if you were working in a French bank that you would approach your management with a debt restructuring idea that would make your bank worse off? Of course not!
The proposal is, naturally, complicated. It features different types of derivatives and the resuscitation of a legal structure that was supposed to have died out in the 2008 catastrophe. It’s the sort of idea that would have been popular back in 2007 before the global financial system collapsed, and one of its appeals to bankers is that mere mortals have trouble understanding it. This is especially true because the details – the Term Sheet – will never be made public.
What we do know is a rough outline of the proposal from the French government. For any Greek bonds maturing between 2011 and 2014, and now owned by French banks, the banks will “accept” 30% of the par value in cash. Since Greece doesn’t have the cash, this will have to come in the form of replacement debt from the Troika. On this part of the deal, the French banks get to wash their hands completely clean of the debt.
For the remaining 70% of the par value of the bonds that are due, the French banks will roll them over – meaning they will extend new replacement debt to the Greek government. Most of this new debt will be extended for 30 years, with a small portion structured as zero-coupon rate bonds bearing no interest payments until maturity. This is the point where the headlines stop. It all sounds great for Greece at this point. They get 30 years rather than three years to pay back the debt, and on some of it they pay no interest until maturity.
Let’s look at the details, however. The 30 years bonds are going to be guaranteed by the European Union, and the zero coupon rate bonds are similarly going to be AAA rated by a third party. Moreover, they are going to be placed into a Special Purpose Vehicle, and removed entirely off the balance sheets of the French banks. The French banks get to wash their hands of Greek credit risk altogether, and upgrade to pure AAA credit risk. They also get the risk off their books, which means no capital needs to be maintained (the banks will put up some undetermined amount of “equity” into the SPV). Didn’t Jamie Dimon, chairman of JP Morgan Chase, say after the 2008 financial crisis that derivative structures like SPVs were dead? Despite the fact that such structures hide real risk from the public and regulators by understating exposure on the balance sheet, and despite the fact that Citigroup is currently a zombie bank that is de facto insolvent due to its SPV, you just can’t keep a bad idea down. The thinking here might be that if a fraud involving derivatives got Greece into this mess, perhaps a deception involving derivatives might get it out.
And what about the interest rate? The proposed coupon on the long term notes is said to be 5.5%., though if you apply it to the actual amount Greece will be allowed to borrow under the plan, it comes to 7.7%. That still sounds really generous for 30 year paper when you consider the going rate for two year Greek paper in the secondary market is over 25%. Again, the headlines make this seem like the French banks are being oh-so-generous in their eagerness to help Greece through such difficult times. Except the real comparison needs to be made to the secondary market pricing for Greece’s long term debt, not its two year paper, and that rate is more like 11.5%. Moreover, there is an option feature that adds to the coupon rate: if Greece’s economy improves, an equivalent 3.5% is added to the coupon. So now you have 3.5% added on to 7.7%, and you are very close to the 11.5% market rate. The French banks aren’t being generous after all. Bear in mind also that the average coupon on the debt maturing from 2011 – 2014 is 4.5%, and you can see that an enormous interest burden is being placed on the Greek population. A more thorough analysis of this whole structure can be found here at the ZeroHedge website.
Spartans to the Rescue!
It remains to be seen whether the French bank proposal will be part of the rescue package for Greece. We know that the Greek parliament has approved further austerity measures for the country, and we know that the German banks are anxious to join in on the French bank plan, which can’t be good news for the Greek population. Greeks are already suffering unemployment near 17%, almost a doubling from a year ago. The medical system is slowly shutting down as doctors will only accept patients who can pay with cash. The agriculture industry is having trouble planting crops because government subsidies are now cut back sharply or canceled altogether, and this despite the fact that there is a noticeable exodus out of the cities and to the countryside as people look for a plot of land to feed themselves. The elderly, who cannot move to the countryside, are scrounging garbage cans in Athens and other cities to fend off starvation, since their pensions are no longer being paid.
The IMF and its sister institutions must be pleased that it is able to extract so much more collateral damage, though how this will help Greece pay back the new amount of debt that is being piled on is anybody’s guess. Actually, it’s no guess at all – the Greeks can’t pay it back. That’s the point of being a debt slave.
That’s the whole point of the global financial system. It didn’t used to be this way, and it certainly wasn’t intended to turn out this way when the IMF was formed 66 years ago. Way back then, the IMF was intended to be a supranational lender of last resort for countries which got into balance of payments trouble. In those long ago days, commercial banks were considered utilities, because credit was considered a social utility every bit as important as electricity or water. Banks had caps placed on the interest rates they could charge, and the business provided a steady but unexciting return on capital for its shareholders. The only thing bankers had to do was understand and monitor the risks they were bringing on to their balance sheet (there was no off-balance-sheet hocus pocus going on either). All that changed somewhere in the 1970s or 1980s, when banks decided their ROEs should be 15% at a minimum (very nice that was for executive bonuses), which means they weren’t utilities anymore. The regulators acquiesced or encouraged them every step of the way, until one day they discovered the banks owned them.
Look at the absurd situation the IMF is in now. It reserves for itself the right to default on its obligations to Greece, but it refuses to let Greece default on its obligations to the market. The country can’t be allowed to leave the euro, which would give it a fighting chance to devalue its currency and restore its trade balance. At least in the old days, meaning back in the 1990s, countries like Russia could default on their bonds and the ruble could crash on the exchange markets (as also occurred with Argentina). Yes, there was a terrible depression which occurred in those countries, with enormous pain and suffering for the average person and especially the poor, but these countries were able within a few years to work their way out of their problems.
Greece, on the other hand, is given no such opportunity, but it incurs all the pain and suffering anyway, and for years and years, as it works under conditions of indentured servitude. The IMF, along with other members of the Troika, get to play the role of enforcers for the banks, which get to convert all their bad debts to AAA debts, and have the taxpayers guarantee their interest and principal repayments.
How long can this system last? At some point some politicians are going to say “We’d prefer to take our pain all at once and be free of the banks, rather than be their slaves forever.” When this happens, the whole rotten system comes crashing down. Pain and misery will be spread everywhere, but it is the pain and misery that is due in any event if this system is going to be replaced, as it must. With it will go quite a few of the big banks, and some of their enforcers like the IMF, the EU, the Federal Reserve, and other institutions which have destroyed their reputations for financial probity and rectitude because they chose to prop up an indefensible global financial system dominated by about 25 highly-interconnected and virtually unregulated banks.
The helots, by the way, eventually so out-numbered the Spartan citizens, that they overthrew their masters. For one, brief, hellish moment, the Spartans were on the receiving end of a massive Krypteia orgy.