August 16, 2022

High & Low Finance: Playing Make-Believe With Greece

For that is precisely what Jean-Claude Trichet, the president of the European Central Bank, has successfully demanded be done about Greek national debt.

As the tear gas cleared in Athens this week — and the Greek Parliament agreed to a new round of austerity that will raise unemployment and prolong a debilitating recession that almost certainly will ensure that the latest fiscal targets are missed — the critical concern seemed to be making sure that no financial institution will ever have to admit making a bad loan.

Mr. Ritter was the chief executive of Regions Financial, a “super-regional” bank holding company based in Alabama, until he stepped down in 2010 after it became clear the bank was in deep trouble. It lives on, thanks to the bailout, but is the only major American bank not to have repaid the bailout money.

Mr. Trichet will retire later this year after eight years at the helm of the E.C.B., at which time he will surely be praised for his leadership in dealing with the Greek crisis. Mr. Ritter is facing investigations by the Federal Reserve Board and his own bank’s audit committee over accusations — made by former bank officers — that he and other executives pretended loans were still performing as the financial crisis intensified in 2008. That enabled the bank to keep reporting profits while other banks suffered losses.

As negotiations proceeded in Europe this spring over Greek Bailout II, Mr. Trichet laid down a line in the sand: Nothing must be done to force banks to take losses on the bad loans they have made to Greece.

Just over a year ago, when Greek Bailout I was announced, the assumption was that by next year Greece would again be able to borrow from capital markets. Instead, the economy has continued to plunge, fiscal targets have not been met and rampant tax evasion continues as it always has.

What has changed is the ownership of the debt. Certainly no one who owns Greek bonds now is under the impression they are safe investments, and many investors — banks and others — have taken losses and exited. In the spring of 2010, Mr. Trichet seemed surprised by a suggestion that the central bank should buy Greek bonds for its own account. Within days, the bank was doing just that. Add in the dubious collateral the central bank has taken on loans to banks in Greece and elsewhere, and its own balance sheet would not look good at all if Greece defaulted.

But central banks can print money, and I don’t want to suggest it is only the bank’s self-interest that guides its policies. There is also great fear that many banks in Europe, still recovering from the last crisis, will have to seek another round of bailouts if Greece defaults. And it may be that the banks that still hold Greek debt include some institutions that are least able to bear the risk. Those that sold in the last year had to report losses, something troubled banks are reluctant to do.

It may be worth it to ask for a moment what would have happened if there were no E.C.B. and no euro currency. Greece would probably have defaulted and there would have been a restructuring of its debts. The same would be true of Greek banks. The Greek currency would have plunged in value, impoverishing Greeks who could no longer afford imported goods, but some export businesses would have boomed as their costs collapsed. The economy would be growing by now.

One recent possible precedent comes from, of all places, Kazakhstan. When two of its banks collapsed, there was no bailout available. The country changed its laws to allow bank restructuring, and the resulting negotiations caused lenders to the banks to take losses of more than half their money. In other words, those who lent money to irresponsible borrowers suffered.

Francis Fitzherbert-Brockholes, a London-based partner in the law firm of White Case, worked on that restructuring, and he questions whether austerity alone can enable Greece to grow and service its enormous debts. He thinks that Greece must get “some sort of relief” on its debts or Europe and the International Monetary Fund will just have to keep putting up more money.

There is a case for “extend and pretend,” also known as “delay and pray” to bankers who sometimes seem better at rhyming then lending. If the borrower’s distress is temporary, delay can provide time for recovery. That tactic was used by bank regulators when American banks got into trouble in the early 1990s, and seemed to work, although the fact they did not suffer may have helped encourage the banks to plunge into the new excesses that led to the recent crisis.

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