Greece protesters flags 311 (R).
(photo credit: Yiorgos Karahalis/Reuters)
You may be fed up with Greece and its wretched crisis. The drama surrounding
whether Greece will be saved (from defaulting on its huge debts) may leave you
cold. But if all that has to do with YOUR money in what you fondly regard as
YOUR bank then, by golly, you’ll pay attention. And if it’s all Greek to you
then, by Zeus or Apollo, you’ll master Greek too.
Not surprisingly then,
last week’s column that sought to explain how and why the Grecian agony would
seriously endanger the well-being of the European and ultimately the global
banking system, generated reader response. No one asked what would become of the
Greeks; rather, the concern was about the banks.
Specifically, why did I
suggest that if the banks went kaput, not only would their shareholders be wiped
out – that is what is supposed to happen under capitalism, although the
Americans conveniently forgot that bit in the great bailout of 2008 – and not
only would the bondholders suffer heavy losses, but depositors would also not
come out whole? The unspoken assumption is that depositors who put their money
(usually that’s written “their hard-earned money,” or “their life savings,” for
dramatic, tear-jerking effect) in the bank are protected from the threat that
their money will be lost if the bank fails. That salvation will come, they
believe, via one of two channels – both of which lead to their country’s
The first is the direct route, whereby the government
guarantees the depositors’ money. This is what the British and Irish did in
2007/2008. The second is the indirect route, wherein the bank pays an insurance
premium to a government agency (in the US this is the Federal Deposit Insurance
Corporation), which is then able to step in when a specific institution fails
and use the accumulated insurance premiums to prevent that bank’s depositors
from being damaged.
Each system has its pros and cons, but we can skip
that discussion because it is no longer relevant. These approaches work when you
are dealing with small-town banks in America, or even with something as big as
the British building society Northern Rock, which collapsed in September 2007.
However, when a major bank fails, it creates a system-wide collapse, which
requires a systemic response.
The Irish banking system had to be bailed
out by the government, but this entailed the state assuming so much debt that
it, too, went bust – and had to be bailed out by the EU, under such onerous
terms that the Irish economy is effectively crushed for years to come and
everyone who can is emigrating, ensuring that things get even worse.
matters stopped with Ireland, the EU would have been fine and the Irish would
have eventually recovered. However, Ireland was followed by Greece, then
Portugal, and soon Spain and eventually Italy. Why? Because these countries are
all buried in accumulated debt, which they can either nationalize and then go
bust at the sovereign level, or leave in the banks and let them go bust at the
institutional and systemic level.
The advantage of pushing the debt
upward – from small banks to big banks, from big banks to small governments and
from small governments to big governments – is that it extends the period before
the entire system collapses and life becomes much more difficult for everyone –
especially elected politicians and senior bankers. At that point, governments
will have to admit that they cannot repay all depositors – and the illusion of
safety will be destroyed. However, the underlying systemic bankruptcy has been
apparent for some time, allowing the financial markets to adjust accordingly the
prices of the assets traded in them. That is why two-year Greek government bonds
yielded over 25 percent per annum last week. The market works faster than the
ratings agencies, but even they adjust eventually, which is why Moody’s
downgraded Greece’s rating by another three notches this week (the latest in a
string of rating downgrades), putting its credit on a par with that of
The political system, however, has the great advantage of being
able to conjure money out of nowhere; in reality, out of the citizenry’s future
earnings via higher taxes. Its goal is to deny and delay. This is the essence of
the complex maneuverings in Europe this week, which has resulted in another
bailout package paid for by European taxpayers, to which American taxpayers will
unknowingly contribute via the IMF involvement in the bail-out.
requirement from the politicians and bankers has been for this package not to
involve any move (such as rescheduling, restructuring, etc. of existing debt)
that could be construed as a “credit event,” a legal term for default – because
that would bring the whole house of cards down at once. If this can be done –
and the financiers and their lawyers are capable of virtually anything – more
time will have been bought, unless the citizenry reject it.
indeed increasing rumblings of revolt across Europe, with people in the rich
countries unwilling to continue paying for the rescues, and people in the
rescued countries unwilling to endure the austerity being demanded of
But until this unhappiness goes beyond demonstrations and protest
votes, the system is safe, and so is depositors’ money in the banks. How long
that might remain the case is an open question, but few depositors realize that
they are gambling daily on the answer to it.