Jun 14, 2011
Bank folks can’t count
By Chan Akya
With a dull inevitability that portends the sheer indifference of the rest of the world, the sovereign debt crisis in Europe ripped out another leaf from the Keynesian book. Breathtaking only in its sheer delusions of grandeur, the European Union decided that lobbing another 60 billion euro (US$86 billion) into the black hole of Greece was just what the doctor ordered.
As if that amount could help to solve the problem. Let us look at some math:
1. The European Union along with the International Monetary Fund (IMF) and other grandees lobbed 60 billion euros into a Greek debt extension barely a year ago;
2. Since then, the amount of private credit heading towards Greece has fallen dramatically;
3. Private capital from within Greece – as deposits in its banks and holdings of Greek equities by Greeks – has fallen dramatically. Put another way, Greeks have been busy getting the heck out of Greece;
4. The laughable stress tests of the Europeans last year assumed there would be no “haircuts” on Greek sovereign debt, based on which assumption all European banks (barring a handful who didn’t know how to fudge) continued to hold these assets and refused to hedge them;
5. The European Central Bank (ECB) is the proud owner of some 80 billion euros of Greek debt – some say it is even more once you count the stuff that is on repo from bankrupt banks – but itself has only 79 billion euros of capital. Thus a 50% haircut on Greek bonds (which is where the market is trading them) would cause the ECB to lose half its capital.
If anyone around had bothered to count the stuff up properly they would have concluded that the sole purpose of last year’s bailout of Greece was to fund the expensive exits of the rich and the famous from those beautiful islands, leaving behind an even angrier populace that would be rather keen not to quite give up on the money train called the EU until every last citizen has managed to get out with some funds still in their bank accounts.
In effect, Greece is bankrupt and likely to become more bankrupt with every new bailout. I am sorry, but that doesn’t make sense in plain English – but you need to know the banking jargon of the West to pretend to understand this and nod sagely to the tune of “yes sure, what else can they do”.