Wednesday, 5 August 2015

Oh dear, where did the money go?

A third bailout for Greece is apparently around the corner having already received two bailouts totalling over €320 billion from its creditors, ‘The Troika’. After all this money was poured in to help the Greek people, perhaps little actually reached them in the end. According to the Nobel Laureate and economist Joseph Stiglitz, it turns out that a great deal of the bailout money went into the pockets of private creditors, especially the French and German banks. This then leads to the question; why did these banks lend to Greece in the first place?

In order to understand this we must look at the general banking system. In the US and the UK the market is dominated by four/five banking corporations. Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland Group lead the fray in the UK. Due to their large presence in the market, each bank tends to earn high profits. On the contrary, German banks don’t enjoy such a large presence on the world stage. Each one commands profits, but on a relatively small scale. Did they yearn to change that?

So why Greece? There was little competition in the Greek market for loans, less so amongst non-Greek banks. This offered the chance of high profits/profit incentive for overseas banks. And after living through a time when interest rates had gone into double digits, the Greeks were happy to take out loans with interest rates from 1-4%. It seemed like a mutually beneficial situation. Depfa, a German mortgage bank, gave €265 million to the Greek government for building a railway. After several other southern European ventures the bank was on the verge of collapse and its leader fired.  Similarly, many banks loaned to municipal governments, with mayors accepting loans to improve their cities. There is a well-known expression that ‘irresponsible borrowers cannot exist without irresponsible lenders’.

To see what went wrong we can quickly look at America’s sub-prime mortgage market; this caused the financial crisis of 2008-2009. American banks had funds aplenty and ended up giving mortgages to people who couldn’t pay them back. It is believed that these French and German banks did not carry out proper assessments and chose to think solely in the short-term. Perhaps they were so driven by the profit motive that they didn’t really consider whether their customers could pay them back in full.

Why is the money flowing to these banks, at a time when Greece is on her knees? Hardships range from being unable to download apps on your phone to a shortage of essential medicines. Credit exposure outlines the extent to which the creditor is at risk of loss in the event of the borrower’s default. The Germans and the French are the most exposed, but would they be hardest hit in case of Greek default? Stiglitz raised the point that the bailout money was heading west in order to preserve those banking systems. Could this be the real reason behind the hard line stance of the Germans? Doesn’t it seem ironic that Germany’s debts were written down twice, yet they are reluctant to do the same for their ex-creditor Greece?

Now, that’s for another day.