Stavros Lygeros: Obama reminded us of the colpo grosso of the European hierophants against Greece

Since 2010, I have described the imposition of the Memoranda on Greece as a “colpo grosso” (grand caper) in order to save the German and French banks, which would have registered a black hole if Greece followed the path of normal bankruptcy. Why did I remember forgotten stories in the midst of a pandemic? Because Barak Obama reminded us of them with his book.

“I noticed that they rarely mentioned that German and French banks were some of Greece’s biggest lenders, or that much of Greeks’ accumulated debt had been racked up buying German and French exports – facts that might have made clear to voters why saving the Greeks from default amounted to saving their own banks and industries,” Obama writes in his memoir “A Promised Land” released Tuesday.

“Maybe they worried that such an admission would turn voter attention away from failures of successive Greek governments and toward the failures of those German or French officials charged with supervising bank lending practices,” he further notes

Obama, although he had and still has excellent relations with Merkel, told the truth, albeit “elegantly”. Let me start, then, with the basics that in the case of Greece were bypassed so the German and French banks that had Greek bonds in their portfolioss would have to face “black holes”, as Bloomberg later admitted.

The lender is also liable

It is a rule in capitalism that a country that cannot pay its creditors goes bankrupt. The IMF imposes a tough austerity program on the country, combined with neoliberal changes. At the same time, however, it imposes on the lenders the debt reduction to the extent necessary to make the debt sustainable. That is, so that the bankrupt country can get back on its feet and pay the remaining debt.

In capitalism, it is not only the borrower who has responsibility, but also the lender, as Obama says. If it were certain that each state would pay its debt, there would be no difference in the borrowing rate. The difference in lending rates reflects the difference in risk. The haircut of an unsustainable public debt, then, is the punishment for the lender, who did not calculate the risk correctly, or took a risk and lost.

Regarding the Greek debt in 2009-10, there is no economist in the world who claims that it was sustainable. Greece, after all, in the spring of 2010 was excluded from the markets. The German and French banks that then had in their hands the large volume of Greek bonds did not want to suffer the necessary haircut. Nor did the governments in Berlin and Paris want it, because they would have to cover the hole that the haircut would create. They would be forced to recapitalize their banks with money from the German and French budgets.

Loan agreements to pay off lenders

Instead, after finding the necessary willing people in the Greek political system, they implemented their colpo grosso. They forced all Eurozone member states, even the poorest, to lend to Greece (depending on their share of Eurozone GDP) to pay in full (at face value) all bonds maturing by the beginning of 2012, when the PSI took place.

The German and French banks had inside information from their governments, which decided. As evidenced by the transactions  on the secondary market, they kept the Greek bonds that matured until the beginning of 2012, knowing that they will be paid in full. The rest, which expired later, were “pushed” on the market. As a result, they did not pay the price of their superficiality to lend to Greece amounts that it could not actually repay.

With the first Memorandum, then, Greece was in three times worse position:

• Its debt went from favorable Greek law to unfavorable for the debtor English law.
• Debt as a percentage jumped, despite the PSI, due to the sharp contraction of GDP.
• The backbone of the remaining debt ceased to be a debt to individuals and became a debt to states. This change made – from a political point of view – any future haircut difficult.

Obama and the colpo grosso

The irony of the matter is that those who set up the colpo grosso then invoked the result of their own method (the fact that Greece, after the passage of the first Memorandum and the first loan agreement, usually owed to refuse relief. Merkel and Seibel were first.

For them, the Greek debt was not a problem that had to be solved not only for Greece to be able to stand on its own two feet, but also to deal with a factor of instability in the Eurozone. For them, the Greek debt was used as a weapon to transform the weak link of the European chain (Greece) into a postmodern colony, in which the rules and various economic and social standards that apply as Community law in the rest of the EU have ceased to apply.

The colpo grosso effectively bypassed the rules of capitalism. Why did the government of George Papandreou accept the method of Euro-piracy? He was correct in saying that he had inherited a budget bomb. Although he was warned, he did not try to defuse it. Instead, it caused an explosion, increasing costs for the country.

“Memorandum or bankruptcy?”

The political weapon of the then government was the extortionate dilemma “Memorandum or bankruptcy”. Shock tactics were applied with this weapon. Aim to immobilize society, so that it does not react to the memorandum “treatment”. They therefore raised blackmailing dilemmas, which could be answered unequivocally. In other words, they made society choose between the supposed catastrophe and the painful treatment they offered it. Under the state of this extortionist dilemma, the Greek Parliament voted in the first Memorandum and the two that followed.

But why would bankruptcy be more of a disaster than the Memorandum years? Obviously, in the event of immediate bankruptcy, a violent fiscal adjustment would have been imposed. This, however, was also imposed through the Memoranda. It would probably have been imposed at a faster pace. With bankruptcy, however, the debt would have been drastically cut in order to make it sustainable.

The threat of the European Union to prevent this from happening was that if Greece chose to declare bankruptcy, it would expel it from the euro. This was probably a bluff not only because there was no legal way, but also because 2010 would be a major systemic risk for the Eurozone. Even if we assume, however, that Greece would be expelled, there was no reliable study of the pluses and minuses of the two roads. And this possibility did not exist, because the Greek political system was ideologically-politically down a one-way street. The same goes for Greek public opinion, which wanted to believe the assurances for a short way out of the crisis. Greek citizens had to suffer what they suffered for them to start fostering second thoughts, and not always.

Greece down on its knees and also a hostage

The only thing that is certain is that the Germans and the French saved their banks, loading all the burden on the Greek people and those unannounced third parties who suffered the PSI haircut in early 2012. Thus we reached the end of the Memoranda with the Greek economy-society, however, having suffered disasters. And of course having made painful commitments for many, many years.

I emphasize that the Greek debt remained unsustainable even after the withdrawal from the Memoranda. With the rubber-stamp of the Eurogroup and the Greek signature, in fact, the possibility of a haircut was ruled out. The Greek debt restructuring measures were timid, a fact that instead of solving the problem, just postpones it. This is the reason why the IMF refused to participate financially in the Greek program and the ECB refused to include Greece in the quantitative easing program.

The result is that the Greek economy remains on its knees and in a peculiar hostage situation. With the pandemic, in fact, the situation has become more and more dramatic, even if this will be seen as soon as the health crisis passes.