Banks and Greece’s bailouts

Greece’s 2010 assistance program was largely a bailout of European banks, initiated to prevent a wider banking crisis. I didn’t expect this claim, from the previous post, to be very contentious. But apparently it is, so I’ll overdocument below. Certainly a bank bailout was not the program’s sole purpose — fear of contagion to other indebted Eurosovereigns was also concentrating people’s minds. But the operation was not a huge help to Greece except in the sense replacing private creditors with more generously scheduled official creditors gave the country breathing space.

Commenters have brought up the 2012 program, which is more complicated. It included “private sector involvement”, Eurospeak for getting private creditors to take a haircut on their holdings of Greek debt. That’s a more ambiguous case, and we’ll discuss it below. My view was and remains that the “cramdown” was made possible precisely because the first program helped European banks to reduce their exposures to Greece, both directly by getting paid in full on near-maturity debt, and indirectly by creating time and a window of optimism during which positions could be offloaded without too much impairment. Below, I link some data and and work through an exercise that supports my view, but I certainly don’t claim it is definitive.

Most of this post is going to be documenting stuff. But I want to correct a misperception I fear I may have left with the previous post.

I am not criticizing Europe’s handling of Greece because banks deserved to take a hit and were treated too lightly. It is not the absence of pain and blame that troubles me, but its asymmetry. What was required was a Europe-wide solution to a European problem. What occurred, in my opinion, was the quarantining of a scapegoat. I blame Europe’s leaders for not framing the crisis in a different way, for acting as though it was about alms to Southern miscreants rather than explaining its roots in EU-wide regulatory errors and poor credit allocation incentives, Europe-wide problems that threatened many states. Framed this way, solutions would have looked very different. They would have addressed Germany’s problems and France’s problems as well as those of Greece, Spain, Portugal, Italy, Ireland, and Cyprus. Framed this way, solutions would have been conducive to “ever closer union” one crisis at a time. Instead, leaders chose to inflame national stereotypes. They pretended that there were villains and angels, and that they (and their own constituents, of course) were the angels.

I understand that life happens in real time, people are human, and politicians face pressures and constraints. But if we can admit that of politicians in Brussels, perhaps we might extend the courtesy to politicians in Athens as well. They too inherited their imperfect institutions, and followed paths of less resistance that perhaps were not so virtuous.

2010 Program

The 2010 assistance program was widely understood at the time to be motivated by the need to prevent disruptive write downs at non-Greek banks. The Guardian reported in February 2010 that France and Switzerland had exposures to Greece of €55B each ($119B @ 1.4266 $/€), and Germany €30B ($43B @ 1.4266 $/€), based on BIS data. The Wall Street Journal reported similar values, as does CRS. [1]

In early 2010, it was not the case that the majority of Greek debt was held by Greek banks, as people seem fond of saying. From the same Guardian piece:

Analysts…dismissed as misplaced concerns that Greek banks might be holding all the €300bn of debt in issuance. “Greek banks own around €40bn of the total…implying most Greek debt is sitting on the balance sheets of non-domestic banks,” said Jagdeep Kalsi, an analyst at Credit Suisse.

From Swiss Daily Tagesanzeiger as translated by Ed Harrison:

According to the International Monetary Fund (IMF), about two thirds of the debt of Greece is held by foreign creditors — an above average value.

After the program was announced, European economists (but not politicians) frequently explained it as intended to shore up non-Greek banks. Here’s former IMF staffer Gary O’Callaghan, writing in 2011:

The new Portuguese programme is set to be launched in the context of a continuing lack of market credibility in the other two — the Greek and Irish…

[W]hy are [Eurozone finance ministers] supporting these financial assistance programmes? Because, if they are not implemented, the non-payment of debt — including bank debt — by the nations on the periphery would lead to severe banking crises and a return to recession in the core of the eurozone.

Former Bundesbank head Karl Otto Pöhl, just after the 2010 program for Greece was approved:

Pöhl: …a small, indeed a tiny, country like Greece, one with no industrial base, would never be in a position to pay back €300 billion worth of debt.

SPIEGEL: According to the rescue plan, it’s actually €350 billion …

Pöhl: … which that country has even less chance of paying back. Without a “haircut,” a partial debt waiver, it cannot and will not ever happen. So why not immediately? That would have been one alternative. The European Union should have declared half a year ago — or even earlier — that Greek debt needed restructuring.

SPIEGEL: But according to Chancellor Angela Merkel, that would have led to a domino effect, with repercussions for other European states facing debt crises of their own.

Pöhl: I do not believe that. I think it was about something altogether different… It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about — namely, rescuing the banks and the rich Greeks.

Pöhl, by the way, agreed with the now-(in)famous Yanis Varoufakis that from Greece’s perspective, a partial default would have been superior to the 2010 package. Here’s Pöhl again:

Pöhl: …They could have slashed the debts by one-third. The banks would then have had to write off a third of their securities.

SPIEGEL: There was fear that investors would not have touched Greek government bonds for years, nor would they have touched the bonds of any other southern European countries.

Pöhl: I believe the opposite would have happened. Investors would quickly have seen that Greece could get a handle on its debt problems. And for that reason, trust would quickly have been restored. But that moment has passed. Now we have this mess.

Strange bedfellows, perhaps.

If this is all nonsense (as a correspondent alleges) because of errors in the BIS exposures data widely known four years ago, I’m not the only one who’s missed the memo. I’m in pretty good company. Here’s banking scholar Anil Kashyap writing just a few days ago:

By the spring of 2010 the excessive debt problem became unbearable and there was open speculation that Greece would default. The country had done this on four occasions previously since 1800. Much of the government debt was owed to banks outside of Greece, with the largest amounts in France and Germany. So if Greece had stopped paying, the French and German banks would have suffered substantial losses.

Greece was lent new money in 2010, but as Karl Otto Pohl former head of the German central bank observed at the time much of that money was used to repay the obligations owned by the French and German banks. The new lending was advertised by the politicians across Europe as a rescue for Greece. But it was at least as much a deal to buy time for the banks and other owners of Greek debt to avoid a default.

2012 Private Sector Involvement (PSI)

In 2012, private sector creditors were indeed asked to take a hit. As I mentioned in the intro, my view is that “PSI” was undertaken in deference to the politics of creditor moral hazard only when, thanks to the 2010 intervention, non-Greek banks were able to reduce their exposure. I’m hardly alone in that view. Again, Anil Kashyap:

By continuing to allow banks everywhere to use Greek debt as collateral, the ECB also created conditions that supported the trading of Greek debt. By this time the French and German banks had shed their exposure to Greece so that they would no longer be directly harmed if there was a default. So the stealth rescue of the non-Greek banks was completed with little public attention and the narrative that all the problems were self-inflicted by the Greeks became more pronounced.

By June 2011, Greek banks did hold the majority of Greek debt, and other banks’ exposure was small enough that large write-downs would be manageable. (Here’s a spreadsheet, published by the Guardian, with data apparently from UBS.)

According to the best discussion of PSI I’ve found, by Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati, the debt exchange was large, affecting €199B of debt at face-value, with a present value of roughly €130B at the time of the exchange (using a discount rate of 15.3%, see Table 4, p. 23). The authors estimate the total debt relief to Greece from the operation to be €98B. Of that €98B, €15.8B are accounted for by subsidies embedded in two below-market loans from official lenders: €8.2B in underpriced borrowing to buy notes from the EFSF (to be distributed as a “sweetener” to encourage creditors to make the exchange), and €7.6B in the form of an underpriced loan to partially recapitalize Greece’s banks (which would be impaired following their own participation in the write-down). That left a subsidy of €98B – €15.8B = €82.2B which had to have been provided by surrendering €130B in debt, for an average write down of 63.2%.

If we assume that the Guardian/UBS exposures linked above are valued at comparable discount rates, we can compute the distribution of the incidence of this cost-to-debt-holders / subsidy-to-Greece. According to that data, Greek banks would have accounted for 45.3% of the €130B debt exchanged, non-Greek banks would have accounted for 25.3%, and unknown non-European-bank holders would account for an additional 29.4%. In absolute € terms, then, Greek banks representing €58.9B of exposure would have transfered €37.3B; non-Greek banks representing €32.9B of exposure would have transfered €20.8B; and unknown non-European-bank holders representing €38.2B of exposure would have transfered €24.2B.

I’d say that non-Greek European banks got off pretty easy in this exercise. If you believe the Credit Suisse analyst cited by The Guardian above, Greek banks held only 13% of Greece’s debt when the 2010 bailout began. Yet in the 2012 exchange, Greek banks were responsible for substantially more of the debt relief than non-Greek banks, even net of the recapitalization subsidy. (€29.7B vs €20.8B)

There’s lots you can quibble with here. Maybe the Guardian/UBS exposures are valued at a very different discount than our 15.3%. Maybe that data’s no good (it’s just the only data I could find). I’m treating all debt as incurring the same write-down. In fact, the size of the write-downs were maturity sensitive, with short maturities incurring larger haircuts than longer maturities, and there’s no reason to think the maturity profile of our three subgroups was identical. Maybe the assumptions beneath the pieces I’m borrowing from Zettelmeyer, Trebesch, and Gulati are wrong. Maybe I’m just screwing something up. (Let me know! Trashy spreadsheet!) But this is about the best I can do on the evidence we actually have. And, tentatively, it doesn’t look like Greece’s pre-2010 bank creditors had it very rough at all, especially when compared to 2010 BIS exposures.

Profile of Greece’s overall finance, 2010 – 2012

There’s a wonderful analysis at Greek Default Watch of Greece’s sources and uses of external finance from 2010 – 2012. It seems like a good way to conclude this piece:

The Greek government needed €247 billion in the period from 2010—2012. Of that, a mere 7.7% went to finance the government’s deficit—the rest went for other purposes. Around 15.4% went to pay interest on debt—this money went to both domestic and foreign investors. Another 12.3% went to repay Greek investors who held government bonds that were expiring in that period. A full 24.3%, the largest item, went to repay foreign holders of Greek government bonds—in sum, almost €60 billion. Around 18% went to recapitalize banks, 14% went to support the PSI (such as buying back debt) and 8.6% went for other operations.

In other words, more than 50% of the money that Greece needed in that period was to deal with the country’s excessive debt burden (interest on debt and repaying residents and non-residents). Given that the bank recapitalization and PSI were both, ultimately, linked to the country’s debt, almost 84%, or €206 billion, was ultimately devoted to Greece’s debt—which, at year-end 2009, was €299 billion. Importantly, however, a large sum (€60 billion) went to bailout foreign banks and other investors. So this operation was minimally about covering the current profligacy of the Greek state—it was mostly about covering its pass excesses.

I think that covers it.


[1] By Twitter, Dave Rabinowitz disputes these values, citing 2011 data and some earlier not-so-accessible investment bank research. It’s not disputed, I think, that exposures were much lower by 2011. That’s much of what buying time with a bailout would be intended to enable. (If Rabinowitz does have better information than the BIS on exposures at the time of the program, and what policymakers at the time would have understood those exposures to be, I hope that he’ll provide it. I’d be glad to offer links in an update.)


18 Responses to “Banks and Greece’s bailouts”

  1. dlr writes:

    The 2010 assistance program was widely understood at the time to be motivated by the need to prevent disruptive write downs at non-Greek banks.

    Those quotes from the commentator haystack are not persuasive evidence. Commentators comment. A lot of well respected and well placed people were quoted arguing that QE was Bernanke’s attempt to create “asset bubbles.” Also David Stockman. Should we care? There are also a gazillion quotes from 2010-11 from every stripe of Greek government official including Papandreou fiercely opposing any kind of debt restructuring and preferring the assistance package, but I don’t think that’s evidence that Greece was cramming this plan down the throats of French and German depositors. There are also stories in April 2010 of Germany being the holdout on this very bailout package that was supposedly saving German depositors at the expense of Greece, and those stories claimed that strong opposition from the Social Democrats had Germany asking German banks to *increase* their exposure to Greek debt *and* to contribute to the bailout fund. Quotes and stories, right?

    The media articles citing French bank “exposure” of 55b euros are simply weak, poorly researched readings of Crude BIS data, that almost surely included the non-GGB holdings (i.e. normal private loans made by non-recourse subsidiaries with Greek, not French, depositors) made by Agricole’s Greek subsidiaries. If we start including that then the domestic Greek Bank exposure goes through the roof. Go look at the actual GGB exposures explicitly announced by the French banks in May of 2010. These are not a random sampling of banks, these are all the biggest French banks.

    BNP Paribus: 5b
    SocGen: 3b
    Natixis: .8b (some nuance, but not important)
    Agricole: .9b

    These are confirmed in the ECB stress test of 2010, which explicitly released the top 10 Greek bond exposure (the largest non Greek bank exposure was Commerzbank at 2.9b). They are also stated repeatedly in CSFB research, who you quoted above (see May and June 2010 CSFB pieces). Notice all of these individual exposures are roughly the same levels on page 9 of the Zettelmeyer working paper as of June 2011. In fact, the largest holder, BNP Paribas, explicitly promised to continue to hold its Greek bonds when it announced it exposure at the time of the May 2010 program. That is, these loans for the most part sat on the books, not benefiting from the May 2010 package (and BTW Greek Bond prices continued to decline thereafter) and took the full 58-80% (you can follow the write downs bank by bank in 2010, 2011 and 2012) losses from the eventual restructuring.

    The stakeholders of these banks were simply not “saved” by these loan and restructuring packages. Not even close. You can always argue that they were saved from death-by-contagion, but then maybe so was every bank on the planet. We may not know where all the GGB’s sat on private balance sheets, but we know where they were not. And remember, even the non-bank private sellers of GGBs post May 2010, banks or otherwise, were not getting handed all their money back. Most of these sales would have been significant losses. I remember the 30 YRs trading in the low 50s through 2010 and the 10 YRs in the low 70s. Those prices got even worse in 2011. the GGB 10YR was still sub 6% at the end of 09 pre-package and it was already 18% by mid 2011 pre-restructuring announcement.

    Again, I think this claim from your original post is just provably wrong:

    In 2010, the EU, ECB, and IMF laundered a bailout of mostly French and German banks through the Greek fisc. Cash flowed into Greece only so it could flow out to rickety banks. Now, suddenly, the banks were absolved. There were very few bad loans left on the books of European lenders, everyone was clean, no bad actors at all…That is, Greece’s citizens are in precisely the place France’s citizens and Germany’s citizens were in 2010, at risk that personal savings maintained as bank deposits will not be repaid. Something was worked out for French and German citizens.

    The banks were not absolved. None of the large French and German banks had enough Greek bond holdings to put their depositors at risk, held most of their bonds long past the May 2010 bailout package, and took substantial losses on these loans. Other private holders perhaps benefited from the original bailout, though the extent is extremely unclear as GGP price declines continued unabated and all private sellers sold at meaningful losses.

    I have plenty of sympathy for Greece as a borrower in this terrible story, but I think you are telling an oversimplified creditor-borrower, villain-victim parable that is incurably short of nuance, and that this in particular is a situation already overflowing with blunt outrage from both sides from far less thoughtful writers than you.

  2. ravi writes:

    I don’t recollect this level of debate among the economists when the IMF came up with much more stringent austerity programmes , in the much poorer countries of Asia , after the SE Asian crisis . Are we wiser now ? or we react to misery only when its closer home ?


  3. […] at 3:16 on July 6, 2015 by Mark Thoma Austerity Arithmetic – Paul Krugman Banks and Greece’s bailouts – interfluidity Teaching finance after the crisis – Vox EU Fluctuations in the financial […]

  4. Kindred Winecoff writes:


    Surely if the Northern Europeans had the finance to launder funds through Greece to bail out their banks they also had the finance to save their banks directly if necessary. Thus, it is bizarre to claim that this elaborate scheme was conducted only for the benefit of the banks. It would have been much simpler and easier to deal with the banks directly. It almost certainly would have been more politically popular, too.

    The truth is that the EZ has been phenomenally generous with Greece relative to pre-2009 expectations of what was allowable (much less politically feasible) under treaty. Direct assistance to Greece is well over 100% of GDP. Indirect assistance could be a multiple of that. And since Greece has *still* not made it to a stable primary surplus that assistance continues despite every indication that it will never be repaid. Not a cent of the debt has been paid down, and more has been given even while the creditors are being blamed for lending anything at all! The “blood from a stone” rhetoric is just not supportable by actual facts.

    It’d be great if there were cops and robbers, good guys and bad guys. That would be reassuring. But this just isn’t that clear-cut.

    Now maybe Greece should have refused the deal in 2010, taken the default, exited the euro, and defaulted. I don’t think they’d be any better off today, but that view is certainly defensible (and at times I made the case back then, altho I was not at all certain it was the best course). But Greece didn’t make that choice, and you cannot blame that decision on the Troika. Even today overwhelming majorities of the Greek public wish to not devalue.

  5. […] Banks and Greece’s bailouts – interfluidity – arguing that one of the reasons of the current meltdown is the reckless lending and bail-out policy of the European Union intelligentsia […]

  6. Tushar writes:

    So how did the French and German banks get out of their previous positions on Greek government bonds?

  7. […] betrayed the ideals of European integration in their handing of the Greek crisis.” (And more from Waldman on the earlier bailouts.) Thomas Piketty points out — to Die Zeit! — “that […]

  8. […] My favorite of these is Steve Randy Waldman. His take on the Greek bailouts includes an in-depth discussion of the 2010 assistance program as “largely a bailout of European banks, initiated to prevent a […]

  9. John writes:

    When we talk about the debt writedowns we need to remember that those writedowns happened after several years of Greece paying usurious interest rates. Greece got to write down the interest on the capital but the private lenders had put huge risk premiums on their lending which predicted the extent of the writedowns surprisingly well. So the haircut was just clawing back the profits made before and returning the Greeks to square one. The only generosity that the Greeks received was a few years of can kicking but that came at the price of a macro-economic suicide pill.

  10. csissoko writes:


    Perhaps there’s room for both your view and Steve’s view to be accurate. You seem to be saying that the big EU banks had subs in Greece that were very exposed to Greek debt. The banks, however, were protected by the corporate form from liability for the Greek sub’s obligations.

    In the post-crisis years, however, banks relying on legal rules to escape perceived (and likely deliberately cultivated) expectations of support of their subs was not always possible. Essentially, you are claiming that this was not a bailout of French and German banks, because they could have just let their Greek subs go without support. But is the true as a practical matter, even if it is a legally defensible position?

    Presumably many Greeks put their money in these subs, because they believed them to be safer than domestic banks. Was 2010 a good time for reliance of the EU banks on the corporate form to be tested? What would have happened throughout the EU if these legal rules had been enforced in 2010?

    In some sense you are arguing that the monetary union was already fragmented by the national structure of the banking system prior to the crisis. But what would have been the effects of making this obvious to the public in 2010?

    Thus, it is possible that both you and Steve are right. Technically the bailout was of the Greek subsidiaries of the big EU banks, but in practice it was a bailout of the broader EU banking system, which could not afford in 2010 for the reality of the fragmentation of the EU banking system to be made obvious to the public.

  11. Luis writes:

    This is another source of private to public debt swap.

    A question to me is: what became of the 32 000 million euros of debt shrikage from 2011 to 2015? is this money repaid by Greece or is it a haircut?

    Congratulations on your previous post. It goes well beyond economics.

  12. […] also seen the Zettelmeyer, Trebesch and Gulati study, pulls apart the private creditor deals in a new Interfluidity post and tentatively concludes that the non-Greek private banks got quietly rescued on very good terms. […]

  13. Peter K. writes:

    @ 1 dlr

    If it was a bailout of the Greek government and not the banks, then you would think it would have worked out better for the Greek economy.

    If dlr is correct, then the structural reform/austerity programs forced on Greece were even more of a failure than commonly understood.

    But I don’t think he’s correct. I do think he’s correct that things would have been worse without a bailout but think of TARP as analogy. The US bailed out the banks and it would have been worse if they had not, but the recovery is still one of the worst on record. It “worked” and yet in a sense it didn’t work very well.

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  16. Graham Williams writes:

    The true nature of the May 2010 bailout/ loan package is revealed by the interest rate charged. The bailout was conditional on the acceptance of severe punishment for past misdeeds. The interest rate was 5.5% at a time when the ECB main refinancing rate was 1%. The package was always as much about punishment as it was about rescue.

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