What do Greece, Ireland and the U.S. have in common?
Each experienced what was termed at the time a “new financial era” that produced an enormous expansion of its finance sector. This led to an intoxicating combination of aggressive lending, leverage and recklessness. In each case, the era ended in a financial crisis; perhaps most important, each crisis ended with a bailout of lenders, bondholders and bankers.
This hat trick of bank bailouts hasn’t gone unnoticed in Greece. Yanis Varoufakis, who just resigned as finance minister of Greece, might be a provocateur, but he is apparently no fool. Monday in a blog post he said, “The Greek ‘bailouts’ were exercises whose purpose was intentionally to transfer private losses onto the shoulders of the weakest Greeks, before being transferred to other European taxpayers.”
This astute (albeit little known) insight has been echoed by a small number of insightful analysts. 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 wider banking crisis.”
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Alas, bailing out banks as a way to fix a financial crisis is standard operating procedure. What was called the “Mexican bailout of 1982” was, in fact, a bailout of the U.S. banks that made improvident loans to Mexico (as well as to Brazil and Argentina) that had gone bad.
As if to prove all parties were unwilling to learn from their experiences, a repeat of almost the exact same errors with the same players — bankers, Latin American borrowers and the U.S. — unfolded in 1994. The emerging market crises in 1997 weren’t identical, but displayed similar themes of leverage, recklessness and loans gone bad.
Which brings us to Greece. The latest restructuring attempt has been emphatically rejected by the Greek people as little more than a bailout for European creditors. Although more pain awaits the Greeks (as well as those who made related macro bets), we are on the road to socializing the losses of German banks.
Consider the previous bailouts and restructurings: The austerity imposed on the Greeks made their economy significantly worse. The financial crisis might have been bad, but the bailouts made it a debacle, transforming a fragile post-credit crisis weakness into a full depression. According to Eurostat, Greece’s gross domestic product fell 26%, to 179 billion euros ($198 billion) last year, from 242 billion euros in 2008. Per capita income fell 24%, as the unemployment rate rose to more than 27%, from less than 10% in 2005.
What the EU has foisted upon Greece appears to be a thinly disguised rescue for private sector (primarily German) lenders, not a plan for the future of Greece.
You may not be familiar with the phrase “lemon socialism,” but that is precisely what this is: private profits and socialized losses.
Understandably, it is difficult for the public to accept the asymmetry of this situation, which explains why people respond by protesting (Ireland), voting down austerity (Greece) or forming new political movements (U.S.’s tea party).
With Varoufakis gone, the Europeans are rid of an adversary who made negotiations difficult. But the events he helped set in motion are far more significant than his negotiating style. The Europeans have to accept that Greeks are no longer willing to accept Austrian-style austerity as a pre-condition for a rescue plan. They are slowly figuring out that they would do better on their own than to suffer at the hands of European technocrats.
There’s still time for a full debt restructuring for the benefit of the Greek people, not the German banks. Germany’s rigid stance is somewhat ironic, given the generous debt forgiveness it received after World War II.
So far, the Greek people haven’t been treated with similar generosity. It’s no surprise they have rejected the failing prescription of more austerity.
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm. firstname.lastname@example.org, www.ritholtz.com/blog