Doing over the creditors, Greek style

As Greece’s situation has gone in recent days from bad to worse to worser to even-worserer-than-that, I’ve seen a lot of claims that the European authorities treated Greece’s private creditors too generously back in 2010-2012. My natural tendency was to accept those claims, partly because I wasn’t paying close attention to Greece back then, and partly because creditors have a long history of getting off lightly in these situations.

Let me explain for a moment. The fate of creditors is important in financial disasters, and usually under-examined. People talk about the bailouts of banks and insurers in the 2008 crisis, but it was typically their creditors rather than the institutions and their shareholders that got most of the benefit of those US interventions. Goldman Sachs and Societe Generale, for instance, seem to have won most from the huge AIG bailout, due to regulators’ fears that they would collapse and take the entire world financial system with them. By the time the rescue was done, Goldman Sachs and Societe Generale and their shareholders and management escaped with remarkably little penalty, and Goldman Sachs today is not a charred, smoking corpse but a live colossus of world finance.

That’s a problem. If you really want to avoid moral hazard, you want to make sure in these situations that the creditors get royally ****ed over, in a way that will forever remind the next generation of creditors not to be so ****ing stupid as to lend to organisations like AIG that are taking a bunch of dumb ****ing risks. That will make it more expensive for dumb ****s to borrow money, which is a good thing. But in the process of trying to prevent collapses from taking the whole financial system with them, the regulators often end up saving the creditors.

My view, for what it’s worth, is that regulators save the private creditors far too often. But it’s easy to say this from my comfortable viewpoint. When you have a weekend to make a decision that might end up destroying a piece of the world financial system and ruining a lot of ordinary people’s lives, there is a certain pressure to err on the side of caution.

So when I heard the likes of Steve Randy Waldman saying Greece’s private creditors had gotten off lightly, I assumed he was right.

But it turns out, maybe not.

So far I’ve found only one study of the 2010-2012 Greek bailout’s effects on private creditors whose authors seem really powerfully qualified to make judgements. That study is the 2013 paper “The Greek Debt Restructuring: An Autopsy“, by Jeromin Zettelmeyer, Christoph Trebesch and Mitu Gulati. Trebesch, who wrote an AEJ paper called, irresistably, “The Price of Haircuts”, also maintains a terrific Haircut Dataset of 187 government debt restructurings. 

And this study says Greece’s private creditors got done over pretty good. Indeed, the authors calculate that the 2010-2012 Greek bailout established a new world record for creditor losses.

“… the exchange resulted in a vast transfer from private creditors to Greece, in the order of €100 billion in present value terms; corresponding to 50 per cent of 2012 GDP … the ‘haircuts’ suffered by creditors on average were … in the order of 59-65 per cent …”

Now 59-65 per cent losses are lower than they could have been – and, incidentally, lower than they were reported as being at the time. And the ultimate results were mixed, say the authors:

“On the one hand, the restructuring was both unavoidable and successful in achieving deep debt relief relatively swiftly and in an orderly manner – no small feat. On the other hand, its timing, execution and design left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents – particularly in its very generous treatment of holdouts – that are likely to make future debt restructurings in Europe more difficult.”

Nevertheless, their conclusion was that what happened in Greece in 2010-2012 wasn’t awful.

They also concluded that the Eurozone needs some sort of agreed resolution protocol for governments in debt trouble. This is looking like a fairly sensible comment right now.

You can draw what lessons you like from all this, or choose to ignore it. That €100 billion transfer doesn’t mean Greece is getting off lightly now. But it does seem to suggest a) that Greece’s private creditors did not escape unscathed from their dumb ***ing lending, and b) that the 2010-2012 deals were not especially incompetent in their treatment of those creditors.

It also suggests that if, as a country, you get into the situation where you can’t pay your debts, the resulting negotiations will be necessarily imperfect and messy. If you completely **** up, in other words, it will be hard to get you un****ed.

Update: The admirable Steve Randy Waldman, who has 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. See his comment below.

About David Walker

David Walker runs publishing consultancy Shorewalker DMS ( David has previously been: editor of INTHEBLACK magazine (, Australia's largest-circulation business magazine; chief operating officer of publishing firm WorkDay Media (; director of communications and advocacy for the Business Council of Australia; director of policy and communications for the Committee for Economic Development of Australia; site director for online finance start-up eChoice; and an editor and columnist at The Age. He has written professionally on economics, business and public policy since 1987 and spent three years in the Canberra Press Gallery. Contact him on 03 8899 7790 or email [email protected]
This entry was posted in Business, Economics and public policy, regulation. Bookmark the permalink.

9 Responses to Doing over the creditors, Greek style

  1. (Do see my follow-up if you haven’t, which addresses PSI directly, using information from the same source you’ve found. I think it’s pretty clear that PSI occurred only after exposures had been adjusted so that they would have a very small impact on Eurozone banks, and in fact a very large impact on Greek banks. But a lot remains murky, I’ve been able to find no real study of the incidence, and while I think my back-of-the-envelope estimating is the best that can be done with the information that is public, it is very tentative.)

  2. paul frijters says:

    Hi David,

    yes, the private sector has lost a lot of money over this (what I termed ‘losing their shirts’ in my last post).

    To understand how the credit boom is, in a sense, still underway, have a look at Sinn’s piece on the loans within Greece that are being converted into Euro assets outside greece:

    It details the scam I talked about two days ago. It has grown spectacularly since June when Sinn wrote about it: the implicit new loan via the ELA now amounts to a staggering 89 billion Euros, much of it in the last year.

    Cast your eyes also on and just look at where the 250 billion euro loan that the Greek government was given in tranches over the last few years went to. French and German banks? Not at all. Yes, there was debt maturing and interest rate repayments, but the degree to which that went to French and German banks appears paltry (follow the IMF links given by commenters at the bottom). Rather, large chunks of the money was used to prop up the Greek banks (and some of the debt maturing will have been with Greek creditors also). Now, in other countries, those payments have to come from government revenue one way or another, so really you are talking about expenditures within Greece that are in effect an enormous stimulus package rolled out in the last 4 years.

    The whole austerity-inflicted-by-bankers line that many commentators have fallen for is thus bs from start to finish. The end of the credit boom in 2008 lead to an inevitable recession, but the massive transfers to Greece after 2010 seem to so far have mainly lead the Greek elites to cook up ever more inventive ways of borrowing from the rest of the Eurozone, combined with political grand-standing of how unfair it is that tranches of loans one was getting in the very same week should ever be paid back. And it would seem from the announcement in the last 24 hours that the ECB will keep the Greek banks afloat for a few more days that the Greek elite has the opportunity to effectively borrow a few more billion from the Eurozone (via the scam me and Sinn have talked about). The bailout mistake continues.

  3. Nicholas Gruen says:


    I haven’t rummaged around the same sources you have, but what you describe seems fairly unremarkable to me. How’s this for a description? The Europeans bailed out the creditors to the Greek banks. That included Greek and particularly German and French banks. There commenced a slow motion bank run in Greece and firstly the smart money and then most of the money got withdrawn in Greece and reinvested elsewhere.

    Quite how to characterise these events seems unclear. Looking at it from the European angle you can certainly call it European subsidies. On the other hand the role of a central bank is to back up national banks. So from the Greek point of view, the ECB is doing its job which is to go lender of last resort to the Greek banks. What’s the alternative when faced with a bank run? Of course one alternative would be for the ECB to have adopted the position it seems to have now, but if it had done so then it’s not really much of a central bank for Greece is it?

    What is harder for me to see is why you should consider this a “stimulus”.

    Of course if you want to just say that the Greeks were being loaned vast amounts – that may be true – though it’s subject to the perspective you take as set out in my previous paragraph. But if this is true and the Europeans have found the ELA subsidising Greeks, that’s because those Greeks took all the money they had in Greek banks and moved it elsewhere – perhaps there’s vast corruption in the way this occurred, and I’ve not read your words closely enough – but just eyeballing it, it looks like a bank run.

    You can argue about how things might have played out if Greece had its own currency with it’s own central bank writing out cheques to underwrite all these withdrawals, but from the POV of the Greek people doing the withdrawing, they owned all those billions of Euros and they were in Greek banks and now they’re in a German bank. That’s kind of the way banks are supposed to work from the perspective of their customers non?

    • paul frijters says:

      The Greek banks are in effect printing money: a lot of the money now flowing from Greece via the scam I am talking about didn’t previously exist, ie they are deposits that were created from loans.

      More broadly, I would say that it is a mistake to look at Greece and imagine that the place is like Australia or the US. To understand what is going on there now, I encourage you to look at Greece as if it was Zimbabwe and ask yourself the simple question: what would I expect to happen if the Australian government for 10 years ‘sort of’ guaranteed the loans Zimbabwean politicians made of private banks here in Australia because of your credit rating? And what do you think would happen after those 10 years when your private banks have caught on to the fact they will actually never be paid back (leading to a credit crunch and associated economic decline there) if we as a government lent them another 5 billion per month in the following 5 years on the condition that they fire a family member per week from their cosy positions? And what do you think we should do after those 15 years when you find out at that moment that the Zimbabwean economy is much worse off after the last 5 years than before your generosity, but they come beg you for another 100 billion whilst berating you for how mean you were for insisting they no longer give their 7 deceased grand mothers a pension?

      • Nicholas Gruen says:

        Thanks Paul,

        You haven’t addressed my points. You perspective is an interesting one. It might be right. It still doesn’t address my points. It just reiterates what you said in the post.

        • paul frijters says:

          the 200-250 billion loan was after the initial bailout of the creditors (who took big hits, btw) so it was a steady flow of large volumes of money (which I dare call a stimulus).
          Same for the ELA funds I am talking about: the flows of money buying up assets outside of Greece appear not to originate from something already productive in Greece. They could be buying up machinery (but are not)!

  4. Chris Lloyd says:

    It can only be a matter of time before “****” is classified as obscene by web filters!

  5. Nicholas Gruen says:

    Greeks have money in Greek banks. How did it get there? They earned it. Now it’s a fractional reserve banking system, so if they withdraw it, the bank runs out of money. So the ECB steps in – as per its central banking mandate. Greeks then get their euros out of the Greek banks and put it in other European banks and other assets.

    This isn’t a ‘stimulus’ or if it is, it’s the worst designed stimulus in the world because virtually none of it has been spent. So let’s call it a transfer. From the europeans perspective it’s some kind of bailout. From the Greek perspective it’s just the central bank performing it’s role. So it doesn’t seem like the scandal or the conspiracy you’ve argued, even if it does represent the Greeks taking advantage of the cockamamie way the Europeans have set up their currency union.

Leave a Reply

Your email address will not be published. Required fields are marked *

Notify me of followup comments via e-mail. You can also subscribe without commenting.