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.