Yanis Varoufakis: Europe’s Latest Policy on Irish and Greek Banking losses – Two Swindles Too Similar for Comfort

By Yanis Varoufakis, professor of economics at the University of Athens. Cross posted from his blog

The Irish and the Greeks are, in many ways, very different people. And yet, caught up in the Euro Crisis, our fortunes have become too close for comfort. Recently, European authorities have devised a creative new method for damaging the people of Ireland and of Greece further. The new method involved imposed changes on the public financing of bank recapitalisations that shift even greater burdens on taxpayers and on the weaker members of our societies. This article examines the changes and answers the pertinent question: Why is Europe doing this?


When the Irish banks imploded, the European Central Bank famously leant on Dublin to bail them out. Thus the Irish government, without the consent of the Irish electorate, offered the bankrupt bankers so-called Promissory Notes which, as every Irishman and Irishwoman knows, bankrupted the nation, brought mass emigration back and condemned the majority to untold hardship.

The Promissory Notes specified regular payments by the Irish Treasury to the bearer of the notes. The payments were steep and to be paid in a few years, thus causing both the liquidity crisis of the public sector and the insolvency of the Irish state. The Irish Banks deposited the Promissory Notes as collateral with Ireland’s Central Bank, drawing liquidity in the process from the latter’s ELA (emergency liquidity assistance program) and repaying their (mostly German) bondholders.

After the change in government, the new Irish government bowed to the ECB’s pressure not to haircut or restructure these Promissory Notes. Instead, Dublin adopted the ‘model prisoner’ strategy: Do as we are told hoping for a reprieve, in the form of a restructuring of the Promissory Notes. For two years the Irish government has been petitioning Brussels and Frankfurt to elongate the Promissory Note repayment schedule. The ECB was adamant that there should be no loss of present value to the bearers of the Notes. It won the day. The Notes were, eventually, swapped for new interest-bearing Irish government bonds (in contrast to the Promissory Notes that had no interest compoment attached to them). Once Anglo-Irish Bank was liquidated, its assets (including promissory notes that Anglo-Irish had deposited with the Irish Central Bank as collateral for loans under the Irish ELA) were turned over to the Irish Central Bank, and so the latter ended up holding some of the fresh government bonds that were swapped for the Notes.

What seems to be happening now is that the ECB is pressurising the Central Bank of Ireland to reduce its assets by selling the government bonds it swapped for the Notes that it used to hold. Why? Because the ECB considers the ELA transactions to have been a form of government financing that it allowed during the crisis’ peak but which it now wants to roll back. But if the Irish Central Bank does sell these bonds to the private sector, this will strike another blow at the Irish taxpayer. Why? Because these bonds come with considerable coupons (i.e. interest) that will have to be repaid over a long period. Had the bonds been retained by the Irish Central Bank, the latter would be obliged to return these interest payments to the Irish Treasury (as profits from monetary operations). Now, it seems that hedge funds and assorted financial predators will take another chunk of Ireland’s diminished income. Moreover, a sale of bonds today will involve a haircut (as Irish government bonds are not trading at face value, despite having recovered significantly in recent months) that will, in due course, burden the Treasury further. And guess who will pay for this burden…


Following the haircut of Greece’s public debt held by the private sector (the so-called PSI) in the Spring of 2012, the Greek government was compelled to compensate the Greek banks. Indeed, the banks had just lost €38 billion from the PSI and they were bankrupt to all intents and purposes. So, Greece’s second bailout (that came along with the PSI) had set aside… €50 billion that the government would borrow from Europe’s ‘bailout’ fund (the EFSF-ESM) in order to recapitalise the banks. In effect, the bankrupt Greek state was forced by Europe to borrow from Europe on behalf of the bankrupt Greek bankers and ensure that the latter receive these capital injections without losing control of ‘their’ banks.

To allow the bankers to keep control of the banks, Greek Parliament had to legislate that if the bankers could show that they could raise 10% of the additional capital, the Greek state would put in the remaining 90% of required capital (money that the taxpayer would borrow from Europe) but have no control over the running of the banks. And as if that were not enough, the same piece of legislation specified that the privateers would receive (with their shares) something called ‘warrants’. Warrants are, essentially, options to buy more shares at the original low share price. Put differently, the state was not only allowing the bankers to remain in control of the banks they bankrupted, but committed itself to passing on whatever increase share prices achieved to the bankers. Tails the state lost, heads the bankers won. Simple!

Naturally, these insanely generous terms, especially the warrants, caused a whirlpool of speculative interest in the banks. Once Chancellor Merkel had impressed the markets that Greece would not be thrown out of the Eurozone, and therefore, that Greek banks would not be declared bankrupt (even if they are!), hedge funds began to recognise the great opportunity in purchasing Greek bank shares and targeting the lucrative ‘warrants’. (Click here for Mr John Paulson’s enthusiastic participation in this racket.)

This week, as part of a complex bill of ‘reforms’ that the government had to pass through Parliament in order to be granted another loan tranche of €9.2 billion (so as to repay part of its unpayable debts), a change in the bank re-capitalisation rules was slipped in in relative silence and in a manner that the vast majority of Parliamentarians failed to notice. The sub-clause allowed the government’s Financial Stability Fund (that owns the bank shares following their recapitalisation last year) to stay out of the new share issues that the banks are indulging in these days. It sounds benign. Only it is not!

By allowing for new shares to be issued at prices well below those that the Greek FSF (i.e. the Greek citizens) paid for the shares that recapitalised the banks last year, the shares that the FSF retains lost value while the FSF’s equity in the banks was diluted substantially. In short, the public was shortchanged, in ways that are not dissimilar to what transpired this week in Ireland.


The common thread between these fresh assaults on the Irish and the Greek people, is the European Central Bank; the truly guilty party here. In Ireland’s case, the ECB imposed further losses on the Irish by forcing Ireland’s Central Bank to sell (at a discount) government bonds that should be held to maturity so as to minimise the cost to the Irish people. In Greece’s case, the ECB allowed for (and, indeed, encouraged) a change in the rules of bank re-capitalisation that increase the effective transfer of wealth from the exhausted Greek public to the bankrupt and corrupt bankers (who, in turn, back Greece’s political and media establishment).

Why is the ECB doing this? There are two main reasons. One is ideological, fundamentalist, pig-headedness. The other is cynicism. The fundamentalist dimension has to do with a pathological fear of debt monetisation (in the case of the Irish Central Bank) and of public ownership of banks (in Greece’s case). Turning now to cynicism, the fact is that the ECB (following the so-called ‘banking union) knows that it will have (from next November) to evaluate the assets of these banks, in the full knowledge that: (a) they are bankrupt, and (b) the ECB cannot say that they are bankrupt as it lacks the capacity to recapitalise them (i.e. it is not like the Fed that can call the FDIC in). So, in order to allow itself room to pretend that the banks of Ireland and Greece are not insolvent, it is pressurizing Dublin and Athens to transfer additional wealth to the bankers. It is that simple…

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  1. allcoppedout

    We surely knew this in 2008. No one got nicked. If what Yanis repeats here is true, what does this say about the influence economists might have on the ear of government?

  2. financial matters

    Thank you for this concise and insightful analysis of where the economy destroying austerity generated funds are going.

  3. TheCatSaid

    Great analysis.
    It’s amazing that ECB et al keep adding insult to injury in Ireland and Greece, and that everyone is letting them get away with it without even a murmur.

    For example, even though this matter includes recent matters, I have seen no coverage of this in the Irish press at all. It seems that other political scandals are used as a convenient / deliberate distraction by government and media alike.

    For the last couple months there has been a drip feed of information regarding questionable practices in the police, police ombudsman, secret phone call taping at many police stations since >30 years, secret taping of some conversations between lawyers and clients at prisons, and related political fallout–all worthy of discussion, but NOTHING that I’ve seen about recent ECB pressure on the Central Bank of Ireland. (It would be great to know how he gets his information.)

    1. James Levy

      I keep asking the same question: why conform? Every political science theory I’ve ever read maintains that one or more political party should, in order to win votes and grab hold of the government, adopt the popular position and say in no uncertain terms that they will tell the ECB to fuck off. The only way this cannot be happening is that every, and I mean every, political party in Europe is in the pay of the bankers. No other explanation makes any sense. The job of men like this author is to track down the pay-offs and expose them. All else is chatter. Only by showing the people that their politicos are bought, and rioting in the streets until these people are brought to justice, is any change going to take place if what I argue is true and these people are paid agents of the banks.

      1. Banger

        You present the obvious question. Why do these counties continue to elect people in the pay of the bankers? The Greeks had an alternative in Syriza but they chose not to take that path.

        1. TheCatSaid

          Typically the candidates that are “promoted” are those with the most financial backing or equivalent powerful support, which means. . . they’re in the pocket of the bankers and their buddies.

          It would be fascinating to see what would happen if elections were funded publicly and all candidates got exactly the same airtime / press space to present their views.

          Our US voting methods (majority wins) are also part of the problem. We’re “educated” to think this is the best, fairest & most democratic way, when it’s actually the voting method that is least representative in its results.

        2. PaulW

          Exactly! I’m not in Ireland but I am of Protestant/Loyalist background yet I would have voted Sinn Fein without any hesitation. So why did the Irish, when given a chance to vote for change just return the same old elites to power? Likewise in Greece.

          I can’t help but jump at two possible conclusions: 1) things still are not bad enough for people to have the courage to vote for change. Or those hardest hit simply drop out of the process, leaving the better off to continue voting. 2) the elections are rigged. I know with electronic voting coming into fashion the intent is to fix elections. Perhaps we already have that in Ireland and Greece with paper voting.

  4. allcoppedout

    A better question might be why we don’t have easy access to the data Cat. I’m in complete agreement with Yanis to the point I’m bored with the story – though it is important to keep telling it as he does. The big problem is our presstitute media. The analysis itself isn’t rocket science. I’m reminded of the days when unions tried to demand real information on the companies claiming they couldn’t afford to meet wage claims. We are denied easy access to the management information.

    The data itself is published by government bodies and various central banking institutions like ONS, BoE, BIS, OECD and so on. In addition we search academic books and articles. It’s very rare the presstitutes bother with any of this and they tend to report establishment spin. We could, pretty much in real-time, put up critique like Yanis’ as soon as the pundits in our newsrooms start. This is not what we get. The data itself could easily be put up on such as BBC and Fox websites.

    The heterodox economists have long been saying that private debt and the finance system need to be included in economic analysis. They were talking about the financial parasite long before I started with business and economics in 1982 (grad school). My view is this still excludes more of what matters than is included. We have known since Richard Cantillon (1680 – 1734) that first use of money really over-benefits those with first use, but have somehow chosen to amplify this through the use of banks as Yanis outlines.

  5. Banger

    Yanis, clearly the Greek and Irish people have refused to oppose these policies and we have to face the fact that contemporary populations are spellbound. There are monsters stalking us and we cannot move.

  6. Taxidermist

    Isn’t the answer here that politicians have the same relationship with economists re the GFC that you would have with your oncologist if you’d been diagnosed with cancer? You hope to God they’re not right but who else are you going to place trust in? Your millkman?

    Charlatans have always been with us and always will be, but now they can get University credentials – and I’m not talking about oncologists.

  7. Patrick Donnelly

    Those countries that were worst run end up paying most to those who corrupted them! The meek shall inherit the earth.

    I thought that the Anglo-Saxon disease was eschewed in Europe? Infectious!

    Remember the SSIA in Ireland? An incentive to capitalize the banks before they were bust….! Irish greed won in the fight with awareness. Edmund Burke said something about history repeating…. But even he had to borrow… Just unfair to those who did not borrow?

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