Yanis Varoufakis: Monetising the… ECB: The latest insult to be added to Greece’s multiplying injuries

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

Last week another installment of the cruel theatre of the absurd, also known as the ‘Greek Rescue’ (and more recently re-released as ‘Greece’s success story’), was delivered silently: Not for the first time, the bankrupt Greek state borrowed from one arm of the Eurozone to give to another, with massive interest to boot. To be precise, the Greek government borrowed €4.2 billion from the European Stability Mechanism (ESM) in order to repay the… European Central Bank (ECB) €5.6 billion, leaving the ECB with a profit of €2 billion plus from this hideous transaction. Re-pay what exactly?

You may recall that between Greece’s first bailout (in May 2010) and Portugal’s collapse almost a year later (June 2011), the ECB tried, in the clumsiest of manners, to stop the contagion by buying Greek, Irish, Portuguese, Spanish and Italian bonds in secondary markets. As was expected, that ‘program’ (known as SMP) failed for the simple reason that the then President of the ECB, the hapless Mr Trichet, had pre-announced that the ECB would not spend more than €200 billion in that effort: an open invitation to speculators to short these bonds until the ECB’s €200 billion was exhausted, cashing in massively once the ECB withdrew with its tail between its legs (which is precisely what happened).

Still, during that yearlong folly, the ECB accumulated a large number of peripheral government bonds, which it purchased at so-called ‘distressed’ prices; i.e. at a large discount. In the case of the Greek bonds that were thus purchased (and which matured last week), even though the ECB does not tell us how much it paid for them, my information is that it paid less than 64 cents to the euro. In other words, the Greek government bonds that matured last week, owned by the ECB, had a face value of €5.6 billion but cost the ECB only €3.6 billion. Which means that, last week, the Greek government handed over to the ECB €2 billion plus 55.6% interest for two years in addition to the monies that the ECB spent in order to purchase these bonds. If this is not usury, I know not what is.

ECB defenders may say that these ‘profits’ will eventually be returned to Greece, assuming that the Central Banks of the surplus states agree. Perhaps they will. What they forget, however, is that had the ECB not purchased these Greek bonds, they would have been haircut last year, with the so-called PSI of early 2012, and then again last December with the so-called ‘debt buyback’. In short, the bonds until recently held by the ECB of €5.6 billion face value would have shrunk to less than €1 billion (the rest constituting the haircut). Noting that the ECB’s purchase of these bonds did nothing whatsoever to help Greece, the end effect of the ECB’s action was to put the Athens government in the situation it found itself last week: of having to borrow €4.2 billion from the ESM and to add to this pure blood money (i.e. the savings it made by cutting savagely on health, education, pensions, disabled people’s benefits etc.) equal to €1.4 billion in order to redeem the ECB owned Greek government bonds to the full, thus creating the aforementioned €2 billion profit for the ECB. In total, the cost to the Greek state of the ECB’s intervention (taking into consideration the extent to which this debt would have been haircut without the ECB’s intervention) comes to a staggering €4.6 billion. Money that is now being taken out of the Greek economy in ways that crush Greece’s society.

In short, had the ECB not tried to ‘help’ Greece during 2010/11 (by buying these bonds secondhand), the Greek government would now be able either to avoid borrowing the last tranche of €4.2 billion from the ESM or to borrow it in order to invest in our suffering people and/or economy.

Many lament that the Eurozone is a perverse economy in that it has a Central Bank without a state to direct it and states without a Central Bank to back them up. In fact, the situation is worse, as the above tale demonstrates: The Eurozone has a Central Bank that, even when it tries to help its weakest members in the midst of a vicious crisis, it ends up weakening them further; operating unwittingly as a giant squid on the face of their societies.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Ignacio

    Yes, it is usury. And worst, usury has higher consideration and respect amongst very serious people than… how did you say?… social benefits?

  2. Alejandro

    I can’t shake the semiotics of the former “democratically” elected PM of the cradle of “democracy” proposing a referendum on the conditions of the bailout. Two weeks later he was out and a former banker was in. A case study on the empty promise of “democracy”….
    Is government a collective effort to solve collective problems or the enforcement branch of the oligarchy?

    1. Mr. Jack M. Hoff

      I’m not entirely sure about Greece, but here in the USA, govt does exist to serve the oligarchs. Policies are made of, by, and for them. I imagine its much the same there, possibly worse, as you have had a longer go of it.

    2. Systemic Disorder

      Yes, I remember when The Guardian used the term “summoned” to describe Sarkozy and Merkel’s calling of the Greek prime minister to a meeting to inform him there would be no referendum. Ambassadors are “summoned”; supposedly soverign heads of states aren’t. Oops, Greece is not sovereign …

    1. Paul W

      These politicians are Quislings. I don’t care if they are greek, irish or spanish, they are selling out their countries each day. It isn’t just the troubled economies. Every western nation has its “Country Club” gang working to serve the elites at the expense of average citizens. How much more are people going to take lying down? There are no good options, however targeted assassinations of these politicians and bankers would at least be a way of fighting back. Otherwise we just sit quietly while they further enrich themselves while destroying all that was once good about western civilisation.

  3. Jim Haygood

    ‘The bonds until recently held by the ECB of €5.6 billion face value would have shrunk to less than €1 billion (the rest constituting the haircut).’

    The same is true of unpayable student loan debt in the U.S. If it were treated like ordinary debt, it would simply be written down to a collectable value.

    But thanks to the intervention of politicians, such government-sponsored debt is undischargeable in bankruptcy, and can be collected even by Social Security garnishment in old age.

    Both the Greek tale and the U.S student loan debacle illustrate that government is the harshest usurer of all, refusing to write off even one penny of principal, and pursuing its debtors to the grave.

    Nice guys!

    1. Mr. Jack M. Hoff

      Jim, Money is usually borrowed with good intentions to repay, not? And laws are debated and passed with the same too? Actually, I know thats not the case in either, but most people beleive it to be that way. My point being, that when every fucking doctor and suit in the country was refusing to pay their student loans off, laws were enacted to stop the bullshit. But then the gov’t guarantee on the debt gave the green lights to the universities to charge whatever they could get any dumass to pay. The dumass was told continually that he couldnt get any job without a diploma, so he asked “where do I sign?”. Little did he know that job couldn’t pay the education off and provide a living. SO the system was gamed by those at the top… again. I’m not sure, but in the Greece case, I’d think they borrowed that money from the ECB under great pressure duress. Sign right here… Govt guaranteed and all. Its the cocksuckers at the top again who made out like bandits. See any patterns here?

  4. emmrob

    As a citizen from the Netherlands I find Mr. Varoufakis’s comments rather pathetic. The Greek government received the face value of these bonds whem they issued them. Yes, the Trichet policy was stupid pre-announcing of a purchase limit. But reasoning that the PSI haircut which came into play a year later would have been a better deal for Greece is beyond comprehension.
    Is there no pride or any feeling of responsiblity in the character of the Greek people?

    He finds it quite normal that the private sector had to write off 75% of their Greek bond holdings. With hindsight Mr. Varoufakis even claims that the ECB has ripped Greece through the SMP-program. If the ECB didn’t buy these bonds they would have been eligible for a 75% hair cut, according to Varoufakis. This is all one sided reasoning of a culture with no sense of responsibility.

    Greece is a highly corrupt country. From the bottom to the top. Politically, privately an publicly. The reasoning of Mr. Varoufakis is an example hereof. The current euro zone situation is of course disastrous, as is the international fiscal and monetary situation (dutch readers are advised ti visit: http://www.economie-macht-maatschappij.com/eurozone-duitsland-frankrijk.html).

    This kind of victim-reasoning, is way out of wack given the dubious corrupt role Greece herself has played during the last 20 years. There is only one solution: seperate the Latin and German part currencywise and take the losses. Never again go in close monetary partnership with untrustworthy countries like Greece ever again.

    1. Stelios Theoharidis

      Emmrob I would like to turn your reasoning on its head for a moment and ask you to think about it a different way.

      European and other bondholders of Greek debt made poor economic decisions when purchasing the Greek debt and priced it inappropriately expecting that the country full of corrupt leaders and tax avoiding oligarchs (shipping industry) would repay their debts. Speculators additionally purchased the mispriced debt with the implicit expectation that a backdoor bailout would occur through the ECB.

      The ECB conducted a backdoor bailout of the bondholders and speculators first by providing Greece loans to pay European banks back and then later by purchasing the debts at a lower haircut than the market would have delivered considering the utter breakdown of the Greek economy and its inability to pay debtors.

      Corruption between the ECB, European banks, and the Greek Government has socialized their losses across the European public (not just the Greek one) in order to enrich the shareholders and employees of European banks.

      That is the other side of this coin. Buying debt is a risk that a bank takes. European bankers are not neophytes to this game and understood the risks that they were getting into. If they didn’t, then they weren’t competent enough to do the job that their hefty bonuses would have suggested. Their failure to properly understand their risks is their problem as well as that of the debtor.

      The European and Greek public were not party to this transaction. They did not misprice risk, they did not get Goldman Sachs to cook their public accounting books. That was a problem between the officials within Government of Greece and the banks that purchased the bonds.

  5. Jim Haygood

    ‘Reasoning that the PSI haircut which came into play a year later would have been a better deal for Greece is beyond comprehension.’

    Eurozone governmental entities such as ECB and now ESM lent enormous sums to Greece, but refuse to accept any haircut, now or ever. That’s why the first restructuring failed, and the second one likely will too. Even now, after two restructurings, Greece labors under an unsustainable 156% gov’t debt to GDP ratio.


    As you say, Greece is highly corrupt. And a currency split may well be the ultimate solution. If so, it should be done promptly, rather than make matters worse with botched restructurings that leave Greece unable to recover. But northern European banks can’t afford to let that happen.

    It remains brutally clear that restructurings in overbanked Europe have served purely to bail out its bloated banks. The fate of the debtor countries and the people who live in them is of no consequence to Europe’s oligarchs

    1. Susan the other

      Where is the plan to restore Greece? Does it depend entirely on saving Deutschebank? The dance the banks are doing is so much like the dance between the Axis and the Allies before WW2 it’s creepy. Why all this appeasement? Who stands to lose? And who cares?

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