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Richard Mellor

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Beware the ECB bearing gifts for Greeks
« on: October 12, 2017, 06:05:03 AM »
Beware the ECB bearing gifts for Greeks

by Michael Roberts

The announcement by the European Central Bank that it has so far  made ?7.8bn in profits from its holdings in Greek government debt  reveals the true nature of the so-called bailouts of Greek government  finances that the EU leaders organised in return for massive austerity  measures from 2012 onwards.

Back in March 2012, five years ago, a so-called private sector  involvement (PSI) deal was agreed under which French, German and Greek  banks who held the bulk of Greek government bonds agreed to take a  ?haircut? on the value of their bond holdings.  Under the PSI, they  received in return new Greek government bonds with 30-year lives, paying  about 3-4% a year in interest and guaranteed by the Eurozone financing  operation, the EFSF.  And they also got some cash upfront for turning in  their old bonds.  The Euro leaders and the IMF provided around ?130bn  in new money plus ?34bn left over from the previous Greek package to  fund the interest to be paid on the new Greek government bonds,  repayments to the IMF, money to recapitalise the Greek banks and money  for the cash on the PSI deal.

As part of the PSI, the ECB bought up some of these bonds, for which  they were guaranteed repayment as they matured by the Greek government,  as part of the bailout packages that ensued.  In total, the ECB and  national central banks bought ?56.2 billion of Greek debt, according to  analysis by a University of Munich academic. Of this, ?29 billion has been repaid, with ?27 billion still outstanding.  The ECB bought bonds to be repaid up until 2028.

Well, not only have these bond purchases been repaid over the ensuing  years as the Greek people took the pain of wage and pension cuts, a  collapse in public services and the privatisation of public assets, but  the ECB has made nearly ?8bn in profits. The ECB said holdings of Greek  sovereign bonds acquired under its Securities and Markets bond-buying  programme (SMP) had resulted in ?7.8bn of net income interest between  2012-2016. These profits are not being returned to the Greeks but  distributed among the 19-country central banks in the eurozone.

Another cruel irony is that, having purchased these bonds from the  French and German banks so the banks? losses were minimised, the ECB has  since refused to buy Greek government bonds as part of its quantitative  easing programme to help the Greeks.  Why? Because the Greek government  debt is not sustainable!

And that is certainly true.  When imposing the PSI on Greece, the  Troika (ECB, EU, and IMF) aimed for Greece to get its public debt burden  down from 166% of GDP before the debt default to 120% of GDP by the end  of the decade through the austerity measures.  But it would not do this  by writing off any Greek debt but only by squeezing the Greek people  dry to pay back the ECB and the IMF for their ?bailout? loans.  Of the  total ?164bn funding in 2012, only ?23bn went towards financing the  Greek government?s budget.

So one hand gaveth and the other took it away.

Because the Greek economy imploded, Greek government debt, far from  falling under the three bailout programmes, just rocketed further up to a  peak of 180% of GDP.  Austerity did not work and still is not working  to reduce the debt and stop the unending interest payments to private  bondholders as well as the ECB.

It?s probable that the IMF and the ECB have made more profits from  the ?bailout? loans.  An analysis from the Jubilee Debt Campaign in 2015  estimated the IMF had made ?2.5bn in profits from its loans by  then.  And the IMF and the ECB will make even more profits from the  ?bailout? loans.  The JDC reckons that, based on the difference between the average effective interest  rate the ECB has received on the debt of around 10%, the maturity of the  debt, and the normal negligible cost of borrowing from the ECB, the  accrued profit could be ?22 billion in 2022, ten years since the PSI.

The IMF reckons that, without debt relief, Greece?s public sector debt to GDP ratio will not fall even with  further austerity. Indeed, it would rise from around 180% now to nearly  300% by 2060 ? in a ?snowball? effect where debt is repaid with more  debt and interest payments keep rising on top.

And there is no sign of any such ?relief?.
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