Bailout Blues

Busted Bailout

The Bailout Bias

Why the Greek Bailout Failed

The fact is that only the US and the massively over represented countries of the European Union supported the Greek bailout. Indeed, the major emerging economies all strongly opposed it, with the Brazilian representative calling it a bailout of Greece s private debt holders, mainly European financial institutions.

For example, the Dodd Frank legislation specifies that all large financial institutions should draw up meaningful living wills specifying how they could be allowed to fail, unencumbered by any kind of bailout, if they again became insolvent.

After a bank s shareholders are wiped out and its creditors take an 8 haircut, the European Fund transforms itself into a bailout fund, justifying some of Germany s fears. And there is no explicit prohibition of some form of national government bailout.

What was once a quack s idea for resolving Europe s financial crisis is now the only reliable way to save the euro. Having their bonds purchased by the European Central Bank did not keep Greece, Ireland, and Portugal from needing a bailout.

They belonged to a global institution, the International Monetary Fund, and to a pair of regional ones, the European Commission and the European Central Bank. Their mission was to negotiate the terms and conditions of a financial bailout of Greece.

Will the bailout work? We have national debt, Detroit, currency valuations, healthcare, all these issues facing us.

Ultimately, this is merely a new round of the eurozone s old game of financial hide and seek, whereby losses are obscured by distributing them among different institutions and time horizons. The game started with the bailout fund for Greece, which was followed by the European Financial Stability Facility, the European Financial Stability Mechanism, and the International Monetary Fund, which in turn were relieved by the ESM.

Spain like Greece is spiraling into depression, and may need a full scale bailout by the troika (the ECB, the European Commission, and the International Monetary Fund). Meanwhile, austerity fatigue in the eurozone periphery is increasingly clashing with bailout fatigue in the core.

Governments should not only avoid protecting bondholders after the fact, when the details of a bailout are worked out but should also make their commitment to this approach clear in advance. Some of the benefits of a government policy that induces bondholders to insist on stricter terms when financial firms take larger risks would not be fully realized if bondholders believed that the government might protect their interests in the event of a bailout.

It took decades, if not centuries, for them to obtain sizeable public budgets and begin engaging in income redistribution. And both prohibit the kind of fiscal or monetary bailout operations for single states or cantons that the EU pursued during the financial crisis.

This threat means that the financial bailout funds authorized by Congress can legitimately be used to support the automakers. Treasury s refusal to do so is a monumental blunder that risks a general meltdown, the consequences of which will extend far beyond America s shores.

In other words, governments should establish bailout policies before the need to intervene arises, rather than make ad hoc decisions when financial firms get into trouble. The best policy should categorically exclude bondholders from the set of potential beneficiaries of government bailouts.

Such a bailout would have cost an estimated 500 billion or more, and the main beneficiaries would have included big financial firms. Was there any realistic chance that such a measure would have passed Congress before there was blood in the streets?

So yesterday s (pre crisis) world is being resurrected. Dismissing the risks that taxpayers incurred, financial institutions used the bailout to restore profitability and are now reverting to their old habits, which had worked so well for them and so badly for others.

PARIS The bailout of the financial system was a bizarre moment in economic history, for it benefited those who benefited most from the markets irrational exuberance the bosses of financial firms. Before the crisis hit, however, redistribution of wealth (and the tax and social security payments that make it possible) was considered the biggest obstacle to economic efficiency.

PARIS The bailout of the financial system was a bizarre moment in economic history, for it benefited those who benefited most from the markets irrational exuberance the bosses of financial firms. Before the crisis hit, however, redistribution of wealth (and the tax and social security payments that make it possible) was considered the biggest obstacle to economic efficiency.

Forcing a debt for equity swap or debt forgiveness would be no greater a violation of private property rights than a massive bailout. But, for the major players in the financial sector, it is much more appealing to be bailed out by the taxpayers.

But, without a bailout, the financial system would have remained paralyzed, making the subsequent recession much deeper and longer. True, the US stimulus package was largely wasted, but that was because most of it went to sustaining consumption rather than to correcting the underlying imbalances.

LONDON Germany has been leading the opposition in the European Union to any write down of troubled eurozone members sovereign debt. Instead, it has agreed to establish bailout mechanisms such as the European Financial Stability Facility and the European Financial Stabilization Mechanism, which can lend up to 500 billion ( 680 billion) combined, with the International Monetary Fund providing an additional 250 billion.

The IMF learned this in 1997, when an inadequate bailout of South Korea forced a second round of negotiations. In Greece, the problem is even worse, as the 86 billion ( 94 billion) plan now under discussion follows a 110 billion bailout in 2010 and a 130 billion rescue in 2012.

Tsipras and his Syriza party, however, spent their first six months in office still blinkered about financial realities, unable to see things from the perspective of others. The decision to hold a referendum on the bailout terms set by Greece s creditors showed that they were politically blinkered as well.

All assumptions will need to be assessed and reassessed, starting points found and re found, and new tools developed and perfected. The mechanics of the welfare state will need to be strengthened public policy must stop deferring to the financial sector, regardless of the need for bailout packages.

Moreover, the grand bargain between the eurozone core, the ECB, and the periphery painful austerity and reforms in exchange for large scale financial support is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands.

Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.

The tide of crisis, it seemed, had begun to turn, particularly after the German Constitutional Court upheld the European Stability Mechanism, Europe s bailout fund. Despite the ECB s imposition of conditionality on beneficiaries of its potentially unlimited bond purchases, financial markets across Europe and the United States staged a major rally.

The EU and the ECB are worried about the moral hazard of any bailout. But that is precisely why a credible IMF program that ties financial support to the progressive achievement of fiscal and structural reform goals is the right way to teach Greece and the other PIIGS how to fly.

So I think that the oil blowout, the bank bailout, the mortgage crisis and all these things are absolutely symptoms of the same cause.

So I think that the oil blowout, the bank bailout, the mortgage crisis and all these things are absolutely symptoms of the same cause.

If negotiations stall, financial and liquidity stress, resulting from Greece inability to borrow at current interest rates ten year bond yields have reached 9.5 will weaken the fiscal position and banking system further. This could lead to a collapse in confidence, triggering financial upheaval and, in turn, forcing the country to seek a third bailout one that would require Greece to leave the eurozone and introduce a new, devalued currency.

Moreover, Greece could exit the eurozone in 2013, before Spain and Italy are successfully ring fenced Spain like Greece is spiraling into depression, and may need a full scale bailout by the troika (the ECB, the European Commission, and the International Monetary Fund). Meanwhile, austerity fatigue in the eurozone periphery is increasingly clashing with bailout fatigue in the core.

With minds concentrated by fears of another 1930 s style Great Depression, America s political leaders developed, virtually overnight, a 700 billion bailout plan to resuscitate the country s rapidly deflating financial sector. But, just as stunningly, rank and file members of the US House of Representatives have rejected it at least for now.

A new fiscal compact and new governments in Greece, Italy, and Spain spurred hope of credible commitment to austerity and structural reform. And the decision to combine the eurozone s new bailout fund (the European Stability Mechanism) with the old one (the European Financial Stability Facility) significantly increased the size of the eurozone s firewall.

As the bailout has ballooned, it is increasingly clear that this was merely another example of financial markets mis appraising risk just as they have done consistently in recent years. The terms of the Bernanke Paulson bailouts were disadvantageous to taxpayers, and yet remarkably, despite their size, have done little to rekindle lending.

NEW YORK It doesn t take a genius to figure out that the United States financial system indeed, global finance is in a mess. And now, with the US House of Representatives having rejected the Bush administration s proposed 700 billion bailout plan, it is also obvious that there is no consensus on how to fix it.

Even the extravagant bailout of financial giant Citigroup, in which the US government has poured in 45 billion of capital and backstopped losses on over 300 billion in bad loans, may ultimately prove inadequate. nbsp When one looks across the landscape of remaining problems, including the multi trillion dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars. nbsp

Even the extravagant bailout of financial giant Citigroup, in which the US government has poured in 45 billion of capital and backstopped losses on over 300 billion in bad loans, may ultimately prove inadequate. When one looks across the landscape of remaining problems, including the multi trillion dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars.

We do that corporate whether it's a bailout, an oil spill, a recall we pretend like what we're doing doesn't have a huge impact on other people.

The German proposal, spearheaded by Finance Minister Wolfgang Schäuble, highlights the fundamental change that has occurred in Greece s relationship with its European partners since its last bailout package three years ago. In 2012, Greece was offered hundreds of billions of euros in financial support, and its creditors, including Greek commercial banks, were pushed to accept substantial voluntary haircuts.

In the climate of scarcity that characterizes debt deflations, the specificity of bailout operations inevitably leads to intense political debate. We see this in the current discussion about the distributional effects of rescuing the automobile industry or the worry that hedge funds, which are widely blamed for today s financial malaise, should have access to the Fed s emergency credit lines.

So, despite revulsion on the part of Germany and the European Central Bank at the idea of a bailout, Greece needs large official financial support this year at rates that are not unsustainable to prevent its current illiquidity from devolving immediately into insolvency. But official support will only kick the can down the road until next year.

Alternatives to a debt restructuring are fast disappearing. A full blown official bailout of Greece s public sector (by the International Monetary Fund, the European Central Bank, and the European Financial Stability Facility) would be the mother of all moral hazard plays extremely expensive and politically near impossible, owing to resistance from core eurozone voters starting with the Germans.