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Who Is Bailed?

An important point from Atrios that he makes specifically about Greece but has general applicability — a bailout “of Greece” would largely be a bailout of Greece’s creditors, you’d be giving Greece money that Greece would use to pay people who own Greek bonds. Obviously that’s win-win for both the bondholders and for Greek people, but it’s actually the bondholders who have more at stake. A roughly parallel situation existed with the AIG bailout, which was less a bailout of AIG than it was of institutions to whom AIG owed money and who failed to do due diligence on AIG’s financial situation.

This is part of what, to me, makes northern European (and especially German) stinginess and self-righteousness about the situation a bit hard to take. The political discourse makes it seem like we’re talking about showering Greece’s citizens with the thrifty Germans’ cash when in fact we’re talking about Greece’s citizens facing tax hikes and spending cuts while German money just cycles back to the big European banks who’ll have holes in their balance sheets if Greece defaults. And in the terms that Tyler Cowen used to frame it, it’s not just that Greece was pretending to be richer than it is, the financial institutions that lent to Greece agreed to believe them! But nobody forces banks to lend to countries with shaky political systems and questionable public finance practices.

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