Jean-Claude Trichet, the former president of the European Central Bank, may have played a pivotal role in blocking efforts to ease Greece’s debt burden during negotiations over the country’s bailout package in 2010, according to a new paper.
The implication of the paper is that the ECB screwed up in 2010 when Trichet flew into a rage, rejecting a plan to restructure Greek debt in a way that would have avoided the current crisis. If Greece cannot reach a new financing deal today (and over the next few weeks) it may exit the EU and the euro currency area — causing widespread financial chaos.
The paper, released by the independent think-tank the Centre for International Governance Innovation (CIGI), claims that the negotiating team from the International Monetary Fund (IMF) had pushed for debt haircuts for private bank sector holders of Greek debt (meaning to reduce the amount they could expect to be paid back). The idea was to provide an orderly process out of the debt crisis and prevent the full burden of banking sector debts being pushed onto Greek taxpayers.
However, the paper’s author’s claim, the proposal came under fierce opposition from then ECB president Trichet. At an ECB meeting in the spring of 2010 a member of the central bank’s executive board brought up the prospect of debt relief. Trichet allegedly “blew up,” the paper says:
The ECB president “blew up,” according to one attendee. “Trichet said, ‘We are an economic and monetary union, and there must be no debt restructuring!'” this person recalled. “He was shouting.”
The CIGI gives some credit to Trichet’s rage, by noting that he feared “a Lehman-like event” across all of Europe if bondholders were forced to take less than face-value of their Greek contracts.
It could result in a contagion, putting the entire region’s financial system into jeopardy. The paper claims these worries ultimately “trumped concerns about what was right for Greece”:
Once faith in the creditworthiness of one euro-zone country was shattered, Trichet feared, confidence in the bonds issued by other European governments would be destroyed as well, the almost certain result being a Lehman-like event in which investors pulled money out of markets all over the continent. This anxiety over financial contagion was widely shared in Europe, and it was based on perfectly legitimate reasoning, starting with the fact that the biggest holders of Greek bonds included some of the region’s most vulnerable banks. The exposure of French banks to Greece was €60 billion, and German banks had €35 billion worth (Bastasin 2012, chapter 13); if they were obliged to take steep losses on their Greek paper — and on their other euro government bondholdings as well — the financial system’s viability would come under a huge cloud.
As the negotiations were taking place with only weeks before Greece would be forced to default on a May 19 payment to bondholders unless it received emergency funding, the Greek government’s bargaining position was weak. Ultimately, the prospect of a clash with the ECB president, who controlled the provision of emergency liquidity to troubled Greek banks, was a risk that the Papandreou government was unwilling to take.
And so there was no restructuring agreed for Greece. The country paid off its immediate debts to the private financial sector — investment banks, basically — and replacement debt was laid onto Greek taxpayers. The government agreed to a package of harsh government spending cuts and structural reforms in exchange for loans totalling €110 billion over three years.
The left-wing Syriza party, which currently leads the governing coalition in Athens, has long claimed that the terms of the 2010 deal were unjust and helped prolong the country’s economic crisis. This paper is likely to stoke those fires still further.