If Only Greece Were AIG

Robert Kuttner | June 17, 2011

The struggling country hasn’t been bailed out because it’s not a bank—it’s just a country with suffering people.

Here comes Financial Crisis 2.0. Like its predecessor, it was caused by the banks.

(AP Photo/Lefteris Pitarakis)

Protesters gesture and wave flags in front of the Parliament during a rally against plans for new austerity measures in central Athens.

The first crisis was the result of banks inventing toxic financial products and then promoting bets on different kinds of securities with borrowed money. When the speculative bubble popped, tens of trillions of dollars in financial and housing assets vanished. At that point, governments and central banks stepped in and rescued the banks. The only thing that suffered was the rest of the economy.

On all policy fronts, banks called the shots. The supposed cure for the large public deficits caused by the financial crisis and resulting recession was belt tightening—for everyone but the banks. Yet voters were oddly passive because the issues seemed technical, elected leaders sided with bankers, and citizens were not quite sure whom to blame.

Now, the worm is turning. Austerity itself is creating a second crisis, and this time it has some political bite.

The epicenter of the new crisis is Greece, which epitomizes the folly of banker rule.

Greece has large public deficits, partly caused by bad accounting and tax evasion, but mostly by the recession itself. It’s obvious that Greece cannot afford to pay its current debts, so money markets expect a default. As speculative global markets decide Greece’s fate, the cost of Greek government borrowing has been pushed up to nearly 30 percent.

The world’s finance ministries and central banks, which sprang into action when AIG or Citibank needed help, are not rescuing Greece. After all, Greece is only a country with suffering citizens. AIG is a corporation! Citi is a bank!


Instead, the European authorities and the International Monetary Fund have pressed the Greeks to pursue more and more painful austerity policies as a condition for any relief. But austerity doesn’t work: As belt tightening pushes Greece deeper and deeper into depression, markets lose even more confidence in its capacity to pay its debts.

There is an easy solution, one similar to the restructuring of Latin American and other third world debts nearly two decades ago: Trade Greek short-term debt for longer-term debt. In addition, give Greece some debt relief at the expense of its bondholders, who are mainly the European Central Bank (ECB) and various commercial banks. When Latin American debt was restructured, bondholders lost about 30 cents on the dollar, but Latin countries were freed to resume growth.

This solution has been off the table because of the political power of creditors. The European Central Bank in particular has acted as the agent of Greece’s creditors, and without ECB support, no restructuring of Greek debt is possible. Even the German finance ministry—not exactly a hotbed of profligacy—has been pressing for bondholders to share in the losses so that restructuring can go forward. But their effort has been stymied by the bankers.

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