Do you remember the days before the collapse of the Lehman Brothers bank in 2008? Well, the history is repeating – only this time is spoken in more languages and has a different continent behind.
Today EU decided to wipe out 50% of the Greece debt – in effect the private bondholders have agreed with a 50% cut on their holdings of the Greece debt. The agreement, struck after nearly 11 hours of talks at a summit of eurozone leaders, includes a new €130bn bail-out of Greece by the European Union and the International Monetary Fund.
This situation is identical with the resolution of the mortgage crisis’s conclusion 3 years ago, when the US government agreed that the banks are too big to fail. A similar pattern will occur probably with the European banks with a large exposure to the Greece bonds – they will need to be re-capitalized, governments will bail those out on taxpayer’s money, and 2 years later we will find out that they made record profits from another type of transactions and they re-purchased the government shares. Nothing really new here, I guess.
The only problem remains the externality generated by this bailout. How many of these costs will be supported by the European taxpayer? What will be the consequences for the Eurozone economic growth? How long will now the recovery take? Nobody knows, but I have this feeling that the costs will not be small. We’lll see…