Greek Bank Recapitalizations: Moral hazards and economic opportunities

Bail out? Yes. But with taxpayers money secured and a rise  in household disposable income.

Here is my view :

The Greek Parliament is set to approve the recapitalization plan for Greek banks, within the following days. The form of the recapitalization is not yet disclosed but according to the preliminary plans some Euro 50bn are set aside for this purpose.

The recapitalization has been put into place in order to support the banking system following the write down of the Hellenic Republic bonds that most of the bank’s hold in their portfolios. The purpose is to ensure the existence of banks within the economy. Without them as financial intermediaries, institutions that transform deposits into loans, the economy cannot function. 

Of course, every time the State proceeds with the recapitalization of private banks , a huge debate on the morality of such an action arises and public debates hit new highs. 

Common sense dictates that banks are private institutions, so when private institutions screw up, there is no reason for taxpayers to contribute to the bill. 

This is a statement that seems hard to object to. It’s perfectly sound.  No argument can stand against it.  And in principal I agree. In private enterprises, the State has no reason to spend a penny for their survival. Taxpayers money is sacred and above all.

So In a situation of a potential bank failure, what is the best solution in order to protect taxpayers money? And my answer is “bank recapitalizations by the State”. It may sound an oxymoron, but allow me to explain.

The recapitalization of banks will secure the deposit base of  citizens. Without it, banks will collapse and, what people will gain from not contributing for their  bail- out will be wiped out as the deposits of the citizens  will be in peril. Moreover, it will result in the absolute absence of credit for some months, leading to company closures and lay offs. The result being a huge spike in unemployment and a severe drop in social security contributions as well as a huge reduction in tax revenues for the state. 

I am not trying to pose a dilemma. On the contrary. I argue that if recapitalizations are done properly, then banks will survive and the economy will be able to function, taxpayers bail out money can be recovered with a PROFIT and disposable incomes for troubled small enterprises and households can rise.  Higher disposable incomes will mean more consumption and growth. How can this be achieved?

As discussed, the EU has put in place a bailout fund of around EUR 50 bn . According to the latest estimates, some Eur 35-40bn will be needed to bail out the banks, as a result of their losses from Greek Bonds. 

I would argue that since a recapitalization takes place, it should be done at full force.  We should put in use that EUR 10-15bn that is “left” from the Bailout Fund. So, in practical terms, the  State should use the whole facility to recapitalize banks, giving the money in return for common shares or preferred shares with a 10% annual yield.

Back in 2008, when the US government spent almost a USD trillion to bail out banks, the arguments were the same. Today, 4 years later, the taxpayers money has been recovered in full, PLUS a profit of around USD 100bn for the State. A profit made by the sale of the bank shares held by the state in the market, following the economic recovery. 

In the case of Greece, a similar bail out should take place. But  the banks should agree to  write off not only their losses from Greek bonds but also loans from troubled households and small enterprises at an average of  30-40% of their face value. 

Imagine if a household is currently paying a monthly mortgage payment of EUR 1500. If this falls to EUR1000 and at the same time the loan’s face value goes down, this household would have an  indirect increase of its disposable income by EUR 500 per month. Same applies to credit cards and all other consumer loans. Should it be done uniformly? In my view, no.  

The debt of higher income households should be written down by no more than 10-15% leaving room for higher cuts (above 50%) for those who are really in deep financial trouble. 

Solidarity should be the name of the game. Not in words but in reality. The result would be an indirect, SUBSTANTIAL, increase in the disposable incomes across the board. The first pillar to return to growth.

We have the money in the bailout fund. Let’s use it properly to save the financial system, make money for taxpayers and increase the disposable incomes of households and SMEs currently in financial trouble.  It’s up to the government. They have to raise up to the occasion and do a proper recapitalization, taking some of the interest burden that citizens currently carry. 

Bailout? Yes. But with issuance of shares, profits for the taxpayer and an increase in disposable incomes. No free rides.

D.