Greece is Screwed No Matter What Comes Next

No matter how you look at the Greece situation, taxpayers in Europe are pretty screwed. If they use public funds to bail out Greece, that will be money that comes right from their pocketbook. If they do nothing, Greece collapses and (possibly) leaves the euro and eurozone in shambles. Now, European Central Bank Executive Board member Lorenzo Bini Smaghi says the third option — a privately funded bailout of Greece — might be the worst option of them all. Bini Smaghi points out the logic behind the clamoring among some for a private bailout of Greece. “The basic rationale behind involving private creditors when a debtor is in distress is straightforward and uncontroversial: creditors and investors should bear the consequences of their decisions as fully as possible and should not rely on taxpayers' money to be bailed out,” he said. “The underlying reason has long existed: a bailout by taxpayers today may encourage risky lending by private investors in the future,” said Bini Smaghi. That was the argument in America, too, when the first round of bailouts of the financial industry were announced in 2008. Opponents worried that, by shifting the cost of the bailout to taxpayers (rather than the geniuses who drove the system into the ground), we would encourage future risky behavior. Bini Smaghi, like the architects of the banking bailout in America, sees the public bailout (with changes and regulations to prevent a reoccurence) as the best of a series of bad options. Consider what he says about private-funded bailouts. “It would not be a way to prevent taxpayers from suffering the consequences of bad investment decisions. In our Monetary Union, given the integration of financial markets and the single monetary policy, the taxpayers of the creditor countries would suffer in any case. According to the Financial Times, for instance, a default on Greece's debt would cost the German taxpayers alone ‘at least 40 billion' euros.” Bini Smaghi also sees restructuring the debt as punishing good behavior and rewarding bad behavior. Why? “This would be a way to punish patient investors, who are sticking to their investment and have not sold their bonds yet, and are confident that with the adjustment programme the country will get back on its feet. Restructuring would instead reward the investors who exited the market earlier or short-sold the sovereign bond, speculating that they would gain out of a restructuring,” he said. It would also delay the return to a normal market for the debtor nation, as private funds will not be available when creditors cannot be assured that they will not simply be wiped out in restructuring in the near-term. “This is how a good idea (private restructuring rather than publicly funded bailouts) can turn into bad practice. Continuing to pursue it suggests strong masochistic tendencies,” Bini Smaghi said.