Sunday, 9 May 2010

Greek Bail Out Fun

The British voter had long been led to believe that as we kept sterling and did not join the Euro, we would not have to bail out members of the Euro-zone.

Ho hum, that didn't last long. Of course we will end up footing part of the bill, as follows:

1. Even if we completely ignore the EU aspects, UK banks have lent vast sums of money to the PIIGS, included $193 billion to Ireland, but they remain 'tight-lipped' on how much they have lent to the the others, according to the Wall Street Journal. As we know, the UK government has so far always bailed out UK banks, so whether the UK government
a) gives the banks money to compensate them for losses on those loans, or
b) underwrites future losses on those loans, or
c) gives or lends the Greek government money to enable the Greek government to repay those loans,
it all comes to much the same thing.

UPDATE: Justin Credible has posted a link to this handy table in the New York Times, which shows that the PIIGS owe 'Britain' (as defined) over $400 billion. It looks me to as if the figures quoted relate to government or 'sovereign' debt for all countries, apart from Ireland - presumably Ireland's figure of $867 billion includes gross liabilities of banks under government control/ownership?

2. Again, ignoring the EU aspect, when Icelandic banks went *pop*, the UK government used up to £4 billion of taxpayers' money to compensate the savers. How much of that the UK government will ever recoup, e.g. from a sale of UK situs assets held by the Icelandic banks as security, is another topic.

UPDATE; Anon in the comments reminds me that, with or without the EU, the UK also has to chip in 4.94% of the IMF's total contribution.

3. Turning to the EU aspects, the key Article in the Lisbon Treaty is Article 122.2 (pdf):

"Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under cer tain conditions, Union financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken."

We can only assume that the EU is relying on the bit in bold, which is a bit rich. How on earth in Greek public spending and borrowing 'beyond their control', but hey. So that gets us as far as 'Union financial assistance'.

Particularly galling about this is that the overall tenor is, other EU countries have to bail out Greece to 'protect the Euro', and not because they particularly care about Greece's debt problems. As the UK is not in the Euro, they'd leave us to fend for ourselves, and quite rightly too IMHO.

4. According to The Telegraph, 'Union financial assistance' is decided by qualified majority voting; the qualified majority have decided and the decision will be rubber-stamped today.

5. Quite how the EU forces the UK to pay up its share of the cost is unclear to me right now, but no doubt they'll sort something out.

6. Quite how much UK taxpayers and banks will lose on this (and how much of the banks losses will be fobbed off onto the taxpayer) is also unclear. A week ago, the potential cost of the Greek bail out was given as a rather staggering €120 billion over three years. Staggering, because Greek's entire government debt is only about €216 billion. Could investors in Greek bonds really lose half their money? I suppose it's just about plausible if Greece leaves the Euro zone and devalues; and if Greek interest rates stay at 9% or 10%.

7. So the UK's share of that loss would be in the order of £10 billion (plus or minus £5 billion), not the scariest sum of money of all time, but you can multiply this up for Spain, Portugal, Ireland and possibly Italy, and then it gets worrying.

8. Hey... here's a thought, maybe a political party, perhaps one of the smaller ones could capitalise on this at the next election and suggest that we leave the EU? If we did it in time and with a bit of cunning manoeuvring, we might even get the EU to bail out our banks :-)


Justin Credible said...

An illuminating graphic on who owes what to whom from the New York Times

Joseph Takagi said...

UKIP really need to get that out there in terms people understand. £150+ for every man, woman and child.

Could UKIP be the biggest party at the next Europeans?

Mark Wadsworth said...

JC, ta I have updated.

JT, indeed. Or '£500 per household' as I would put it. And quite possibly we will.

woman on a raft said...

This diagram looks tangly at first but I've tested it on a bright teenager and once they focus on a flag they can read which organizations a country is a member of. Shame it has an accurate but polysyllabic name. If you did a version called "Clubs in Europe" it would be less scary.

What I like about it is that it shows that all they would have to do is move from where they are to membership of only the club(s) they wanted to be in. Could we be like Switzerland? Sure - just move the flag. Or, if you don't like the Schengen travel arrangements, move to where Lichtenstein is.

This introduces subtle choices but it gets rid of the old idea that "you are either in Europe or out of it".

At any rate, I find it helpful when trying to get over the idea that EU membership is not the only way to manage our political relationship with Europe.

Mark Wadsworth said...

WOAR, nice chart. I'd like to be in the pink or the dark blue area.

Umbongo said...

I won't say I told you so exactly but I told you so.

James Higham said...

Nice analysis - the balance sheet should tell all but often doesn't.

Anonymous said...

You are forgetting that the UK also has to contribute a large amount of funds to the IMF.

So we end up paying twice?

Mark Wadsworth said...

U, you could have predicted this ten years ago...

JH, it's not an analysis, it's just a summary of the state of play so far.

Anon, excellent point, I have updated.

Umbongo said...


Maybge 8 years ago - but I can't prove it!

Mark Wadsworth said...

U, I'm quite happy to believe that you did say it eight years ago, you wouldn't have been the only one.

Roue le Jour said...

"Particularly galling about this..."

It certainly galls me. Being asked to assist someone else on the clear understanding that no such assistance would be made available to oneself in similar circumstances is socialism in its purest form.

woman on a raft said...

This morning on telly a beaten-looking Alistair Darling was spinning that he's done it because we are in the IMF.

The BBC lady kept calling him Chancellor and reminding everyone that under our constitutional monarchy he was as entitled to keep ruling as Lord Mandelson is.

So yah boo, all this democracy bollocks can go hang. It's window dressing when you get right down to it. AFAICS, we have roughly the same constituional arrangements as we did under James I, except our current courtiers don't give a damn about the values embodied in the Crown and actively seek to undermine them.

I'm not averse to living under a monarchy - they voted for one in Lichtenstein - but I want one which is interested in ruling in the interests of Britain, not Europe.

Mark Wadsworth said...

RLJ, galling it may be in principle, but in practice, the UK should be looking to cut the deficit, and indeed running small surpluses to repay the debt. If somebody offers to bail us out, that jsut prolongs the agony.

WOAR, I think The Badger did the best he could under the circumstances. It's not his fault if iDave and iAgreewithnick can't get their act together. Somehow I think The Badger will be happy to hand over to somebody else.