The willing participation chapter of the Private Sector Involvement (PSI) exercise to alleviate the Greek sovereign debt by €107 billion went through OK – in short, the vast majority of lenders, aka the banks, accepted to lose around 70% of the value of the titles they hold. Why? Well, the simple answer is that they could not expect to receive any more than that.
Germany, Holland, Finland and Austria offered only loans and guarantees of some billions of euro, but the real money has come from the European Central Bank (ECB), which handed €1 trillion to the Eurozone's banks.
It was this trillion euro that paid for Greece's debts, rather than German taxpayers, and this is how – the 'liquidity' loans from the ECB went to 800 banks at a negligible interest rate of 1%. This is money for free, and the banks can do whatever they like with it. In total, the €1tn is expected to generate a free gift of €100bn every year for the next three years, given that the loans have a 36-month maturity period.
In total, these lenders are expected to make a windfall profit of €300bn, just by lending the trillion euro during this period of time. The profits made will be enough to pay for the losses on Greece's debt or any other Eurozone sinner's default.
Clever? We don't think so, because actually, it will be the Eurozone citizens who will foot the bill through higher inflation or via a necessary capital increase in the ECB to cover for the central bank's losses from loans that will not be repaid – even if all those loans are paid back to the ECB, the fact remains that the borrowing banks will make profits of €300bn just by exploiting the trillion for three years. The idea is that they charge 11% on the average for the credits they accord while paying only 1% for the money. At the same time, millions of Greeks, Italians, Germans, Spaniards and others will be sweating to make five euro per hour and will pay taxes on this, both directly and indirectly.
In short, the bankers have discovered how to create money out of nothing, while the rest of European society keeps on sweating for a living. If Adam Smith was still around, he would have doubtless demanded that the central and investment bankers be charged with fraud and would have denounced them for unethical behaviour in shamelessly cheating the society that they are supposed to serve.
The champion of free markets was totally opposed to applying the freedom principle when it came to money – his masterpiece, The Wealth of Nations, contains very interesting sections on money and banks, in which he concludes that the free-market principles should not apply to money merchants, because this is a highly specialised trade.
Bankers and banks, he said, should be very closely watched, controlled and their practices restricted by rules. He even suggested that bankers should be examined by Ethics Committees. Today, following some 20 years’ deregulation of the banking industry, western societies have reached a point where the credit crisis is considered as being a natural phenomenon, and we also accept that the big banks cannot go bankrupt, thanks to mainstream media brainwashing.
Ireland is a case in point, having not lived beyond its means as Greece did. In both cases, however, the banks were swiftly recapitalised and ECB made sure that citizens paid for it with taxes and austerity measures.