FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 05 July 2016

Why Would Creditors Not Want To Be Repaid?

Written by

Former Greek Finance Minister Yanis Varoufakis has published an article in the Journal of Australian Political Economy, No. 77: Creditors Uninterested in Getting Their Money Back. This article was also used as manuscript for a presentation at the University of Sydney. But why would such a condition exist? That we will explore in the following.

Varoufakis maintains that the financial crisis in Greece is not about Greece repaying debt. Once the eurozone was established, he says, German banks no longer were concerned with underwriting standards. Instead loan officers were instructed to make loans wherever they would be accepted in the "euro periphery" up to specified amounts so that these trading deficit countries could continue to buy German exports.

Thus loans were no longer made with an eye toward repayment by the borrower. They were made to provide means to support a high level of German (and other core countries to a much lesser extent) exports.

The bank loan officers didn't care - they were paid to make the loans - not to recover principal and interest. And the money lent in the periphery comes back to Germany as German cars and other goods are bought. Capital builds up in Germany

The process is a self-reinforcing spiral. Varoufakis says:

So the oversupply of capital in Germany was pushing down the value of money in Germany. That affected interest rates in Germany, pushing them very low. So there was no incentive for the banks to lend that money in Germany and there was not sufficient demand. But in the periphery of Europe where there was an exodus of capital going to places like Germany and the Netherlands to facilitate the purchase of the net exports of those surplus countries, this exodus of capital created a scarcity of capital - of money - in Greece and Portugal and Ireland, which pushed up the effective price of money.

So if you were a business person and you wanted to borrow money in Greece to invest, you would have to pay a much higher interest rate than the equivalent German businessperson, even though the official interest rates were the same. The commercial interest rates were not the same because of this imbalance. So, if you were a banker sitting on a pile of cash in Frankfurt, where the effective interest rate is one or two per cent, but you can lend the same money to a Greek businessman or woman for five per cent, what would we do? Lend it in the latter place, of course. You're going to take the pile of cash, go there and say: 'please take it'.

This type of escalation is exacerbated in a monetary union like the eurozone because they lack the fiscal balancing of the asymmetry between overproducing states (like New York, Texas and California) and underproducing states (like Mississippi, Arkansas and New Mexico) that exists when a monetary union is accompanied by a fiscal union.

Varoufakis asserts that the resolution of the credit crisis with Greece is not what the austerity forced on that country is all about. He says that the objective is to avoid writing down assets (loans held) to the current repayment value. The objective of the entire destruction of Greece is to

"find some way of saving the German and the French banks ... bailing them out a second time, without the parliamentarians and electorates of Germany and France realizing that this was what was going on."

Varoufakis has a hypothetical story which explains the utter futility of the Greek resolution process:

Imagine if you went to your bank and you said: 'dear manager, I can't repay my mortgage because I've lost my income - I lost my job or I lost overtime or I had to take a pay cut or I'm sick and I need to pay all this money for medical treatment - I can't repay my mortgage. Please can you give me a second mortgage from which I'll repay the first mortgage?' Imagine your banker saying: 'yes but under the condition that you will agree to shrink you income further'. Of course, no banker would say that. No creditor would sensibly impose on debtors conditions that guarantee that the creditor will not get their money back. Because I never believe an explanation based on the assumption or presumption of stupidity, something else must be going on. What was it? The fact of the matter was that a year before the bankruptcy of the Greek State, Deutsche Bank was deeply bankrupt. When Lehmann Brothers went bankrupt, it had a leverage ratio of 1 to 38 - that is, for every one dollar it had, it owed 38. Deutsche Bank in 2009 had a leverage ratio of 73: it was clearly kaput.

But the scheme is not working. Deutsche Bank (DB) is still going down - just later and after Greece has been raped. See the parallel between and Lehman Brothers (from Zero Hedge):

So, let's answer the question: Why would creditors not want to be repaid?

Because if they accepted repayment at any realistic recognition of current asset value (discounted from original loan face value) their insolvency would have to be recognized.

If Greece repaid its debts northern European banks would go belly up!

In 2010 Greek debt could have been restructured at perhaps 50 cents on the dollar (or more with repayment extension to many more years). Today the writedown would have to be much greater and the banks are not in much (or any?) better shape today than 2010.

Click here for Historical Opinion Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Opinion


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Comments on Feyerabend’s ‘Against Method’, Part III
Taking a Wrench to Healthcare
News Blog
Early Headlines: Asia Srocks Mostly Lower, Energy HY Bonds Surge, Google Fiber Cutback, Shadow Banks Dominate Mortgages, NATO Crowds Russia, Coffee Surges And More
Top 10 American Misconceptions about China (Version 3)
Documentary Of The Week: Job Buffers Are More Efficient Than Unemployment Buffers
Typing Is The New Talking
Outsourcing Viewed As The Top Threat To U.S. Jobs
SOS, Extra Savings Needed For An Adequate Pension
Bob Dylan's Nobel Prize - And What Really Defines Literature
What We Read Today 25 October 2016
Baby Remarkably Survives Being Born With Heart Beating Outside Her Chest
October 2016 Conference Board Consumer Confidence Declines
Richmond Fed Manufacturing Survey Remains In Contraction In October 2016.
October 2016 Chemical Activity Barometer Continues to Signal Improving Economic Growth
Case-Shiller Home Price Index August 2016 Year-over-Year Rate of Growth Marginally Improves
Investing Blog
This Or That? Technical Report 25 October 2016
Opinion Blog
What Triggers Collapse?
The Beer Goggles Stock Market
Precious Metals Blog
Inflation Surging As Platinum Signals Stock Market Decline
Live Markets
25Oct2016 Market Close: US Stock Market Indexes Closed Down Fractionally, Investors Remain Concerned With Friday's Fed Rate Change, Crude And US Dollar Down, Gold Up
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved