Broken promises break resistance

When the Executive Board of the IMF decided in May 2010 to participate in the Greek bailout programme, there were major misgivings. Many members of the Board feared that the programme would boil down to a great bank bailout which would do nothing to help Greece. These concerns were allayed in part by false promises given by the German and French financial institutions, for which the Federal Government of Germany shares responsibility.

For more than five years, Greece has been drip-fed by its creditors in the troika. During that time, almost 250 billion euro of supposed bailout loans were issued, mainly to service public debt. According to the country’s public debt management agency, Greece is already set to pay approximately 15% of its GDP in interest and repayments in the period 2013-2020. In July 2015, a third bailout package was arranged. Now around a further 80 billion euro are being drip-fed and the troika will be staying in the country for three more years.

It is unlikely that this time the austerity recipe will have any different effect in the country’s prospects of overcoming the crisis, especially if there is no substantial debt reduction and stimulation of household income. As with the first two programmes, the troika of creditors is focusing on austerity, largely putting the Greek economy into permanent recession through severe cuts, for five consecutive years. Private demand has fallen by 23.9% and public demand by 21.5%. Economic output has shrunk by more than a quarter [1]. The third bailout programme will further intensify austerity, as it increases VAT and introduces indirect pension cuts. Such measures will add more fuel to the downward spiral of decreasing demand, rising unemployment, decreasing tax revenue and rising debt.

Serious concerns about austerity policy

These consequences are not surprising. Germany learned at first hand, on the eve of the Nazi dictatorship, how austerity intensifies crises. And since the 1970s the International Monetary Fund (IMF) and the World Bank have brought numerous debt crises in the global south to a head through such programmes. In the case of Greece, too, the members of the IMF were by no means agreed that the imposition of social cuts would achieve the desired result. In May 2010, for example, when the first adjustment programme was adopted, Rene Weber, the Swiss representative on the Executive Board of the IMF, voiced considerable misgivings about the prospects for success: “We have considerable doubts about the feasibility of the program […] We have doubts on the growth assumptions, which seem to be overly benign. Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term” [2].

There was also heavy criticism expressed towards the absence of any provision for private creditors to share the costs of the programme. Many directors feared it would end up as an operation to save the banks, which would be of little use to Greece. IMF Executive Director Paulo Nogueira Batista, from Brazil, summed up these concerns: “The risks of the program are immense […] As it stands, the program risks substituting private for official financing. In other and starker words, it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”. The directors from Argentina, India and Russia, among others, also expressed similar concerns.

Why then was the programme adopted, despite the many misgivings and contrary to the historical experiences of the IMF Executive Board?

Non-binding pledges provided by Germany’s financial institutions

Clearly the representatives of Germany and other EU countries had a great interest in the programme. Their motives are open to speculation.

One uncontested factor was revenue from interest, from which Germany in particular benefitted through the exodus of capital out of Greece and the other bailout countries, seeking safe haven to German bonds. Hence on 25 September 2012, the German asset management giant Allianz estimated that the German government would save 67 billion euro for the period 2010-2012 and the next years to come [3], due to lower borrowing costs (10 year Bunds yields dropped to a 1.18 percent low in 2012) [4]. A recent study of the Halle Institute for Economic Research shows that Germany has already saved interest costs from about 100 bn euro due to the crisis [5].

Another significant consideration were the possibilities for European buyers arising from privatisation projects linked to the programme. Added to this, was the concern to avoid official state insolvency with all its unpredictable repercussions.

It cannot have been a coincidence that it was the banks of precisely Germany and France, which held the largest shares of Greece’s sovereign debt. The beginning of 2010 found the German banks exposed to the tune of almost 45 billion USD to Greece (public sector, banks and private sector), according to the Bank of International Settlements data [6]. Still, this figure merely represented only a fragment of the total exposure, as RBC Capital Markets noted at the time [7]. The exposure of the French banks to Greece was even higher, amounting to about 75 billion USD. It should be noted that – despite the discrepancies among the various estimations – the above figures were widely accepted as the working figures for analyses [8] and publications [9].

It is apparent that the governments of both countries would hustle to protect their banks against substantial write-offs. So, what caused the IMF Executive Board, despite the considerable compunction of many members, to follow the German-French line and sign up to the programme? At least part of the answer can be found in the minutes summary of an IMF meeting on 9 May 2010 which have leaked out since 2013. The minutes reveal that the representatives of the Netherlands, Germany and France stated they would ensure commitments from their financial sectors to support Greece and withhold their Greek bonds: “The Dutch, French, and German chairs conveyed to the Board the commitments of their commercials banks to support Greece and broadly maintain their exposures” [10]. This was essentially a response to the concern that the commercial banks would be let off the hook while taxpayers shouldered the debts.

What complicated the case was that the banks had simply given non-binding declarations of intent, in which they committed themselves to nothing. Therefore they had no consequences to fear when they ditched the pledges again immediately after the start of the programme.

A declaration signed by 13 major German banks on 4 May 2010 stated that the German financial sector would do all it could to maintain existing credit lines to the Hellenic Republic and Greek banks and the volume of lending to the Hellenic Republic for the duration of the programme [11].

However, the banks‘ later actions indicated they absolutely disregarded their own declaration, rendering it worthless. Between May and December 2010 alone, the German banks shed around a third (from 13.1 to 9.85 billion euro) of their Greek sovereign bonds. By the beginning of 2012 – just before the debt haircut – the volume had shrunk to 2.8 billion euro. Thus, within the first 18 months of the three years covered by the financial sector’s declaration, the German banks had unloaded 78.6% of their Greek bonds [12].

Luring the IMF

The broken promises of European banks about preserving their Greek sovereign exposure was not merely a political manoeuvre to bypass concerns hinting to a bank bailout. The unprecedented Eurozone crisis had brought the core EU countries on the negotiating table with the IMF’s administration itself, in particular the then head of the Fund, Dominique Strauss-Kahn (DSK). With regard to these negotiations there were serious revelations made by the Washington-based journalist, Michalis Ignatiou, in his related book about the Greek crisis. According to his investigation, DSK “elicited from Ms Merkel and Mr Trichet [the former president of the ECB] that the German banks would not get rid of their Greek bonds, so that he [DSK] would be able to ‘sell’ it [the programme] to the board members, for whom he was sure they would revolt against the high cost of the ‘bailout’. He had done the same deal with the President of France” [13], Nicolas Sarkozy. This was the “condition Strauss-Kahn set to Merkel and Sarkozy” [14] in order not to insist in restructuring the Greek debt, as the IMF rules would require for the debt to become sustainable.

Naturally, any restructuring of the Greek debt would be more desirable for the banking sector interests only after they would have unloaded their bonds. “The German and French banks, heavily exposed to the Greek sovereign bonds, would have asked from their governments for immediate recapitalisation, something that was politically unacceptable” [15].

Moreover, a massive selloff of Greek bonds would cause their price to plunge, rendering them vulnerable to speculation. Indeed, according to figures from the Bank of Greece, the 10-year Greek sovereign price fell from 88.32 in May 2010 to 34.85 euro in January 2012, right before the Private Sector Involvement agreement [16].

The 2012 “haircut” stunt

Against this background, the debt haircut of 2012 – intended to make private creditors pay a share of the costs of the Greek crisis – seems like a rigged game. It is repeatedly claimed that creditors wrote off 53.5% of their claims with respect to Greece. What is generally not mentioned is that, by that time, German banks had divested themselves of just on 80% of their Greek bonds.

The French and Dutch banks behaved no differently. In total, the financial sectors of these three countries unloaded around one half of their Greek bonds from mid 2010 to the beginning of 2012. The stance of the banks can certainly be deemed expected; they are financial institutions after all. However, their nature does not relieve them from accountability. If the German Ministry of Finance itself announces that the contribution of the financial sector “was voluntary and that their actual commitment and the implementation thereof rests with the banks concerned” [17], Berlin must have realistically assumed that the banks would break their pledge as soon as it served their short-term interests to do so.

The story unfolded as it was initially feared: the Greek bailout turned into a bank bailout. While in May 2010 private creditors still held 94% of Greek bonds, by the end of 2012 this figure had fallen to just 11.5%. The lion’s share of the debts were taken on by the other euro countries via bilateral credits, IMF shares, the European Central Bank and guarantees for the EFSF loans, thereby shifting the risk to governments and thus to taxpayers [18].

At the same time, the Greek economy has been systematically driven to the ground. The dramatic fall of the value of Greek bonds was only the beginning in a series of potential damage caused to Greece, at least partially because of the false promise given by the European banks. For instance:

(1) the damage caused to the Greek banking system and other bondholders (institutions, individuals), leading to further recapitalisation costs for the Greek taxpayers;

(2) the coercion of Greece to sign up for new loans, burdening its budget with further interest payments;

(3) the surge in borrowing costs and greater inability of the state to seek market funding;

(4) the deterioration of asset value of the Hellenic Republic, resulting in lower revenue from potential privatisation projects;

(5) potential damages caused by the triggering of credit default swaps [19].

Certainly the declarations made by the German banks and the political commitments expressed during the notorious May 2010 IMF meeting are not legally binding. However, this would not prevent Greece from seeking liability against parties such as the ECB, the authority responsible for the banking sector in the Eurozone. Political responsibility should also be sought. For instance, MEP Antolín Sánchez Presedo (S&D) did submit a relevant question to the European Commission (February 2014), contemplating how “the drastic reduction of exposure to Greek debt by the banks […] contributed to exacerbating the crisis” [20]. The EC essentially avoided answering the question.

Finally, it should be reminded that “the European Central Bank shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by it or by its servants in the performance of their duties” [21], while “Jurisdiction shall also be reserved to the Court of Justice in the actions referred to in the same Articles when they are brought by an institution of the Union against an act of or failure to act by the European Parliament, the Council, both those institutions acting jointly, or the Commission, or brought by an institution of the Union against an act of or failure to act by the European Central Bank” [22].

It surely makes none wonder which or how many institutions of the Union failed to act in order to prevent the deterioration of the Greek economy, considering that once more, today, another “bailout” has been agreed, similar to the previous ones. Full repayment of Greece’s debts is unrealistic, while the third bailout programme will do nothing to change this.

The German Government shares political responsibility for this far-reaching redistribution at the expense of European taxpayers and to the benefit of the banks.

Published originally in German, 19 Sep 2015

Authors: Steffen Stierle, A. Moutzouridis




[3] Allianz – Working Paper 154 / Economic research & corporate development, p. 5.



[6] BIS Quarterly Review, June 2010, International banking and financial market developments, pp. 19-21.


[8] Anne Sibert, The Greek sovereign debt crisis and the Eurosystem; paper for the Directorate General for Internal Policies, p. 4.

Click to access 20100610ATT75776EN.pdf

[9] Griechenlands Schulden bei Banken im Ausland.

[10] Summary available from the Wall Street Journal.


[12] Deutsche Bundesbank (2015): Beiheft Zahlungsbilanzstatistik, Table II. 4.

[13] Ignatiou, M. (2015). Troika – O dromos pros tin katastrofi (Troika, the course to disaster), p. 449. Athens: Livanis.

[14] Ibid. p. 477.

[15] Ibid. p. 461.

[16] Bank of Greece, Government benchmark bond prices and yields, and

[17] BMF (2010): Die Finanzwirtschaft in Deutschland flankiert die staatlichen Maßnahmen des Programms zur Stabilisierung der Wirtschafts- und Währungsunion in Europa, Declaration of 4 May 2010.



[20] Parliamentary questions.

[21] Article 340, para. 4; TFEU.

[22] Article 51, para. 2; Protocol No 3 On the Statute of the Court of Justice of the European Union.

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