Stefan Homburg

Top German economist lifts lid on eurobank legal stitch-up

In an astonishing development in the EU/Greece fiscal crisis saga this morning, leading economist Stefan Homburg told Der Spiegel that ANY EU bank involvement in sovereign bailout – voluntary or otherwise – would be illegal.

You may have noticed that Trichet and the ratings agencies have been splitting the hairs of angels dancing on a pinhead since everyone started trying to figure out how to get out of the debt mess. This is because they represent all things banking, corporate, Wall Street, Bourse economics and US Fed Reserve.

But under EU banking law, they have a point. Because the ‘voluntary contribution’ solution is a red herring introduced by cynical Sprouts and Germans to disguise an inevitable fact: in the end, by EU law, if there are member bailouts, the taxpayer must cough up for all of it.

As the leading German economist Stefan Homburg points out (my italics):

“(EU) Banks cannot participate (even) voluntarily. An executive board is committed to its company’s welfare, and not the public interest. If it waives outstanding debts at the expense of its own company, this is a breach of trust and punishable by law….A bank can waive a portion of a debt with the aim of saving the remainder. This occurs in all bankruptcy proceedings. But things are different here, precisely because of the bailout package: If the bank refuses to make its own contribution, taxpayers alone will pick up the tab. This is exactly what a board of directors has to strive to achieve to avoid being accused of criminal breach of trust.”

Isn’t that neat? What we have here is an allegedly ‘market economy’ under which banks must not partake in bailouts – otherwise the State can prosecute them, and the shareholders can sue them for a failure of fiduciary duty.

As with most things EU, corporate interests insisted on this in the lawmaking, and so their needs came before those of the citizens.

Just so we’re crystal clear about this: if we bail out the ClubMeds, the banks must stay clear of any involvement. But if we don’t bail them out, the banks must pick up the total tab themselves.

Well, we’re doing the bailouts. Which tells you in one what’s really being protected here. And who the fall-guys are.

The seriousness of the situation has been exaggerated by the EU’s banking and political elite in order to save the banks from taking the hit….and Wall Street from the insurance hit. And if you doubt that exaggeration, take a look at some numbers.

The Greek GDP is valued at around $350bn, some ½% of global GDP – and less than 3pc of the eurozone. Greek debt all up is around $450bn. A crewcut level of debt forgiveness for Greece – or restructuring of timelines – would have the global effect of a gnat biting an elephant – inside or outside the room.

If all the peripheral EU economies followed suit in a disorderly fashion, then yes – things would get tricky. But not if the banking sector accepted serious haircuts. What has been kept from the general public so far, however, is that if the EU simply said ‘no bailout’, the banks would be responsible.

The top three French banks themselves admitted yesterday that exposure to Greek default would NOT sink them. But instead, we’re asking the PIIGS to stop all spending and sell the family silver – and it isn’t going that well.

Following the introduction of public sector austerity in Greece, the EU itself forecasts a sharp contraction of 3.5% in the Greek economy this year….and a deficit at 9.5% of GDP. As this seems to be happening throughout the PIIGS, the monetarist approach to these economies can be fairly firmly said to be making things worse – at least in the short term. And these countries don’t have any long-term without a relaxation of attitudes pretty soon.

This is indeed a crisis of solvency, and always has been. But it was initiated by cheap, reckless lending by the ECB, other eurobanks – and the usual US culprits such as Goldman Sachs…who also, remember, coached Athens on how to lie to Brussels about its deficits.

But nil desperandum banker people, because the law says you have zero responsibility. And as YOU tell our politicians that they must bail out the peripherals, that’s game, set and stitch-up to you.

Jean-Claude Trichet at the ECB wants every single euro to be paid back, interest rates to rise and make things worse for the Greeks, and a zero tolerance policy towards even debt restructuring. He only has a few months to go. He has an ego the size of Brussels does Jean-Claude, and he has his sights on a legacy that says “It didn’t happen on my watch”. The ECB boss is about sound money. Which would be fine if your own cheap loan deal for new EU members hadn’t kick-started all this spendaholic behaviour in the first place.

But Tricky is no more than a wily old banker putting his own kind first….as ever. Cameron kept us out of the bailout? If he was half-briefed, he could’ve made this a mega-issue about bailout validity in the first place.

Related: Why the Greek asset sale is irrelevant.

Dr. Stefan Homburg is a current Member of the Supervisory Board at MaschmeyerRürup AG. After studying economics, mathematics and philosophy, he was awarded his doctorate in Cologne, and his post-doctoral qualification in Dortmund. Even before graduating, he co-authored a standard work on economics. He is now Economics professor at the Leibniz University in Hanover, and Director of the Institute for Public Finances. Professor Stefan Homburg is highly regarded internationally as an economist and a successful political advisor.