Lessons for Portugal –
What happens when debt writedown gets its priorities wrong

Lessons for Portugal-What happens when debt writedown gets its priorities wrong

thepressproject.net

april 12, 2012

 This is a tale that should be read with utmost care in Portugal. It is a tale of how Greek hospitals, universities, professional unions, even the Greek archaeology fund were bankrupted by the PSI agreement- the “voluntary” debt exchange deal that saw holders of Greek bonds lose part of their money. For these institutions, not just the haircut, but also the purchase of greek bonds in the first place was nothing but “voluntary”. The foundations for this robbery were put in place years before the word PSI (private sector involvement at the debt writedown) entered the greek lexicon- this is why its lessons should be heeded by the Portuguese now. Before, not after, their own inevitable haircut.

At the bottom of the matter lies the question of who pays for the crisis. The answer here is that greek hospitals universities etc are taking a strong direct hit by the PSI without having willingly invested in Greek bonds. This is what  a country gets when it lets banks arrange its debt restructuring.

So here s what happened:

Over the past few weeks managers of  Greek hospitals, universities, technical education institutions, professional chambers, military personnel funds, the greek archaeology fund, and other self-steering state entities (“NPDD”) were faced with painful surprises. Large sums went missing from bank accounts meant to cover their institutions’ day-to-day expenses.. Athens Technical training (TEI) institution had 11 million euros and it now has 1,9 million, a 82,5% haircut. Thessaloniki Technical training institution had 8.200.000 and now has 180.000. A 97,8% haircut.

NPDD are obliged by law to place a part of the money they receive from the state in a “Common Fund” at the Bank of Greece. The Bank of Greece is also obliged to use this fund for investments in long term or short term Greek debt.

As the PSI deal was finalized, these institutions didn’t even have the chance to hold out (to refuse the haircut), as the other bondholders did.

So hospitals, universities etc. claim that they lost a large part of their assets because the Bank of Greece used their money to buy Greek government bonds without their knowledge and then subjected these bonds to haircut without their permission.

Have these institutions effectively become dumping grounds for bonds European banks no longer wanted? It is well documented that German and French banks used the time since the first greek bailout, in May 2010, to rid themselves of “greek risk”. It is less well known who bought Greek bonds then and at what prices.

 The Bank of Greece says that it stopped purchasing Greek bonds on behalf of universities, hospitals etc “in May 2011 before any talk of the PSI”. This is supposed to counter claims of criminal mismanagement.  But, by May 2011, of course, everybody knew the Greek debt burden was unsustainable and the European banks had already been busy reducing their exposure. We are all left guessing  who was buying (without knowing).

The losses are very real, but the question whether this money was in fact used to relieve german and French banks off their greek bonds is not an easy one to answer. The records of those purchases are being kept secret. Requests in parliament for them to be published have not led anywhere.

The issue gets trickier due to the very simple fact that hospitals, universities etc have not just lost the money they had placed on the “common fund” . Post-PSI, money from their cash accounts also vanished. In unison, managers of hundreds of universities, hospitals, professional unions, military personnel funds and local chambers say they were never informed, nor did they provide any form of consent.  Hence the accusations of daylight robbery.

Here is how prime minister Lucas Papademos answered the accusations in parliament. (for the record, Papademos was governor of the Bank of Greece in 1997, when the law forcing NPDD buys of greek bonds came into force)

“The Bank of Greece cannot independently move money from cash flow accounts of the Public Law State Entities (NPDD) to their capital accounts. This requires a prior request of the NPDDs, who are the only ones responsible for this decision. Thus, money was placed in the capital accounts willingly, not unknowingly.”

Pasok leader Venizelos rushed to provide assurances that the money frisked away from these institutions will somehow be returned. This sounded like little more than an effort to say something, just anything, in order to silence the uproar.

The lack of funds is now so severe that the university of Crete even asked its departments not to forward requests for funds, unless in extremely urgent and vital cases. Rectors of universities across the country are holding constant meetings to find a way out. Litigation has started, but it is questionable whether it will end before-or after all these institutions collapse and get saved by some private investor….