How The Greek Bailout Money Disappeared—–A Post-Mortem

By Leonid Bershidsky at Bloomberg

A lot of the money from the two Greek bailouts went to banks, including local ones and the subsidiaries of foreign banks operating in Greece. Yet lenders are now the weakest link in the Greek economy. The European Central Bank has only to reduce liquidity assistance or demand more collateral, and the country’s financial system will run out of euros. So what happened to all that bailout money?

Greece’s champions, including Nobel-winning economists Paul Krugman and Joseph Stiglitz, have said repeatedly that the Greek bailouts favored foreign lenders. “We should be clear: Almost none of the huge amount of money loaned to Greece has actually gone there,” Stiglitz wrote in a recent column. “It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems.” That claim has become part of the mythology surrounding the Greek crisis.

In reality, it’s not hard to figure out how much money foreign banks pulled out, and how much they lost, in the course of the two bailouts. According to data from the Bank of International Settlements, at the end of 2009, total international claims on Greece stood at $177.9 billion, $96.6 billion of it on the public sector (those were investments in Greece’s already swollen government debt). By the end of 2011, before the second bailout and Greece’s big debt restructuring, international claims were down to $73.3 billion, $40.8 billion of it on the public sector.

This means that the first bailout, agreed in May 2010 — 110 billion euros ($120 billion) from the European Union and the International Monetary Fund — did indeed help foreign banks reduce their exposure to Greek public-sector debt, by $55.8 billion. This sounds like a lot of money, but it was a tiny fraction

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