Eurozone Bailout: Taxpayer Transfer to the Wealthy?
Europe's €200 billion reverse wealth tax explained
by Harald Hau, via VoxEU.org
Last week, the European heads of government added €109 billion to the existing €110 billion rescue plan for Greece. As Europe’s financial sector would have otherwise taken a huge hit, this column address the question: How did the financial sector manage to negotiate such a gigantic wealth transfer from the Eurozone taxpayer and the IMF to the richest 5% of people in the world?
When the deal was announced, German Chancellor Merkel highlighted the private-sector involvement. She stressed that this was the result of German intransigence. According to the spin, private creditors have to accept a 21% write-down on their claims. This amounts to a €37 billion private-sector contribution. They also provide €12.8 billion in new loans for debt buyback. This buyback, however, should not count as a private-sector contribution as it amounts to an exchange of one debt for another.
The private creditors’ contribution is therefore extremely modest compared to the €109 billion in new public commitments. Especially given that private creditors had the most to lose. Given that the market discount was already 50% for Greek debt, giving up 21% could be viewed as a gain. This has to be qualified as a very bad negotiation outcome for the Eurozone taxpayer.
A closer look shows the deal is much worse for taxpayers
The new plan foresees so-called credit enhancement for the new debt, which means that the new Greek debt is mostly guaranteed by the European Financial Stability Facility (EFSF) – and thus by the taxpayers. Now, in the financial world, a guarantee is worth hard cash – it’s like getting automobile insurance for free.
This is no small concession given that a successful turnaround for Greece is highly uncertain. The economy still is burdened with an excessive debt of around 132% of GDP; large structural policy reforms have not yet begun and may well fail. Most creditors can foresee this and are happy to accept the public guarantees for their debt before the next and much bigger haircut comes.
We can therefore expect that they take up the debt exchange offer "voluntarily", since it is effectively a gift to sovereign creditors and not a bailout contribution.
What about Egalité? Tax for wealth, or on wealth?
More surprising is Sarkozy's spin on these events. He interpreted the new deal as an important step towards Europe's economic governance. But before taking too much pride, Sarkozy should remember that a €200 billion subsidy to sovereign creditors is a gigantic wealth transfer from the taxpayer to essentially the richest 5% of the world. In the US, the 5% richest households control roughly 70% of all financial wealth, and this percentage is not much different in the rest of the world. Ultimate ownership of bank capital and sovereign debt is so concentrated among high-wealth individuals that we should characterise the bailout subsidy as an "impôt pour la fortune" (“a tax for wealth”) – a wealth tax supporting the rich.
This should be problematic in a country like France which has been fighting bitterly over the so-called "impôt sur la fortune" (a wealth tax on the rich). This latter wealth tax amounts to a mere €4 billion annually in state revenue.
Why are the French not at the barricades over the structure of the Greek bailout?
This is a difficult question. Self-censorship by the mainstream French media might play a role, which – mostly left-leaning – does not want to provide ammunition to Eurosceptics like Marine le Pen before next year's presidential elections. But even in France it will not remain unnoticed that almost all of the public funds go to creditors and hardly benefit the ordinary Greek citizen.
Why did taxpayers get such a bad deal?
In principle, governments should have been in a very strong position. Private default can end in the liquidation of a company, but a country cannot be liquidated. This puts private creditors in a very weak position when it comes to negotiating with a government and empowers the latter. But why was this not the case in the current debt crisis?
- Bankers and many journalists convey the impression that we face a choice between a full sovereign bailout and a catastrophic banking crisis.
- ECB executive board member Lorenzo Bin Smaghi even suggested that any talk about private bail-ins would increase the costs for the taxpayer.
Such assertions confuse more than they clarify, because they (falsely) suggest that there was no alternative.
