How the Greek Banks Secured an Additional, Hidden €41 billion Bailout from European taxpayers

bailoutIn 2013 Greek taxpayers borrowed from the rest of Europe’s taxpayers €41 billion to pump into the Greek banks. This is well known. What is not known is that, also in 2013/4, the Greek banks received an additional, well hidden, €41 billion bailout loan from Greek and European citizens. This bailout was never authorised by any Parliament or even discussed in public anywhere in Europe.

This is how it worked: Bank X would lend money to… itself. It would do this by issuing a bond which it did not intend to sell. So, why issue such a phantom bond? Why write an IOU and give it to one’s self? The answer is: In order to hand this phantom bond over to the European Central Bank as collateral in exchange for a cash loan. Normally, of course, the ECB would never accept such a phantom bond as collateral. Accepting it would have been to accept a loan it gave to Bank X as collateral for the said loan. It would have been an assault on the meaning of collateral and a gross violation of the ECB’s rulebook. So, bank X, knowing this, took its phantom bond first to the Greek government and had it guarantee it. With the government’s guarantee stamped on it, the ECB then accepted Bank X’s phantom bond and handed over the cash. Why? Because the Greek taxpayer had, in the meantime, unknowingly provided the collateral for Bank X’s loan.

How extensive was this ‘practice’? Since 2008, European governments have been guaranteeing private bank bond issues to assist them in their desperate quest for ‘liquidity’. The Greek government was no different.[1] Such guarantees were discussed in Parliament and were widely acknowledged as an emergency measure. However, what is startling is what happened in 2013: The heavily indebted Greek government borrowed €41 billion from European taxpayers (secured from the EFSF as part of Greece’s 2012 Second Bailout Agreement) in order to hand it over to Greece’s private banks as a capital infusion that would, in theory, plug their ‘black holes’ once and for all.

Athens, Brussels, Frankfurt and Berlin have been waxing lyrical about the success of this ‘recapitalisation’, proclaiming it as the end of Greece’s banking crisis. Alas, they skillfully neglected to inform us that, during the very same period (and continuing to this day), a second, hidden, rolling (and thus potentially never-ending) bailout (based on government guarantees of fresh phantom bonds) is being extended to the same Greek banks! (See Landon Thomas Jr’s recent article in the New York Times.)

So far, since early 2013, this hidden, second bank bailout has amounted exactly the same value (€41 billion again) as the official, approved by European Parliaments, bailout. This means that, between January 2013 and February 2014, the insolvent Greek state had to add to its liabilities, on behalf of the Greek banks, an astounding €82 billion or 45,6% of GDP![2] Remarkably, this second, hidden bailout was never authorised by any Parliament, nor discussed in any public forum.

The above practice raises two concerns; and the reader can decide which of the two is the most worrying.

First, in an open society, whenever the public assumes responsibility for private debts, it should be properly informed. In a democracy this means that Parliament (or Congress) should debate the assumption of such additional responsibilities. It would appear that in the Eurozone such an important principle has been sacrificed on the altar of the bankers’ interests. Is it thus odd to hear that Europe-wide voters no longer trust European institutions?

Second, the above show that the Greek debt is continuing to rise, not fall. With indebtedness being what it is, who can honestly speak of the Greek economy coming out of its black hole? Rather, it seems that this hole is getting deeper and all this to benefit a small section of society which has already received highly preferential treatment.

For more details and background briefing on the above, read on…

Here is a detailed account of how the Unauthorised Bailout was engineered, via the ECB and with the Greek government’s backing:

  • Step 1: Banks issued private bonds which they did not intend to sell to anyone
  • Step 2: Banks got (under a veil of ignorance and a conspiracy of silence) the Greek state to guarantee these bonds – without seeking parliamentary approval, without the troika’s official approval, without even informing the electorates in Greece or in Germany or anywhere else of this massive increase in the Greek state’s effective liabilities
  • Step 3: Banks then posted these bonds with the ECB in exchange of instant cash

Evidence that I have now seen shows that:

  • Fact 1: Greek banks have, only in the past year (2013/14), issued €41 billion of these government-guaranteed bonds (see first note below for previous years)
  • Fact 2: The bonds issued by the banks are, undoubtedly, phantom bonds – in the sense that the banks issued them with the intention never to sell them to investors: the bonds were to remain the ownership of the banks that issued them, and the coupons to be ‘paid’ by the banks to… themselves. The only rationale for these bond issues was, thus, to use the phantom, un-traded, bonds as collateral for loans from the ECB with the explicit guarantee of the Greek taxpayer
  • Fact 3: The announced interest rate of these bond issues has been rising fast during the past year, reaching a ridiculous 12% per annum, even while the interest rate on Greek government bonds was falling toward 5% – a true paradox that can be explained by no market logic and which, for some, points in the direction of political manipulation – see the Appendix on this matter.
  • Fact 4: The ECB has declared publically that, as of March 2015, it will no longer accept such phantom bonds as collateral
  • Fact 5: The ECB has refused to comment on this wall of new debt (€40 billion) issued by the Greek banks and guaranteed by the insolvent Greek government
  • Fact 6: The Greek government, hiding behind some legal loophole, has not acknowledged this new debt (i.e. it did not add €40 billion to Greece’s public debt), even though its liabilities were increased by €40 billion. Apparently, the Athens government is at liberty to call such debt ‘contingent liabilities’ and, therefore, to choose not to add it to government debt – even though it is clear that, especially given the ill health of the Greek banks (see various reports on non-performing loans by Blackrock, the ECB and the IMF), these ‘contingent liabilities’ weigh heavily on the Greek and, by extension, on the European, taxpayer.

Simple, dispassionate logic leads to the following predictions:

  • Prediction 1: The banks will need to roll over these bonds once they mature next year, seeking new government guarantees and, indeed, going against the ECB’s proclamation that it will not be accepting them after March 2015 as collateral (see Fact 4 above). Indeed, if the ECB insists in its refusal to accept phantom bonds after March 2015, either the banks will have to find upward of €30 billion in cash to repay the ECB, or the Greek government must. Since Greek banks and the Greek state are both as insolvent as one another, the ECB will be forced to bend its own rules, possibly by allowing the Greek Central Bank to accept new government-guaranteed bonds via the Greek Central Bank’s ELA.
  • Prediction 2: Assuming that Prediction 1 is confirmed (as I am convinced it must), the Greek government’s liabilities (as a result of this hidden and rolling bank bailout) are bound to grow further and further, with the banks rolling over these bonds into the future.

The Greek government will, no doubt, retort that it had no choice. That given the state of the Greek banks, not guaranteeing this additional €41 billion of bank debt would cause serious liquidity problems for the banking sector. “We did what we had to safeguard the access of Greek savers to their deposits”, they will say. Be that as it may, the Samaras-Venizelos-Stournaras government need urgently to answer three questions:

  • Question 1: If the banks are in such dire straits that they needed an additional bailout of €41 biilions, on top of the €41 official loans that the Greek taxpayer shouldered on their behalf, is the government not misleading citizens and markets when making such a song and dance about the Greek banks ‘spectacular recovery’?
  • Question 2: If the banks required an additional €41 billion of public loans (and in secret), what right did the government have to proceed with the fire sale of its own banking assets (see here for a woeful example)? Why not wait until the banks returned to health before selling of the government’s shares in them at a better price?
  • Question 3: What gives the right to the government to increase the state’s liabilities, without debating this in Parliament and while keeping Greek and European citizens in complete darkness about these ‘operations’?

Lastly, a question for the German government, the European Central Bank and the European Commission: Will you be surprised if the peoples of Europe lose whatever morsels of trust they have got left in European institutions when they find out about these shady deals?


And so, dear reader, this is how the Greek banks have managed to secure another €40 billion of cash (minus the ECB’s haircut) that you – along with Greek and European citizens – know nothing about. A New, Hidden Bailout with the unsolicited, undeclared and unauthorised backing of the Greek taxpayer. And since the Greek taxpayer owes so much already to fellow European taxpayers that a haircut will soon be exacted upon the latter, this ‘small’ matter ought to be a major issue in the forthcoming European Parliament elections. The fact that it will, in all probability, be hushed up is another sad sign of the decline of European democracy.

APPENDIX: On the paradoxical increase in the phantom bond yields

In 2010, when the money markets would rather perish than lend to Greek banks, or to the Greek state, the Greek banks were issuing phantom bonds at interest rates of Euribor +5%. In the last year, when (supposedly) Greece and its banks have seen their creditworthiness rise, the Greek banks have been issuing phantom bonds at interest rates of Euribor +12%. What explains this rise? Duke University’s Mitu Gulati asks this question (in a fascinating new paper) but provides no definitive answer, other than to imply ‘political manipulation’. My view on the matter is more straightforward, I dare say. Here it is

If a Greek bank cannot repay the ECB for the loans that it took using one such phantom-bond as collateral, there are three possibilities:

  1. The ECB will allow the bank to roll the phantom bonds over – i.e. issue new phantom-bonds, post them as collateral with the ECB and use the new loans to take back the original phantom-bond in order to tear it up. Another similar option is that the ECB will not accept these phantom-bonds but will turn a blind eye to the Bank of Greece accepting them as part of the Greek ELA. In either of these cases, the interest rate of the original phantom-bond is immaterial.
  2. The bank cannot repay its loan to the ECB but the Greek government uses its unused loans from the EFSF and steps in to save the banker’s bacon. Again the interest rate of the original phantom-bond is immaterial – as it will be torn up once it is returned to the bank. (The only complication here is that the government will have to take the matter to Parliament…)
  3. The bank cannot repay and a new Greek government (e.g. a Syriza administration) refuses to pay the ECB on the bank’s behalf (e.g. because the guarantees were never approved by Parliament). Then, the phantom-bond stays with the ECB, it matures, and gives the ECB a legal right to demand from the Greek government to repay the principal plus the huge interest as mentioned in the phantom-bond’s contract.

Of the three cases above, 1 and 2 render the phantom bond’s interest rate irrelevant. But not case 3. In case 3, the higher the interest rate in the phantom-bond’s contract the more money the ECB can claim from a recalcitrant, or utterly broke, Greek government. Thus, the increasing ‘yields’ of these phantom bonds may serve the purpose of softening the ECB’s resistance to the idea of accepting the phantom bonds as collateral, in view of a possible change in government in Athens (or a catastrophic collapse of sorts).



 Year             Gvt-backed bank bonds          ‘interest rates’

2009               €46                                                       2.58%

2010               €33 billion 48 million                      5.81%

2011               €40 billion 208 million                    12.45%

2012               €16 billion 362 million                    13.21%

2013/4           €41 billion 90 million                      12.6%

[2] The latest figure I have seen concerns a phantom bond issued on 6th February 2014 by the Bank of Pireus with a face value of €1750 million and a whopping interest rate of 12.6% (Euribor rate + 12%).

37 thoughts on “How the Greek Banks Secured an Additional, Hidden €41 billion Bailout from European taxpayers

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  10. I must be missing something. The 41bn of direct bank recaps is completely different than the 41bn of government guarantees. The latter is a contingent liability which will only materialise should the Greek banks default and ECB recovers nothing. So why are you all treating is at if it’s 41bn of new government debt?

    In regards to the ECB it is clear that they are acting on an ad hoc basis bending their own rules whenever they want while remaining strict and inflexible in other cases (see Cyprus). Thus the ECB has been for some time now a political actor and hence acting outside its mandate. But of course no one cares..

  11. Actually the question should be why has the govt guaranteed the debt of a private entity?

    It should have been wound up after deposits and day to day operations of the bank where separated to as it did not affect the physical economy.

    That is your broke sir – time to go
    Then the management and books of the company should’ve been audited and criminal charges brought upon those needing to be charged.
    I bet such wouldn’t happen again

    End of story.

    But that isn’t the game

    The game is fascism- the merger of state and corporate powers.
    Exactly what we see happening world wide (except in Iceland)

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  13. I would like for Germany to be the first to exit the Euro. Let’s see how it likes them apples. Hello massively appreciated DM, goodbye trade surplus, so long neo-mercantilist imperialism. Good riddance to bad rubbish (the Euro).

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  16. Yani, This revelation is astounding! Shadow debt accumulation by Greek gov. while trying to convince the public that Greece has turned a corner is the height of hypocrisy. I believe your scenario #3 about the 12% interest is right on. As accountant practicing in USA any US bank that issues bonds to itself would never be able to record the interest expense or income in such a sham transaction. It looks like ECB has helped the Greek gov. hide more debt and given the Greek banks more cash to operate with at the same time. No wonder Wall St. wiil start to buy Greek Bonds. They now know that all debt from Greek banks is going to be passed to its people and ECB will continue to squeeze the Greek taxpayers even more. When will Greece wake up to this hypocrisy?

    • I have said this before, but you did not offer a reply; this kind of shenanigan is only a little token of “whatever it takes” to keep Greece in the EZ, ruling out “Unconstitutional” solutions…

      If you were, in Stournaras’ shoes, having to come up with a way to get the Greek banks 41 bn, and still be “constitutional”, so that Grexit doesn’t happen, blah, blah, … what would you have done better?

      PS. Yes, the MP… but Yanni, face it, it’s unconstitutional !!!
      Seriously, I know it is not easy to come up with a response–esp. a week before elections, so I don’t expect one :-)

  17. It was not entirely hidden. Part of it showed up in the government deficit (thanks to Eurostat). When a government borrows to prop up balance sheets of banks, Eurostat counts it as genuine debt and deficit, when it’s a kind of ‘normal’ investment in a bank Eurostat treats it as a swap of assets and does not add it to the debt and deficit (the UK is another country with MASSIVE government lending to banks which is not counted as part of government debt). You might want to contact Eurostat for details. Here the Eurostat data, it’s not the 41 billion you mention but still a considerable amount of money. The flabbergasting thing about this: these are official, widely published data but nobody takes notice.

  18. o.k. Yani and John:

    I am sure we are going to get to the bottom of this. Keep this in mind:

    The IMF has refused and again postponed their participation on the next Greek tranche. So we have a problem with funding.

    Re: Greek Banks. The preferred shares were a legacy of the Alogoskoufis era (ex-finance minister). The banks asked for a time extension on repayment. The Greek state (hungry for cash) + Troika refused. The banks said that in addition to the red loan problem (which is increasing by the day) it would be exceedingly difficult to repay the preferred now. No avail. Therefore banks were forced to issue new bonds to repay old ones(preferred). Only in the case of Alpha bank where the outstanding preferred was a manageable 400 Mil. euros they were able to cover through new capital increase. Piraeus and others had to issue new bonds. It sounds like they had no other option or the no other option was given to them.

    • I have no problem with the idea that private banks issue bonds. It is their prerogative. The problem I have is when these bonds are guaranteed by the public when the public is not even informed.

    • Yani:

      You are forgetting something very obvious. The original bank recap was DOD. By the very act of the senseless and impressionist haircut Troika had created an additional red loan problem of 90 Bil + 65 Bil of bank deposit flight. Everyone knew at that point that the Troika mandated haircut was an abysmal failure and that it had created an enormous unintended consequences problem (4 times the original size).

      The answer at the time was to nationalize all Greek banks (via the recapitalization oxymoron) and later attempt to unload such shares on private hands at a profit. This part also failed because it didn’t happen soon enough.

      Therefore we went into Plan B and Plan C. Again I seriously doubt that banks issuing bonds to themselves and then paying high interest on it truly solves anything. It sounds like the balance sheet vs. income statement debate we just had and the net result is zero.

      And certainly an obscure NYTimes article is hardly the authority on what really happened. Why don’t you ask Blackrock?

    • Because I have the original spreadsheet… And because Blackrock were commissioned by the Governor of the Bank of Greece who was, until he got this gig, an employee of the most notorious of bankers.

    • Dean,
      Is there a problem or not?
      Let’s get to the bottom line, is there something hidden from Greek taxpayers?

    • Κωνσταντίνος:

      Too early to tell. I read the NYT article and the Harvard paper which is inconclusive. The paper says that basically the Greek government probably over-profited following the 2012 events but they don’t have the evidence either. Such propensity would not be surprising at all since the state sold everything and their mothers to stay alive at all costs. But I certainly don’t think that everything went the way the state planned it. Far from it.

      What we had over the last 3-4 months was a clear appetite for peripheral bond debt due to the extra premiums involved. The only risk to investors would have been a Greek bankruptcy but now we know Merkel would never allow such. So it looks like everybody got what they wanted. Greece some fresh money into its coffers (by forcing its banks to repay the preferred pronto and by accessing some modest new debt for itself as a benchmark for private bond financing to Greek firms such as Hellenic Petroleum, DEH at al) and the investors got some bond premiums just like the old times (pre crisis).

      I haven’t seen the smoking gun yet. And I am not sure that what a NYT contributor finds as bizarre or exotic bond financing qualifies as such just because the author found a source to say that this is “odd”. To an outsider and non-participant many thinks look odd and unconventional.

      The issue is what really happened. And it sounds like a case of a state without any scruples on a “got to survive” mission. But as we said before it was scripted for Greece to survive because it was never about Greece but about the survival of this lunatic currency called the euro aka the new German mark.

  19. Well, isn’t this strategy a rather obvious preparation for a Greek Default (Take 2), where the holders of these guaranteed bonds – who will obviously refrain from triggering their guarantees – will get paid in full while all the rest sovereign bondholders will get a nice haircut? …

  20. Frankly, this is not new. Many commentators (most vocally Hans-Werner Sinn) castigated this ECB policy as “the ECB’s delegating the capacity to print Euros” to periphery countries. If I recall, the banks had run out of collateral which the ECB would accept as eligible collateral. So the ECB delegated the definition of “eligible collateral” to the national Central Banks (I believe Italy was the first one to make great use of that): the banks issued a prom note, the Central Bank guaranteed it and, bingo, you had “eligible collateral”. Whether it was the state or the BoG which guaranteed it is a moot point; they are obligations of all Greeks.

    The real question is what the banks needed that money for. Certainly not for making loans to the real economy. My understanding is this: the banks needed the money to finance the current account deficit and the deposit flight. All of this had previously been taken care of by Target2. Deposit flight was about 80 BEUR. My source at the BoG told me that about 25 BEUR of that were directly transferred abroad (about 55.000 transactions which the government was going to look into with a view towards money laundering and tax evasion…). About 50 BEUR went into foreign portfolio investments at Greek banks. And some of it found its way under mattrasses, of course. What they all have in common is that they were a protection against a Grexit (and against Greek taxation).

    Whether it is the guarantee of the state or the BoG, or whether it is Target2 obligations of the BoG, they are obligations of ALL Greeks. If the primary use of these funds was to facilitate Grexit-protection, then ALL Greeks went on the hook for the FEW Greeks who had something to hedge against a Grexit. Never have so few owed so much to so many…

    One question has baffled me from the start: when a state has to do so much for the banking sector as the Greek state had to do, the state normally gets its “pound of flesh” in return: full ownership for sure and perhaps even direct liens on bank assets. Somehow I get the feeling that the Greek state did it free of charge (much to the happiness of bank owners) or even at a loss. To explain that will be an interesting subject for future economics courses at Greek universities!

    • Quite right Klaus. But there is something new here. That at the time when re-capitalization was effected with the taxpayer’s 41 billion in that same year the state guaranteed bond issues continued as of the recap never happened.

    • The fact that the amount of new capital share issuance for Piraeus in the amount of 1.75 Bil euro exactly equals the 1.75 Bil. euro claimed by the NYTimes article as the phantom bond financing is uber red flaggish.

      I think you are jumping into conclusions and can’t contain spilling personal bias which obviously has been fermenting inside you for a very long. long time.

  21. Are you confusing new share issuance (i.e. dilution of old shareholders) with phantom bonds? In the case of Piraeus:

    on  March  06,  2014,  the  Board  of  Directors  of  Piraeus  Bank  has  decided  to  convene  an 
    Extraordinary General Meeting of the Shareholders, which will take place on March 28, 2014 in 
    order to approve a share capital increase of the Bank up to €1.75 bn in cash via the issuance of new 
    ordinary registered shares  and  abolition  of the  pre‐emptive rights  of the  existing shareholders. 
    Further  details  regarding  the  share  capital  increase  are  provided  at  the  following  link:  On  the  same  day,  the  Bank  published  the  Press  Release  and 
    Presentation which addressed to the investment community regarding the Bank’s Full Year 2013 
    Financial Results.

    • BTW, Piraeus’ take on the use of the 1.7 Bil. new share capital increase is as follows:

      Piraeus Bank’s Board of Directors decided to convene an Extraordinary General Meeting which will take place on March 28, 2014 in order to approve a capital increase in cash in the amount of up to €1,750 mn, with the aim to repay in full the outstanding €750 mn Greek State preference shares, to cover the capital needs (€425 mn under the baseline scenario and €757 mn under the adverse), as  Piraeus Bank Group determined  by  the  Bank  of  Greece,  and  to  significantly  enhance  Piraeus  Bank’s  capital  base 
      transforming it to one of the most capitalized banks in Europe under the new Basel III framework. 
      At the same time, Piraeus Bank announced its plans to proceed with the issue of a senior bond via public offering in the debt capital markets and subject to market conditions. For this reason, in early March 2014 the Bank realized meetings with fixed income investors (roadshow) in selected European cities. Following the meetings, the Bank will determine if a public EUR senior unsecured transaction might follow, diversifying its liquidity sources. 
      Regarding the fundamentals of the Greek banking market, it should be noted that in 2013 the total outstanding  loan  balance  decreased (‐5%). Whereas total  deposits  both  in the  private  and  public sector recorded an annual increase of 2%. The aforementioned increase in deposits was accompanied by the significant reduction of the Greek banks’ refinancing from the Eurosystem (ECB and ELA) which amounted to €73 bn in December 2013 compared to €121 bn in December 2012 and €136 bn in June 2012, displaying further downward trends as activity has restarted in the secured interbank lending (EFSF  bonds)  with  counterparties  other than  Central  Banks  while  at the same time  conditions of economic environment gradually improve. 

    • This is irrelevant. The sum of €1750 million that I mention is in addition to the share issue and concerns a phantom bond.

    • Yani:

      My understanding in a very simplified form is as follows:

      Greek banks engaged in new capital share issuance ( a mandate by Troika) aimed at fortifying their Tier 1 capital (for some reason there is a European obsession with overcapitalizing banks which does nothing to a bank’s liquidity towards lending). This is a purely defensive mechanism designed for a “just in case” new global episode a la 2008.

      Some Greek banks such a Pireaus also issued bonds designed to retire existing preferred bonds in favor of the Greek state (a pre-2009 obligation recorded in the books and which obligation Greek banks asked repeatedly to be written off as part of the haircut but the Greek state + Troika refused to do ). For banks it made sense to replace old preferred debt costing them 9%+ with new bond debt costing 6+%.

      The state benefited from such bond replacement because it received an amount equal to the old preferred bond balance and thus obtained new funds to be used as a cushion towards future Troika demands for covering fiscal holes in 2015-2016.

      I have difficulty following this “phantom bond” thing. It sounds like you consider the act of replacement as an act of phantom issuance. Are you sure about this? And where is the back up for such claim.

  22. I am beginning to think that with ECB so caught up in massive fraud and politically unaccountable conduct, it is time for the euro to be abolished. This goes against all my previous views, but the evidence has amassed that we cannot expect our politicians to reform or obey basic democratic and legal principles.

    Of course, Greece should not be the first to leave the euro: it has to be a major player, whose new currency would not be much lower than the current euro. Then, with any luck, the whole eurozone pack of cards will collapse.

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