How the Greek Bailout is Like the TARP You Hate

Last Updated May 10, 2010 11:37 AM EDT

In the wee hours of Monday, European leaders went "all-in" in their game of Texas hold-'em with the financial markets. But their success in warding off an immediate panic obscures its similarities to the big U.S. bank bailout we love to hate.

The price tag of €750 billion converts nicely into almost $1 trillion, a figure that was enough to generate enough "shock and awe" among traders that markets are rallying today.

Whew. A harrowing Monday was on the horizon.

Financial marketers are abuzz with all sorts of questions as to exactly how this bailout -- a mix of EU and IMF lending facilities -- will work. And they are trying to figure out what government bonds the European Central Bank will be purchasing, one facet of the package that can probably kick in relatively quickly.

But the broad outlines here are clear, and it is difficult not to think of the TARP, Henry Paulson's $700 billion program to rescue the financial system in the fall of 2008.

Think of it this way: when banks made foolish bets on the U.S. housing market, the government responded by bailing out the banks and leaving the homeowners on the hook for their money, although various programs have tried to limit foreclosures -- so far without a lot of a success. Wall Street unquestionably got a better deal than Joe Homeowner.

In the case of Greece, both parties to the foolish bet -- Greece and its creditors -- will get bailed out. But don't celebrate a victory for justice.

The salient points are thus:

1. Greece's creditors, to a great degree European banks, got rescued from their decisions over the last 10 years to feed the borrowing binge in Greece, long regarded as a disaster waiting to happen. The money will be used to pay off creditors as Greek debt comes due. Since the facility is also designed to ward off similar problems in Spain, Italy, Portugal and Ireland, it is a rescue of these similarly profligate countries and their creditors as well. And since American banks are heavily exposed to their European colleagues in myriad ways, they get off the hook too.

Feeling warm and fuzzy yet?

2. The problem of Greece's basic solvency has been kicked down the road, presumably to a time when financial markets are more tranquil, and some sort of debt workout can be arranged. Why will this package not save Greece? I defer to the acerbic words of Carl B. Weinberg, chief economist at High Frequency Economics:

You cannot make a bankrupt company solvent by lending it more money. Similarly, you cannot make a nation that is incapable of servicing its accumulated debt more creditworthy by extending it more credit.
But, to be fair, the debt workout may yet come.

3. Whatever the final cost to taxpayers, it will be higher than it needed to be. The numbers just got bigger and bigger -- first €20 billion then €40 billion and now €750 billion. Dithering doesn't really pay off in a crisis, and German Chancellor Angela Merkel probably lost a key state election on Sunday precisely because she hemmed and hawed over how to handle the Greece situation.

This package came as part of a race against time, announced just before Asian markets opened. So -- again to be fair -- Europeans should get a chance to pretty it up a bit before we pass final judgment. Paulson wanted the TARP to simply buy bad assets from banks and leave taxpayers on the hook, but public pressure led him to recapitalize banks instead, improving the effect on the public treasury and giving the government some leverage over the banks.

Okay, Europe -- you've calmed down financial markets. Now, get to work.

  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.