The rumors about Greece’s second bailout, worth €60 billion ($86 billion), won’t go down easy in Germany, where taxpayers are particularly outraged at the idea of shelling out more hard-earned cash for the sake of Greek salvation. So German officials are pushing for something a bit more politically palatable: getting Greece’s creditors to postpone the payback date on Greek bonds to 2012 or later. That would give Greece a bit more wiggle room in the short-term, though it’s unlikely to prevent an eventual Greek default.
The move hints at an interesting phenomenon raised by the FT‘s Gillian Tett this week called “financial repression.” It’s a term borrowed from Carmen Reinhart and Belen Sbrancia, who wrote a recent paper for the IMF describing the tendency of governments to wash their hands of public debts by craftily forcing them onto banks and citizens. From the 1940s to 1980s, governments managed to do this by erecting capital controls and interest rate caps, explains Tett, which channeled investors into low-yielding bonds and, coupled with rising inflation, shifted public debt into private hands:
One consequence of the controls was they created a captive domestic audience for those bonds. Better still, because these bonds paid a yield lower than inflation, whenever those captive investors bought bonds, they effectively paid a hidden subsidy to the government, enabling them to reduce the debt.
These days, governments are resisting capital controls and seem to be keeping tabs on inflation. But the prospect of”financial repression” (restricting investor choice, basically) still looms. Germany’s urging banks to continue holding onto Greek bonds is an example, even though private banks are pushing back on such moves. In January, JPMorgan Chase’s Jamie Dimon warned the Davos crowd that any restructuring of eurozone debt (which is essentially code for what Germany is proposing) could do more harm than good, sparking bank runs and wreaking havoc on markets. But with political pressure mounting among budget-conscious electorates, governments may get their way. Says Tett:
Central banks such as the Federal Reserve have already been buying bonds. And there are now some intriguing hints that private sector institutions are being urged to hold more bonds. In the U.K., the introduction of financial reforms has forced banks to purchase more gilts. Similar steps are afoot in other parts of Europe and in Washington, some policymakers are quietly mulling whether U.S. banks and pension funds could – or should – follow suit, especially if foreign buyers (who own half the U.S. debt) stop buying U.S. bonds.
The bottom line: If the choice comes down to “financially repressing” private investors by forcing bonds onto their balance sheets or bailing out more governments and banks, taxpayers are going to end up paying the price either way.