eurozone

Alexis Tsipras, the prime minister of Greece, has called a national referendum this Sunday to call the bluff of the European Union and International Monetary Fund who are trying to force his country to accept severe austerity in return for effectively rolling over much of the countries' debt.

Today Greece owes its creditors EUR323 billion ($366 billion), some 175 percent of the country's gross domestic product. How did it end up owing so much money?

"We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there," Joseph Stiglitz, former chief economist of the World Bank and a Nobel Prize winner in economics, wrote in the Guardian newspaper today. "It has gone to pay out private-sector creditors - including German and French banks."

A recent CorpWatch report - The EuroZone Profiteers - can help shed further light on this matter. While it's true that corrupt Greek politicians borrowed billions for shaky government schemes from these banks, there was a very good reason that the financiers made these rash loans: they were under pressure from European Union bureaucrats to compete in a global marketplace with U.K. and U.S. banks.

Take the German banks. While Anglo-American banking is dominated by many branches of a few major banks, Germany had some 4,000 unique institutions in 1990 that made up a three-pillar system of savings banks, co-operative banks, and private banks. These banks lived modestly on miniscule profits of one percent in comparison to Britain's four mega-banks, which boasted returns as high as 30 percent on equity. Under pressure from Brussels, the German government agreed to push some of the bigger banks to become more "market oriented" by withdrawing state guarantees known as "anstaltslast" and "gewahrtragerhaftung" to back them up in times of failure.

Likewise Prime Minister Jacques Chirac began a process of privatizing French banks in the late 1980s to "shoulder its responsibilities to the business community." (The banks that had been nationalized over time by General Charles de Gaulle in 1945 and by President Pierre Mauroy in 1982) Like the Germans, the French banks enjoyed state protection, and thus were easily able to raise money to lend out.

The European Union was firmly behind this since they wanted European entities to compete on a global stage. "Sometimes it is said that competition is not to the benefit of all: It can favor larger firms, but hurt smaller businesses. I do not share this view," Mario Monti, the European competition commissioner, said in October 1997. "Naturally, competition will reward greater efficiency. It will put pressure on less-performing companies and on sectors already suffering from structural problems."

But French banks knew that they could not make billions by competing in Germany, nor were German banks expecting to vanquish the French. They looked instead to a simpler and easier market to loan out the plentiful supply of cash they had - the poorer, mostly southern European states that had agreed to take part in the launch of a common currency called the Euro in 1999.

The logic was clear: In the mid-1990s, national interest rates in Greece and Spain, for example, hovered around 14 percent, and at a similar level in Ireland during the 1992-1993 currency crisis. So borrowers in these countries were eager to welcome the northern bankers with seemingly unlimited supplies of cheap cash at interest rates as low as one to four percent.

Take the case of Georg Funke, who ran Depfa, a German public mortgage bank. Depfa helped Athens get a star credit rating, raised EUR265 million for the Greek government railway, helped Portugal borrow EUR200 million to build up a water supplier, and gave EUR90 million to Spain to construct a privately operated road in Galicia. For a while, the middle class in Greece like the middle classes in Spain and Ireland, benefited from the infrastructure spending stimulus. When Depfa nearly collapsed in 2008, Funke was fired.

Or take the case of Georges Pauget, the CEO of Credit Agricole in France, who bought up Emporiki Bank of Greece for EUR3.1 billion in cash in 2006. Over the next six years, Emporiki lost money year after year, blowing money on one foolish venture after another, until finally, Credit Agricole sold it for EUR1 - not EUR1 billion or even EUR1 million - but a single euro to Alpha Bank in October 2012. Credit Agricole's cumulative loss? EUR5.3 billion.

Money poured in from other banks like Dexia of Belgium. Via Kommunalkredit, Dexia loaned EUR25 million to Yiannis Kazakos, the mayor of Zografou, a suburb of Athens, to buy land to build a shopping mall. It made similar loans to other Greek municipal authorities including Acharnon, Melisia, Metamorfosis, Nea Ionia, Serres, and Volos.

"The tsunami of cheap credit that rolled across the planet between 2002 and 2007 ... wasn't just money, it was temptation," financial writer Michael Lewis wrote in Vanity Fair. "Entire countries were told, "The lights are out, you can do whatever you want to do, and no one will ever know."