Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

This time PSI would be the cornerstone of the entire deal. The haircut would be deep. Banks and their shareholders would have to recognize tens of billions of euros in losses. Rumor had it that the Germans were pushing for 60 percent. The creditors, negotiating from offices in the basement of the EU’s Justus Lipsius building, held out for less, and they were a powerful group. Despite the ongoing sell-off of peripheral bond assets, in 2011 all the major banks of France, Germany and Italy still held Greek bonds. So too did Greece’s own banks, major insurance funds and American hedge funds. To shift this weighty coalition of financial interests it took not only financial inducements but also a forceful personal intervention by Merkel and Sarkozy. At 4:04 a.m. on the morning of October 27, a deal on “voluntary bond exchange” at 50 percent was announced.38 The plan promised to reduce Greece’s debt below 120 percent of GDP. To tide it over Greece was to receive another 130 billion euros in funding, bringing the total in emergency loans it had received since 2010 to 240 billion euros, or more than 100 percent of Greek GDP. To contain the fallout from this momentous decision, all other euro area member states solemnly reaffirmed “their inflexible determination to honour fully their own individual sovereign signature.” The EFSF was to be boosted to close to 1.2 trillion euros by means of leverage or by using its resources not to make loans directly but as an insurance fund to cover...