Financial political power and the role of the Institute of International Finance in the Greek debt restructuring

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Please cite the paper as:
Manolis Kalaitzake, (2014), Financial political power and the role of the Institute of International Finance in the Greek debt restructuring, World Economics Association (WEA) Conferences, No. 2 2014, Greece and Austerity Policies: Where Next for its Economy and Society?, 20th October to 21st December 2014

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Abstract

Much has been written about Greece and the largest debt restructuring in history that occurred as part of the Eurozone crisis in 2012. Nevertheless, little attention has been paid to the precise role of the financial industry representative, the Institute of International Finance (IIF), throughout these restructuring negotiations. By most accounts the role of the IIF is either largely ignored (Porzecanski 2012) or else the organisation is portrayed as little more than a reflexive defender of financial interests (Zettelmeyer et al. 2012). I argue that this latter perspective is a greatly simplified interpretation of what was in fact, a sustained and highly complex political engagement on the part of the financial industry’s leading private business association. On a theoretical level, the case of Greek debt restructuring highlights the tension between the automatic and impersonal forces of financial market sentiment, and the conscious and intentional engagement of financial sector elites on behalf of the general interests of the financial industry. EU authorities had resisted debt restructuring until the absolute final moment for fear of destabilising financial markets and setting off a chain reaction of capital flight across the Eurozone economy. Paradoxically, while major European banking institutions were a prime beneficiary of this structural power – allowing them to slowly offload approximately €100 billion of private debt exposures – they were also substantially threatened by these market forces which engendered the prospect of a disorderly default and a potentially cataclysmic Eurozone break-up and/or regional banking collapse. For this reason, the IIF was invited in by EU authorities to act as representative on behalf of the industry in order to facilitate concerted action by financial institutions and negotiate a voluntary write-down that would be acceptable to the majority of Greek creditors. The IIF proved highly successful in securing agreement on a substantial creditor write-down – offset in part by a range of generous creditor-friendly inducements – but also agreeing to coercive legal action by the Greek Government in order to sideline a minority of ‘rogue’ financial actors that could scupper the deal. The case thus provides evidence of significant divisions between regulated (i.e. major banks) and non-regulated (i.e. ‘vulture’ hedge funds) elements of the financial industry and their competing prerogatives over the long term stability of financial markets.


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