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A protester clashes with a police officer in Athens' central Syntagma (Constitution) Square June 15, 2011. (YANNIS BEHRAKIS/REUTERS)
A protester clashes with a police officer in Athens' central Syntagma (Constitution) Square June 15, 2011. (YANNIS BEHRAKIS/REUTERS)

Eric Reguly

In the EU, banks' armoured cars drive over the taxpayers Add to ...

It is the unwritten rule in the global corporate jungle that three beasts rarely get harmed: oil companies, defence contractors and banks.

Countries are invaded to make the market safe for Big Oil. Defence cutbacks, at least in the United States, are so rare as to be laughable. And banks? Just look at Europe, where the operating principle is to protect the banks and their bondholders at all costs, then bleed the taxpayer white to pay for the effort. No wonder Greece, Ireland and Portugal - the euro zone trio "rescued" by bailout loans - are still sinking.

In each of the three, but mostly in Greece and Ireland, there is no sense of shared sacrifice. Everyone - politicians, tax evaders, teachers, executives, bankers - is responsible for their countries' financial and economic calamities. Yet it is the European Union banks and their senior creditors who are suffering the least. Their gain comes from everyone else's pain.

European Central Bank president Jean-Claude Trichet will not hear suggestions of a Greek debt restructuring as Athens tries to negotiate a second bailout package.

His fear is that forcing private bondholders to take losses would destroy the Greek banks and severely damage the rest of the European banks with heavy exposure to Greece, potentially triggering a second European financial crisis (Royal Bank of Canada's investment arm estimates that European commercial banks hold about €90-billion [$125-billion]of Greek sovereign debt). Mr. Trichet's probable ECB successor, Bank of Italy boss Mario Draghi, has endorsed the ECB party line.

If the European banks and their bondholders are to be protected, the costs of the bailout, by definition, have to be borne by the taxpayer. Based on the latest economic and employment figures, the taxpayer is getting hammered as the austerity programs demanded by the EU, the ECB and the International Monetary Fund kick in with a vengeance.

The latest Greek labour and economic data are grim. The unemployment rate has climbed to 16.2 per cent. Among the young (15 to 24 years old) it is 42.5 per cent, up from just under 30 per cent in 2010. For workers between 25 and 34, the rate is 22.6 per cent. First-quarter year-over-year gross domestic product contracted 5.5 per cent, against the forecast 4.8 per cent.

As GDP sinks, the unemployment figures will almost certainly get worse, dooming an entire generation of young, educated workers to the dole. No surprise that the protests and strikes are getting bigger and angrier. On Wednesday, Athens was paralyzed by a 24-hour strike that turned violent. Austerity programs and employment growth almost never go hand in hand.

The shakedown of the Irish taxpayer is even less fair, to the point of cruelty. That's because Ireland did not have an economic crisis so much as a bank crisis, one aided and abetted by the government. Dublin not only guaranteed bank deposits (which it had to do); it guaranteed most of the banks bonds, made a €40-billion commitment to buy dud bank loans and committed a similar amount to recapitalize the banks.

The result was catastrophic. The cost of the bank rescues more than doubled Ireland's 2010 budget deficit to an astounding 32 per cent of GDP and pushed up its total public debt to GDP to almost 100 per cent from 65 per cent a year earlier. "The government got into debt by taking over its banks' debts. In an unfathomable act of charity, this was done only to save the French and German banks," said Marshall Auerback, global portfolio strategist at Madison Street Partners, a Denver hedge fund.

Who is paying for the reckless behaviour of the Irish banks? The Irish taxpayer, of course. Ireland is still in recession. The unemployment rate is 14.7 per cent and the jobless are leaving the country in droves to find work. "Writing assets down to fair value and then recapitalizing the banks should be the first priority in restoring economic growth after a banking crisis," Lombard Street Research economic consultant Leigh Skene told The Guardian. "Sadly, Europe went in the opposite direction and tried to ensure that no bank, regardless of how insolvent [it was] defaulted on its liabilities."

The German and Dutch governments have emerged as the voices of sanity in the debt crisis. They want bondholders to share some of the burden in the next Greek bailout. Their idea is to induce private bond investors such as banks and pension funds to swap their Greek bonds for new ones with maturities that are seven years longer. The ECB has rejected the idea.

Unless a compromise is found in the next few weeks, Greek taxpayers will suffer the equivalent of medieval torture to keep the European banks intact. Ditto Ireland and Portugal. Impoverishing countries to protect bondholders is not just immoral, it is economically counterproductive. The deepening recession - and social unrest - in Greece tells you that.

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