Friends and journalists often ask me to describe the worst aspect of my negotiations with Greece’s creditors. Not being able to shout from the rooftops what the high and mighty were telling me in private was certainly frustrating, but worse was dealing with creditors who did not really want their money back. Negotiating with them, trying to reason with them, was like negotiating a peace treaty with generals hell-bent on continuing a war safe in the knowledge that they, their sons and their daughters are out of harm’s way.

What was the nature of that war? Why did Greece’s creditors behave as if they did not want their money back? What led them to devise the trap in which they now found themselves? The riddle can be answered in seconds if one takes a look at the state of France’s and Germany’s banks after 2008.

[...] Overnight, France’s main banks would be facing a loss of 19 per cent of their
‘assets’ when a mere 3 per cent loss would make them insolvent.

To plug that gap the French government would need a cool €562 billion
overnight. But unlike the United States federal government, which can shift
such losses to its central bank (the Fed), France had dismantled its central bank
in 2000 when it joined the common currency and had to rely instead on the
kindness of Europe’s shared central bank, the European Central Bank. Alas, the
ECB was created with an express prohibition: no shifting of Graeco-Latin bad
debts, private or public, onto the ECB’s books. Full stop. That had been
Germany’s condition for sharing its cherished Deutschmark with Europe’s
riff-raff, renaming it the euro.

[...] France’s top officials knew that Greece’s
bankruptcy would force the French state to borrow six times its total annual tax
revenues just to hand it over to three idiotic banks.

It was simply impossible. Had the markets caught a whiff that this was on the
cards, interest rates on France’s own public debt would have been propelled
into the stratosphere, and in seconds €1.29 trillion of French government debt
would have gone bad. In a country which had given up its capacity to print
banknotes – the only remaining means of generating money from nothing –
that would mean destitution, which in turn would bring down the whole of the
European Union, its common currency, everything.