Are the European banks saving Greece or saving themselves?

The financial institutions overseeing the bailouts are ignoring the domestic impacts of austerity measures.

Who is rescued by the bailouts of the European debt crisis? The question won't go away. Last week, Greece was granted a second bailout in order to avoid a catastrophic disorderly default. Few observers believe it will be enough to avoid the need for a third bailout, at least in the medium term. This week, the story of the euro crisis has shifted to Portugal as expectations rise on the financial markets that she too will need a second bailout. It wasn't supposed to be like this: Greece's first bailout almost two years ago was to be a one-off; more recently, EU leaders have repeatedly insisted that there would be no repeat of its second package. Once again, they appear King Canute-like: whatever their claims, they cannot turn back the waves of scepticism from the markets.

The Greek banks – vital to the provision of new investment in an economy facing a sixth year of continuous recession – have certainly not been "rescued". The haircuts on the Greek debt of 53%, imposed in the name of PSI (private sector involvement), have severely damaged them, but this is compounded by their losses of about a further 20% on the new bonds they were forced to accept. Read More