It's hard to figure out amid all the television footage of the soaring stock market and the rioting in Greece, but both an article in the Financial Times by Arvind Subramanian of the Peterson Institute for International Economics and a "Heard on the Street" item in today's Wall Street Journal argue that what's being "bailed out" by this European deal to rescue Greece isn't actually Greece itself but the holders of Greek government bonds, who include a lot of French and German banks. As the Journal puts it: "Any restructuring of Greek debt, for example, could force France and Germany to recapitalize some banks, according to Citigroup Chief Economist Willem Buiter. Banks in those countries have more than €110 billion ($140 billion) in Greek exposure, although Greek sovereign-debt holdings vary from bank to bank." And as Mr. Subramanian puts it:
The recently negotiated IMF program changed that situation in one important way: the burden of adjustment is now being spread to include European ($105 billion) and international ($40 billion) taxpayers. China, India, and Brazil, among many others will contribute—which is as it should be—given their growing economic status and the cooperative nature of the endeavor. But there will still be no contribution from European banks that hold large amounts of Greek debt. That taxpayers in much poorer countries should contribute so that rich financial institutions can get away with reckless lending seems unfair and perverse. One might call this "immoral hazard": heads the banks win, tails much poorer taxpayers thousands of miles away pick up the tab.