Saturday, June 23, 2012

A very simple question (seemingly...)

I have a friend who was born and raised and formed and shaped in the American Mid-West. Common sense pure. We both worked many years for one of the US money center banks headquartered in the Mid-West. For a few years he was my boss. During the 1970s, he spent a few years running the Greek operations of this bank (3 branches). After retirement, he returned to his small hometown in Wisconsin where his family owns a community bank which he still runs today. A community bank takes in deposits, makes loans and provides banking services to customers. Actually, not a bad business model for a bank...

He recently asked me the following question per mail:

"For me, I can't understand really why everyone doesn't just face the facts, default on debt and get out of the Euro.  Yes, I understand that much of the debt is held by banks and they would like to delay taking their medicine, but sooner or later they are going to have to recognize reality.  Some of these countries simply don't have the means, or the stomach, to meet their obligations. Perhaps you can educate and enlighten me".

I enlightened him that such basic common sense is not part of the repertoire of EU-elites. And recognizing reality would be far too simple and unsophisticated an approach for EU-elites who pursue much greater and nobler goals! (like saving the Euro and the Eurozone...).


  1. Mr. Kastner, a debt that can't be paid, won't be paid. Regardless of what Mrs. Merkel or Schauble think. Leaving the euro would mean the poor getting hit even more and rich getting richer. But, with this policy, it's not a matter of if, it's a matter of WHEN.

    Already, the 20-year olds are paying the conseguences of mainly the 1980-90 Papandreou's socialist rampage, when they weren't even born. It is very questionable whether we have the right to inherit the same weight to unborn children too, because with the current plan, Greece will be in austerity untill the Second Coming.

    One of the clauses of the memorandum, is, that starting from Jan 1 2013, Greece will service the debt with priority and whatever is left will be given to salaries and pensions. And that Greece will make primary budget surplus which, again in priority will be given to debt repayment.

    This is a clock bomb. Why? Because in the budgets, it is also calculated an annual income from privatizations. I think about 3 bln per year, but i am not sure about the number. Anyhow, it is certain, given the condition of the stockmarket and the uncertainty about the grexit, that such targets won't be met. When the greek pubblic opinion will learn from SYRIZA, that the country has primary surplus, but the wages and salaries need to be cut, because we have to pay Mr. Merkel first, there will be revolution and Mr. Tsipras will become, as we already call him, Comandante Che-pras leading them.

    The patience of the Greeks is expiring and while i am not in favour of impulsive actions, i can see them happening. The private sector has already sustained irreparable damage in these 3 years, because of the unrealistic plan. I would call realistic what Germany took after WWII. Nothing less given the circumstances. Tonight, a greek IMF correspondent said, that it is probable the IMF will ask further salary reductions in the private sector. It will be very very very difficult for the gov to do it, especially at the moment that NOBODY in Greece believes that we can pay this debt. It's a death spiral.

    Greece before the elections was already very close to primary budget surplus. When it happens, Greece will probably ask new debt restructuring or default alltogether. There is simply so much resentment and political impossibility to follow this "austerity" to 2060.

    Also, as i said, this tactic of "putting impossible terms, waiting for the plan to fail, then giving a bit more time, fail again, then a bit more", leads to irreparable damage to part of the economy. It's like giving massive dose of a medicine to a patient, wait for kidney failure and then saying "ok, now we reduce a bit the dose". Kidney failure already happened, doctor, too late...

    I will also say this: Unlike Mrs Merkel, who, apparently likes the idea of Purgatory, Greeks do not believe in Purgatory, that's an exclusive catholic/protestant invention. Greeks believe either in heaven or in hell. And the time is closing that they will prefer Mr Tsipras to lead them to heaven even if they must pass through hell, rather then live forever in Mrs Merkel's Purgatory. (Of course Mr Tsipras will disappoint them, but, someone else will take over after Mr. Tsipras).

    The main fault is on Mr. Papandreou. He should have done what his father would do in 2009. Ask something doable or default immediately, with 120% debt, 98% of which was under greek law (and good luck trying to win in greek courts against the greek state), instead of now that the debt has passed to british law and is 165%. If we exit the euro, i am certain Mr. Papandreou will flee the country because it is close to certain that the people will ask for his trial.


  2. Oh, in case your friend wonders why Greece didn't default in 2009.

    1) Because Mr. Papandreou didn't have the guts to do so, knowing the people would turn against him, who got elected with the motto "there is money" (he was actually saying that 31 bln was ready for him to go grab).

    2) Because Mr. Papandreou, lacks the keen political sense of his father (as well as his economics knowledge) to go and tell the Europeans: "Listen gentlemen, both my country and your banks have apparently made a serious mistake. Now, for my people's best interest, i must default now, while i can kill easily most of my debt. Unless you want to come to an acceptable agreement, your banks should also be prepared to pay for their mistake just like my country will. Talk it between you and see you in a week".

    His father may have destroyed the country, but he knew how to do these things. His most memorable moment:

    1. I don't think the words you used under point (2) are the words one should use in situations like this (there are other ways to communicate the same thing) but I definitely agree with the content. Mind you, though, the challenge for the Greek economy wouldn't have changed a bit. One could forgive Greece its ENTIRE sovereign debt and that challenge would still be the same. Until Greece figures out a way to produce more of the things which it consumes and which it plans to export (i. e. until Greece finds a way to create jobs), the country will continue to depend on a lifeline from abroad. Perhaps the articles below are of interest to you.

      PS: thanks for the article. Seems to have been his finest hour, indeed!

    2. Dear Mr. Kastner,

      I am not a politician, so the proper diplomatic wording isn't my expertese. I said what the substance was behind the diplomatic words. Or to put it in another way. What did Mr. Monti in reality said to Mrs. Merkel the other day? In essense, he said "This summit result, is unacceptable for my country's interests, i don't sign anything and we both face the conseguences". He may have said it diplomatically (actually not so much), but that is what happened...

      I am very well aware of the status of the greek economy, but one must also see the picture in the society.

      1) Mr. Papandreou's big error was accepting a plan with a reduction in deficit from 15,4 to 3% in 3 years, in an economy already is recession and knowing that himself and his party, didn't have the political stomach to do that properly. Already we are talking world record reduction, expecting PASOK to do it properly, was, irrealistic to say the least. Now, the first year, he did reduce it by 5%. But it was like doing a surgery using a butcher's knife. The troika didn't seem to mind either about WHAT he was hitting, as long as he was reaching the 5%. Of course, in the 2nd year, after the blunder, he was in for a surprise...

      2) Which brings us to the 2 "political surprises": SYRIZA and... Golden Dawn. The most preoccupying thing isn't their rise per se. It is the nature of their voters. They both sweep the ages 18-35, with SYRIZA being prevalent up to 55. New Democracy basically won thanks to the votes of the over-55 years of age. The fact that SYRIZA and Golden Dawn sweep the young ages, is an explosive mixture. Greece has had once civil war, a second one must be avoided.

      3) Golden Dawn, KKE (the communist party), Independent Greeks and SYRIZA have something in common. The first 2 are openly in favour of Grexit (the KKE also from EU and NATO). Independent Greeks and SYRIZA claim to want the euro, but their policy says otherwise. In SYRIZA there are also prominent MPs which pubblically have said that exiting the euro is the only way for Greece. Their position is backed up by several economists, not necessarily belonging to SYRIZA openly, who are professors in Britain, USA.

      Personally, i was against the entrance of Greece to euro, against the hosting of Olympic Games, but in both cases, PASOK had a different opinion. Since history can't be unmade, i am not in principle in favour of leaving the euro either. But, there are some things to consider too:

      - Can the political establishment carry out such a program (political cost), while the opposition is shooting at them all the time? If they fail badly and are led to Grexit, the only obvious recipients of the wrath will be SYRIZA+KKE and Independent Greeks+Golden Dawn.

      - The pro-drachma economists, make some valid points: a) not having control of the currency and being the euro high (consider it was 0.8:1$ and now it is 1.24:1),will not allow Greece the recovery, b) Investments will avoid Greece as long as it is unclear the threat of Grexit (There have been in the last 2 years cases of interests by Arabs, Russians, French, but they seem to prefer the "wait and see" strategy), c) Greek banks are as if they didn't exist because of the deposits' bleeding (before the last elections only 6bln went out, 2bln returned), d) There is no chance that Greece can service annually the debt as it is scheduled now and this is admitted by New Democracy economists too, e) there is no chance at all that without a prolongation the current program can hit target, as admitted by the newly appointed New Democracy viceminister of finance, f) the internal devaluation has failed, in the sense, that income fell, but prices didn't,on the contrary there is still inflation and deepening recession (depression really).

      I can add myself, that "There is no chance Greece can sell 50bln assets or come to stable 3-4% annual growth rate as scheduled currently in a couple of years".


    3. (continues here)
      - Even if we accept, that Greece will be running huge primary surplus every year up to 2020 in order to be at 120% debt/GDP and then for another 20 years in order to repay re-scheduled debt and bring it to 60% as per new treaties, i can't see what party will be able to pass that as "normal policy". It sounds more like political suicide.Greece must be the first country ever to have been "stained" in the markets with credit event and find herself with 165% debt afterwards, after having lost 20% of GDP and running 7% recession (and this year will end the same). The pro-drachma economists say "what more do you want to see that a plain default in 2009, would have caused the same but would have also rebooted the economy). I recall also an ex German banker (was it D-Bank or Bundesbank, i am not sure), who rightfully said at the start that this bailout, wasn't about saving Greeks but banks and rich Greeks (who had the time to send their cash to Switzerland). He was right from the point of view, of either it is 50% internal devaluation or 50% external devaluation, your money is gone. In the first case gradually in the second overnight.

      - After all this, my main concern is: either way, reforms are needed and living stardard falls.What i fear is who will be the one doing them. A Grexit at the hands of ND/PASOK will mean the "crazies" taking over and in the turmoil anything is possible.An almost candidate of SYRIZA (he was put on the lists for a while and removed as soon as they found out), has a video on youtube calling for "urban warfare and rebellion", with "grenades, knives, etc". Possible outcome could be military dictatorship.

      On the other hand, a Grexit on the hands of SYRIZA would probably bring voters back to the "sane parties" and unite the people, since the extremist populism would have de facto failed to meet reality.

      This is why Mr. Papandreou has very big responsibilities. Because he put the country to this position,where it is stuck in the mud and risks even civil war.And this wasn't a hard to predict position.

      Now, imagine if Greece does,after these sacrifices, default and fall to a chaos on Tsipras' hands (Tsipras once said "Chaos is a good thing, as long as it leads towards left). It would have been 1000 times better an immediate default in 2009, where the country should have zeroed overnight the primary deficit and current account deficit, but at least, the debt would have been burnt easily and some things would be more clear for the population and for investors.

      It wouldn't be the first time either. Greece has already defaulted 5 times and recovered under much worse conditions than it was in 2009.But the point is, just like his father taught, when you read correctly the situation, you don't really have to press the trigger. Instead, now we have a bailout with: no jobs, depression, unsustainable debt, risk of civil war-dictatorship, risk of SYRIZA ruling (which would be destructive for the destroyed economy) and finally, default on a higher debt, which is under british law. Not very good plan...


    4. Mr. Kastner,

      For the history, Andreas Papandreou was a charismatic politician. He was also called by a US economist of the time, one of the best 10 economists in USA at the time Papandreou was teaching at Berkeley. But, power, corrupts. In order to live his "socialist dream", he threw out of the window economics. The bad isn't that he borrowed so much, it's that he didn't invest it in something productive. He build for example a far too extended health system that Greece couldn't and still can't afford, but nobody dares touch it, because it's the pride of PASOK.
      In foreign policy, he is also a hero figure in Cyprus. It was his idea to put Cyprus to the EU, he actually vetoed Turkey's Customs Union in exchange for Cyprus' taking candidate status and in order to stop turkish threats of war for any minor reason, he invented the "Common Defence Area Pact", where in case of attack to the greek cypriot state, Greece would get involved to the war. Because of that, a military airfield carrying his name was built in Cyprus and a naval base. The Pact, after his death was quietly put to death by his son. Which is why the father is still hero in Cyprus.


    5. Thanks for taking so much time to contribute. A couple more points.

      Mr. Papandreou's greatest mistake was not that he accepted something. It was that he left the impression as though Greece had no choice but to accept what it was offered. That is the greatest fallacy in a financial restructuring. The borrower always has ALL the choices in the world; he just needs to make sure that he brings them across the right way ("If I owe 100 Euros, I am nervous. If I owe 100 BEUR, the bankers are nervous...").

      Any sovereign government which goes into a debt rescheduling negotiation with the attitude "tell us what you want us to do" has lost from the start. I know that this may shatter dreams of a lot of people because, actually, being nice about something is very laudable. It is, but NOT in a sovereign rescheduling process. I am sure Mr. Papandreou had many competent people advising him of that (I know he had meetings with Bill Rhodes) but for whatever reasons he chose to be "nice". BIG mistake!

      The most important instrument which a government has when going into a rescheduling process is to have a plan to present to the creditors (you have to hand it to SYRIZA: their plan may be a bad one but they DO HAVE a plan!). Such a plan has to be convincing beyond doubt that Greece has a wonderful economic future ahead of itself and will return to a situation where it can service all of its debt but in order to get there, it needs support from creditors now.

      As you said, the Troika is concerned with deficit reduction so that the need for new loans is reduced. It's not really the Troika's job to tell a country how exactly to reduce the deficit. They only do that when not enough qualified ideas come from the country itself. Just think if the Greek government had said the following:

      "What determines Greece's future is not the immediate cuts we make now but, instead, the structural reforms we initate now. So we plan to go 'heavy' on the reform part and 'soft' on the cutting side. To cut 15% in 3 years is not sensible. Our expenses are not way of of line with EZ averages so we will reduce them only moderately overall but drastically reallocate them so that the monies are used more wisely. Our primary objective is not to cut more into the government's revenue base than absolutely necessary. On the revenue side we are way out of line with EZ averages. There we will accept all the help we can get in order to improve our revenues. But mind you, we will be heavy hitters with reforms and this is what we plan to do there..."

      I sincerely have no doubt that Greece could achieve near double-digit growth rates for a number of years. Why? Because (a) Greece's problems are so obvious that they don't need to be analyzed to death; they just need to get fixed; (b) Greece is in a catch-up mode and that is a wonderful base for rapid growth; and (c) Greece has never really made a serious effort to mobilize all its competitive advantages. Just imagine what could happen if it did!

    6. On Mr. Andreas Papandreou.

      From everything I have read and heard, he must indeed have been an unusual political talent. We had one of those in Austria in the 1970s, too. It was Bruno Kreisky.

      I think even Kreisky's greatest critics would agree that "he and his team" (that was his wonderful slogan!) introduced the post-WWII Austria into modernity. Some lasting (and very positive!) transformations of society. And always good for "quotable quotes" so that the journalists loved him.

      Despite all these good things about Kreisky (and as a young and impressionable person at the time, I was really taken by him), Kreisky planted some seeds into Austrian minds which are causing damage to this very day.

      Kreisky created the illusion in voters' minds that there was such a thing as a free lunch. One would only need to have the "right" government and material well-being and social welfare were guaranteed.

      Sometimes, a single phrase of a leader can accompany and shape people's minds for generations. Kennedy's phrase was "Ask not what your country can do for you. Ask what you can do for your country!"

      In the midst of a recession, the debate was on how to get out of it. The fiscal conservatives argued that Austria had to reduce its enormous public sector (more than 1/2 of the economy!) and to make it more productive. It came to a head when Kreisky addressed the workers at the country's largest corporation, the state-owned steel company which was losing money like there was no tomorrow. And then Kreisky spoke his Kennedy-phrase which has shaped voters' minds since then:

      "I lose much less sleep at night over perhaps a few billion more debt than I would lose if I had to fear unemployment".

      Result? Unlimited admiration and adulation by the masses. And a situation today which is different from Greece's only as a matter of degree but not as a matter of content!

    7. Dear Mr. Kastner,

      Mr. George Papandreou, was a lousy politician, with no stomach for tough decisions (unlike his father). He was "parachuted" in the party and made minister for a long time only thanks to his dad who was PM at the time. In his early political years he was doing sit-ins with union workers in the pubblic electricity company in a "political hippy-esque" atmosphere. I think his father also knew that he didn't have the fabric of a leader. Consider that his father didn't "inherit" him the party. As a matter of fact, Andreas once said "PASOK isn't inherited, gifted or cut to pieces". Oddly enough Mr. George Papandreou, effectively inherited PASOK, after being voted by the pubblic as leader, in an election with only runner.Himself...

      Andreas' main fault, is that he got "drunk with power" and enjoyed popularism. He had a very acute undestanding of pubblic sentiment and so knew what to give the people to make them happy. At any cost... A univ. professor and friend of his said last year, that in one conversation he asked him "Andreas, is it not bad to have such a rising debt"? Andreas according to him replied "Relax, the US has more debt that we do". Yes, a low debt doesn't mean anything, many underdeveloped or economically destroyed countries had zero debt (ex communist countries too), but the problem was what Andreas was doing with the new loans, together with the fact that for 10 years he was running primary deficits. Of course, he too, in a moment of consciousness had said "the debt either we will eat it or it will eat us".

      Andreas was also populist, but when on tight ropes had the ability to return to reality. Before 1981, he was advocating against the ECC of the time and the NATO. When he became PM he didn't leave either (although he did reduce the US bases in number and operation capabilities). Unlike Mr. Tsipras, he used populism combined with a brilliant use of greek language, mottos and rhetoric. A memorable "battle" in the Parliament was between him and Constantine Karamanlis. It is a legendary video document, of the 2 "greek political giants" of the time.

      When he became PM he agreed de facto with Karamanlis. But moments like that were of tremendous impact to the pubblic opinion and of great political effect. Mr. Tsipras today tries so obviously to imitate Andreas that is tragicomical. For me, who have seen Andreas alive it is a bad joke, but for a 20 year old that has never seen Andreas, Mr. Tsipras seems like a novelty and a "super politician".

      My main issue with all this, is, that we can't have Mr. Papandreou's debt eating 2 more generations of Greeks. The current one has to be sacrificed but lessen the burdon of the next ones.


    8. As for SYRIZA, i doubt they even know their own plan. SYRIZA up until yesterday was a small, obscure, extreme left party, with 12 lesser components (it's a coalition really). Out of the 12, i only knew 1. The further you dig into the other 11 the more you get surprised. They have conflicting views with each other. Even the MPs can't agree if they want the euro or not. Some are going pubblic saying they don't. One of the components is called "KOE" (Communist Organization of Greece). Before the elections, SYRIZA photoshopped a photo with Mr. Tsipras celebrating in front of their flags. They removed the communist symbol and left the flags with plain red in order not to scare voters away. USSR tactics, where people were disappearing from photos according to whether they were in the graces of the party leader...

      I still have no idea of what the other 10 components are of what (if) their program is. It is madness to even think that they could rule the country, but when someone is desperate, even them seem saviors.

      Now they say that next spring i think, they will make a new foundation as 1 party. God only knows what their "common" new political basis will be.


  3. You may also try and find some early reports by 2 american banks (i think one was Morgan Stanley), that in 2009 were predicting that had Greece made an immediate debt restructuring, their prognosis was that Greece would be out of the markets for 3-5 years. Now Greece will be out for at least 15 and the debt will be drowing probably 2 more generations.

    As far as i am concerned, my generation has the duty to stop that part.

    1. The Chief Economist of Citibank once said that the problem was that the Europeans didn't know that outside of Europe debt rescheduling have come a dime a dozen in recent decades. Having personally beein involved in the Chilean/Argentine reschedulings of the 1980s, I can definitely confirm that. A debt rescheduling is the most normal thing in the world when a country hits external payment problems. If handled well, default can be avoided (but doesn't have to be). The rescheduling process must be initiated as soon as one sees that an unstoppable run against the countries has started. I have argued that, for Greece, that would have been at the latest in early 2010.

    2. I fully agree, banks do debt rescheduling all the time, it's the most natural thing in the world.

      Now instead we are in a charade of multiple haircuts (because another one will happen either way).


    3. Furthermore, if I have a primary deficit of 5bn(which in either case must be eliminated) and am told by the troika to shrink wages in the private sector, i.e. lose direct and indirect taxes, have to spend more money to support collapsing social security and pension funds and have anyone who can, leave the country, thus defaulting in a few months with a 20 bn primary deficit, having sold even more public property for peanuts and have EU taxpayers even more irrate for losing even more money, I'd much rather default now, confiscate the property of anyone who ever voted for a deficit and start afresh.

    4. Dear Sir 8:08 AM,

      The primary deficit has actually fallen (of course, after the various cuts), so you wouldn't default after a few months with higher primary deficit. The rest of course is true, yesterday's survey says 68% of Greeks are below poverty line (as defined officially) and 64% of the youth up to 35 years declares ready to leave the country. And here is the big problem, along with the debt. Unemployment is projected to rise to 24% and recession will be at 7% at the end of the year (or worse). Deficit will be stuck, debt will keep rising, youth fleeing. Plan doesn't look good.

      This is where many leftist economists come and say "our primary deficit now is something less than 2bln. The troika asks us to cut another 11 bln in 2 years. So why not cut 2bln and send troika to hell".

      And there you have SYRIZA from an obscure party becoming the 2nd party...


  4. Well, intelligent conversation at last. It is refreshing to see people still using their brains. I have been perusing this and related blogs the last few days and it was eye opening. I decided to start commenting from this slightly dated post because I believe it encapsulates many facets of the present Greek and international problems.
    The above question is both naive and arrogant. Naive because it assumes that all political problems are sorted out, politics are completely stable, exciting the euro will be the reverse of entering and only economic considerations are relevant (just like Wisconsin?)This is not the case:if Greece leaves the Euro it will probably become a failed state, a kind of Somalia. The repercussions of such an event are unimaginable.
    It is arrogant because it assumes that the US is some sort of perfect place with he right to lecture the others: reverse the situation and think of Oklahoma during its banking collapse in 1984. Would he had suggested throwing Oklahoma out of the US? Arguments along the line that this is different to Greece only proves the arrogance. It was this combination of naivete and arrogance that led to the disasters in Iraq and Afganistan.
    I agree with the Herr Schäuble: the US should look after its own deficit, which is much larger than the EC one. I would also add that the US should be getting politically prepared for the day that the erosion of its superpower status will result in explicitly eating crow publicly. It will be very painful and destabilizing.

    1. Let me give one example of what the US could have done and didn't do, and if Europeans had acted accordingly we would all be happier today. Bear in mind that Greece is about 3% of the EZ economy (I have read somewhere) and California is, in its own right, the 8th largest economy of the world (I have read somewhere). So we can all agree that California is a rather important part of the US.

      California was de facto in default on two or three occasions in recent memory. They couldn't pay their bills any longer and had to issue IOU's to state employees.

      Let's just assume that the President, the Secretary of the Treasury and the Fed Chairman had on each occasion called for an urgent press conference and announced with grim faces that they would do everything to avoid a breakdown of the USD (and perhaps even of the American Union). If they had done that, and if they had done that repeatedly, the same thing might have happened there as has happened in the last 2-3 years with the Euro and the Eurozone, if not even the EU.

      It is not against any EU laws or treaties for anyone to be unable to pay. If one is unable to pay, be that a corporation or country, one invites one's creditors to discuss with them a rescheduling of debt. And one asks the only competent place in the world for that, the IMF, to assist with the rescheduling. No one declares this as a life-or-death issue for the Euro and absolutely NO GOVERNMENT JUMPS FORWARD WITH INITIATIVES TO BAIL OUT BANKS JUST LIKE THAT! Banks themselves are the first ones to know that they need a bail-out. If and when that happens, banks go - with hat in hand - to their governments and ask politely for help. The government, of course, provides such help. The only decision it has to make is whether or not TO wipe out all the existing shareholders' equity right away or (at least at first) only part of it.

    2. The whole point here is whether Greek (or italian or any inside the Euro debt) is sovereign. I understand that legally Greek debt is sovereign, but is it in practice? Do the powers that be in the EC want it to be sovereign? The reason I chose Oklahoma is that all this happened before the McFadden act repeal and it seems to me that it is a good fit to the present Greek mess. By the way the place was under complete federal control for a time. The banks were taken over by FDIC and the Fed, together with most collateral ie most of the state's housing stock. I still have somewhere a "I bank with the FDIC" tshirt. The Feds did exactly what you are saying it never happens-they simply took over everything by fiat. Oklahoma did not have the will to reform: Google Okiesmo. So if Greece is to be removed from the Euro why not Oklahoma? Because it was politically impossible. This indicates that there are two types of sovereign debt: the usual one that you reschedule, use the IMF etc and one, much rarer, that political considerations (Save the Euro,the EC the Union whatever) mean that there can be no usual rescheduling, no IMF in the usual way etc. I suspect Greece belongs to the second group. It is the lack of any political perspective that makes the above statement otherwordly. Let me ask the following: do you think that Argentina would have been treated the same way if it had a big nuclear arsenal? I doubt it.
      To recap: the EC is somewhere along the way to becoming a federal state. It has already a common currency. Therefore the debts are halfway not sovereign and political considerations are paramount. Hence leaving the Euro is not an option and then we have to decide if Greece is Oklahoma or California and choose a model.
      I suspect that the currency was united before creating a common fiscal policy in order to force a common fiscal policy upon reluctant electorates in a game of blackmail. The EC seems to work as follows: do something very technical that nobody really understands. So everybody agrees. This technical trick traps everybody and then you move along into the next step of political integration. In our case creating a finance ministry in Brussels was politically impossible so we unite the part nobody really understands (monetary policy) and then we tell the voters: either you unite taxing and spending or you lose you shirt in a global financial conflagration. Sneaky but effective. Even M. Thathcer fell for it:"If I knew what I was signing in Maastricht I would have never done it". Google it. I heard it myself.
      Keep also in mind that California may be treated with kid gloves (ie it must ask first and the Feds must watch their tongue) because it is to big to be bulldozered like Oklahoma. California elects 60 or 70 electors in voting for US president and several Gongressmen. Surely this is in every Federal mind. Therefore a Treasury Secretary will lose his job long before the statements become dangerous. This is what keeps their mouth shut not some correct financial rescue procedure. I put to you that if California is somehow emasculated the Feds will simply barge in.

    3. 1 of 2

      I am not sure that I follow your logic 100% but let me reply the way I understand it.

      First, Greece cannot legally be "removed" from the Eurozone. Experts have explained that even if Greece wanted to exit the Eurozone on its own, it would first have to exit the EU (and possibly re-apply to the EU afterwards). Events so far have shown that, when push comes to shove, legalities don't matter all that much in the Eurozone but, nevertheless, that's the legal situation.

      Put differently, it may be "legally impossible" for Greece to exit the Eurozone without exiting the EU but it may become a "political necessity"; i.e. the opposite of Oklahoma (but I am not all that familiar with Oklahoma).

      I think there is only one kind of sovereign debt and that is the sovereign debt of a sovereign country. Oklahoma is not a sovereign country. Argentina was/is. What would have happened if Argentina had had a nuclear arsenal? The same thing as happened to Russia (in the late 1990s) which also had a nuclear arsenal. One reschedules. Except that Argentina didn't reschedule in 2000/01. Instead, it repudiated part of its debt, which in my view is the silliest thing for a country to do.

      The huge mistake with Greece (and later with others) was that EU-elites thought a sovereign debt rescheduling was something out of this world; an absolute no-no. Actually, it's the most normal thing to happen when a country hits foreign payment problems. If handled correctly, no one really has to take a hit.

      Let's just keep in mind what a rescheduling is. Most every country reschedules its debt all the time in that it takes up new and longer term debt in order to repay maturing debt. If rescheduling is misinterpreted as a country going broke, the US is going broke every time it issues new Treasury Bills (or Germany when it issues new bonds).

      The only difference between Germany and Greece is that Germany can reschedule its debt voluntarily and Greece no longer can. So, when a country hits external payment problems and voluntary rescheduling no longer works, there is a need for a "managed rescheduling". But, again, if handled well, there should be no excitement at all. No haircuts, etc.

    4. 2 of 2

      It's of course a guessing game but personally I would guess that there will not be a Federal European Union in my time. When the Founding Fathers united the US, it was a hard battle but at least all "Americans" had some sort of shared inheritage and a common language at the time. When Bismarck forced unification down the throats of German principalities 100 years later, those principalities were at least "German" and they shared a language. In the minds of many, many Europeans (that term is a misnomer today!) "Europe" is being identified with technocratic elites and a Brussels bureaucracy which determines the shape of cucumbers and the type of light bulbs. I don't know of any European country where the idea of a Federal Europe would carry majority support.

      Of course not all US states are equal and what the Feds may do with Oklahoma they may think twice before they do it with California. Mind you, what the Feds did with Oklahoma would be very similar to what the German government would do with, say, the City of Berlin if the latter completely broke the rules of the domestic fiscal union. I guess the term is "under supervision". But I cannot in my wildest imaginations foresee a day where a Federal Europe could treat a country like Greece the same way the US Feds can treat a federal state.

      Bottom line: I am today convinced as ever that the fact that the Eurozone's debt problem has turned into something like a financial Armaggeddon is entirely due to the incompetent mishandling of the situation on the part of EU-elites. I don't blame them for not knowing how to handle the situation correctly but I do blame them for not seeking advice from those who could have told them (like the ones who handled Latin American debt reschedulings).

      Greece & Co. are responsible for the domestic messes which they have allowed to emerge over the last decades but those are problems which are manageable and which can/should be fixed by the countries themselves. There was absolutely no reason that those messes had to lead to the kind of Eurozone problem we have today. Even if Greece had had a top-secret plan to bring about the collapse of the Eurozone, it would never have worked unless there had been EU-fools to go along with it.

    5. TheAthensdog

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      I said that I was not familiar with Oklahoma? Well, after having googled Okiesmo, I can report that I am more familiar with this part of Oklahoma’s history than most people.

      Okiesmo initiated the decline of probably the best bank/company I have ever known. It destroyed a part of my savings. And, eventually, it killed my first career which I had hoped to become a career for life.

      I had joined the Continental Bank of Chicago out of business school back in 1972. The business principles and philosophies I learned there in the early years; the quality of people I could meet; the general culture of the bank --- all those were unbelievably impressive.

      In 1982, I was living in Chile as Country Manager for the bank in charge of all local banking operations and the cross-border portfolio. In January of that year, both Institutional Investor and Euromoney had the bank on its covers. One for “Best managed bank of the year” (and the most successful US bank during the 1970s) and the other one with REA as “Best banker of the year”. Around March, the bank celebrated its 125th anniversary among accolades from all sides. The NYT described it as “Behind that quiet façade”. Three months later, in early July, the bank had to report that its existence was in danger.

      It was either the last week of June or the first week of July. My boss was visiting Santiago de Chile and we had lunch at the Central Bank. The President of it expressed concern about problems in the US economy and how they might affect the strength of US banks. My boss responded - in the relaxed fashion of a bank executive who knows that his bank is one of the very, very few triple-A rated banks left on the North American Continent – that no worry was to be had about the Continental Bank. It was solid as a rock.
      Back at my office, there was an urgent message for my boss to call Chicago. I noticed how he turned pale during the conversation. I heard bits and pieces like “Really?”; “How much are we in for?”; etc. After he hung up, he said something to me which I still have in my bones: “Maybe we should go back to the President of the Central Bank and tell him that I may have overstated the strength of our bank”.

      A long fax arrived shortly thereafter. From the Chairman to all staff. It closed with the sentence “I am confident that we can make it through this crisis”. I couldn’t believe it. The bank was always so guarded in what it was communicating that a sentence like that could be translated into “We might not be able to make it”.

      There was a lot of talk about a bank called Penn Square. Who the hell was Penn Square? Well, it was described as a small office on the second floor above a supermarket in Oklahoma City. What the hell were we doing with that kind of institution? (as it turned out later, one of the things “we” were doing was to drink beer out of boots when Peep Jennings & Co. visited Chicago). Why did we have so many loans out to them? As it turned out, we didn’t have loans out to them. So, what else had gone wrong?

      If you define merchant banking as the business model where you originate assets, package them and place them with investors, then that Penn Square on the second floor above a supermarket in Oklahoma City was probably the most successful Merchant Bank in history. They originated loans to oil developers. The individual loans were in the range of 5-10 MUSD, so none of the loans individually was large enough to create much attention in the approval process. Also, every loan was secured by real property. However, the liens had never been perfected because the deal makers had no time for such details; that was the job for bean counters. And, last but not least, the price of oil could only go up.

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      On the part of the bank there were 3 people involved in approving individual loans. I knew all 3 of them. All decent people, even though quite aggressive bankers like all bankers in oil & gas divisions are. I honestly don’t think they had ill intentions (and they certainly took no personal profit out of this). Since they were individual loans, there was never an aggregate for the risk that all those loans had come from the same originator. If that originator would be bad, then the loans might not be better either.

      Mind you, those guys who were then blamed could just as well have turned out to be heroes. If Paul Volcker had not wringed inflation out of the US economy at all cost (with the resulting decline in the oil price), they would have become heroes. The only thing is – they gambled, and bankers should not gamble.

      So, what can one learn for today from all of this? A lot, I think!

      From the first week of July 1982 onwards, the internal management debate was how to define and communicate the problem to the public. As a “one-time problem” or as “the first part of a larger problem which would take time to correct”. In their brains, top management probably felt that one would have to be honest and opt for the shock treatment. I. e. inform the public of the total size of the problem and take a full hit at once. Their stomachs stopped them from doing it because they were worried to cause a world-wide financial crisis (remember, the bank was Nr. 6 in the US at the time and to 90% funded interbank with average tenors of 32 days!).

      One opted for the “one-time problem” approach. The staff in Chile asked me whether I believed that it was really only a “one-time problem”. I told them the following: “Look, we are reporting a historic loss of over one billion USD for the 2nd quarter. If this is a one-time problem, then our profit for the 3rd quarter will be similar to the one of the 1st quarter, and we will report earnings in the 3rd week of October. So, I will tell you then”.

      For 8 quarters in a row, management used similar language when it reported quarterly results: “We have taken another close look at the entire portfolio and decided, out of conservatism, to make a new risk provision for this, that or the other”. One didn’t have to be an analytical expert to read in the financial statements that the bank was realizing gains from the sale of previously hidden assets in order to balance the P+L.

      After 8 such quarterly exercises, confidence in the bank had eroded about as much as confidence has eroded today in the EUs ability to solve its financial problems. With that, it only took a small drop to make the water flow over. It came in the form of a side comment made during a TV talk show on a Saturday afternoon. Talking about the Latin American crisis, one of the commentators said something like this: “I know Paul Volcker worries only about 2 things. One, that a Latin country might declare a moratorium. Or two, that a big American bank like the Continental Bank for example might go bankrupt”.

      A Japanese journalist misunderstood and telexed a report to his Head Office that, according to rumors, Continental Bank had filed for Chapter 11. That made the news in Japan.

      The next Monday morning, right after the markets opened, the Japanese banks called back their funding from our Japanese branches. Everyone then was waiting to see what the European banks would do. They called back their funding, too. By the time the US markets opened, the game was already over. Within one day, the 6th largest bank of the US had lost about 1/3 of its total funding. It was gone.

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      The solution was easy. Split into good and bad bank. Old shareholders stayed owners of the bad bank and got a mini-piece of the good bank as incentive to go along with all of this. The good bank was capitalized by the FDIC. They brought in new management with the assignment to dress the bank up for the wedding. The bad bank was liquidated with a total loss for old shareholders. The good bank was later sold to Bank of America. At the end of the day when all the calculations could be made (profits on the sale; loss on the bad bank; etc.), Continental Bank had cost the tax payers a little over 1 BUSD. A lot of money but a lot less than the 30-40 BUSD that had been at stake. And remember, those were USD of the mid-1980s!

      The EU has acted in the last couple of years like the Continental management acted then. Denial of the crisis (at least externally) and kicking the can down the road in the hope that eventually things will get better. Instead, the EU should have allowed Greece to go to the IMF when Papandreou wanted to do that back in late 2009. The IMF would have orchestrated a normal rescheduling with existing creditors and things would soon have been forgotten (if Greece had done its job). Should another country have come up, that, too, would have been sent to the IMF. At some point, markets would have understood what the rules of the game were and they would have stopped trying to bet against them.

      If you are interested, you will find more about the Continental Bank in this link.

    8. I am unable to timely follow the discussion because I am living in my seaside rental (crisis you said?) and moving back to Athens for a day a week. No Internet there by choice. So if you answer this will be answered back in September.
      a) The Bible is correct"Seek and thou shall find"So seek intelligent answers and thou shall find them. Say in Austrian Bankers blogs.
      b) WOW! Someone to talk about Oklahoma. This is first time in thirty years that somebody knows what I am talking about. Also this is the only place that explained the Continental debacle, that seemed strange from the outside.
      c) You are right. The way I placed the question about Argentine nukes was not clear. See it that way: A Buenos Aires government, belly up financially but with a very strong nuclear arsenal and a history of nuclear blackmail, phones the White House and demands the following
      a) change the US & EC farm policies to benefit Argentine exports to pay for future Argentine debt/income b)Put the knife on the banks throat and force them to take 100% loss on their loans and continue to lent money c) If even one IMF person touches Argentine soil it would be arrested. Otherwise Argentina will be financed by massive narcotics production and exports and export of nukes to all. Any effort to use gunboats or similar muscular reactions shall be answered with nuclear fire against US targets in S. America and the Falklands. At the same time populist sentiments about foreigners using banks to take over the Falkland islands are roused and one nuclear test follows another. What do you think would happen? Do you think that the debt restructuring would have been the same?I doubt it. The reason we talk about sovereign debt restructuring using the IMF is because there was a postwar international political consensus (to which Russia wanted to participate so no nuke threats), enforced by the US. One which a large, rogue nuclear state could destroy if so wished. I do not suggest that political power (nuclear or otherwise)can suspend the rules of economics, but political power can change dramatically the way the bill is paid. Iran is probably following the above model. We will find out if/when Iran goes nuclear.
      My suspicion is that Brussels treats Greece like Oklahoma not Argentina, as they want to make a big step towards a EU federal finance ministry, stealthily of course.
      "But I cannot in my wildest imaginations foresee a day where a Federal Europe could treat a country like Greece the same way the US Feds can treat a federal state."I think you are wrong. Mr Raichenbach's EC task force is nowadays asking why Municipality Χ is not paving road Y and why ministry employee so and so is taking his holidays in August and not September. It was all over the news the last few days as another example of national disgrace. I crosschecked it from my own sources.The control is very low level indeed. It is titbits like this that feed my suspicion that we are dealing with a non-sovereign debt situation, at least in the minds of the EC elites.

    9. Just a brief comment on the EU Task Force. I think it's one of the best things which could have happened to Greece. It is essentially there to help Greece get some of the essentials in public administration in place (getting projects ready for EU-financing; making administration more efficient; etc.). It is NOT to be confused with the Troika or some form of a control mechanism. It is more like a consulting firm for Greece. The only mistake is that they made a German in charge of it. And to make things worse, a German with the first name of Horst...