Thursday, February 6, 2014

Greece's 1st Bail-Out --- Promises, promises???

The publication of internal IMF documents from May 2010 (I have commented on one of them before) has created quite a stir in the media. First, the confirmation that quite a few countries had opposed the 1st bail-out, and for very good reasons, too, and then the alleged commitment by France, Germany & Co. to maintain their Greek exposures. MacroPolis published this excellent summary.

From the beginning, I have been amazed at the naivité ('incompetence' is so harsh a word...) with which the Greek external payments crisis was handled. No surprise that so many Latin countries voiced their objections. After all, they have a lot of experience with external payments crises!

An external payments crisis is quite different from a domestic financial crisis (at least in a local currency country). When Germany bailed out its HypoRealEstate, that was a domestic issue which could be handled by Germany alone. An external payments crisis means that a country (not only the state; the entire country) is running out of money which it cannot print. The Greek state ran out of Euros and since the Euro was/is not only a foreign currency but also the domestic currency of Greece, the external payments crisis automatically became a domestic crisis as well.

In an external payments crisis, all external liabilities of the entire country (i. e. not only those of the state) must be brought under control. Typically, this is done via a rescheduling of a country's entire foreign debt. The EU chose to refinance the foreign debt of Greece with tax payers' funds and the EU only brought the state's debt under control; not the debt of banks, of corporations and others.

To accept for face value the statement of a country's 'chair' at the IMF that the banks of his country will keep their Greek exposures would be a cause for dismissal in any bank's credit traininig program! Such commitments must be contractually binding (i. e. signed by all creditors) and they must also include, in addition to keeping existing exposures, a commitment to keep trade lines open.

Who is to blame? Both sides, the Greek side as well as the EU side. I know for a fact that PM Papandreou had more than one meeting with William "Bill" Rhodes, the former Citibank Vice Chairman and grand seigneur of managing external payments crises where Rhodes advised Papandreou what needed to be done in Greece's situation back in 2010. And the EU side? Well, the EU elites were just so self-possessed with their arrogance that they refused advice from those people who knew and they preferred to display their incompetence.

In retrospect, one has to give a lot of credit to PM Papademos. He knew that he needed the best advice; he asked for it; he chose the renowned laywer Lee Buchheit and he smoothly accomplished the largest private sector involvement which the world has ever seen. Hats off!


  1. "In retrospect, one has to give a lot of credit to PM Papademos."

    Indeed we have to give him a lot of credit.

    We have to give him a lot of credit because the psi was the icing on the cake of Greece's immolation.

    First we had the bailouts which saddled Greece with official sector debt (and allowed the European privateers to walk out, thank you ECB). Then we had the psi which turned Greek bonds to British-law bonds.

    An excellent job all around. So excellent that now we have more government debt than ever, and we can't even default on it.

    This isn't economic policy. This is castration.

    1. You have to differentiate between WHAT was done and HOW it was done. I was referring to the HOW.

      I have, for several reasons, objected to a haircut. A 'private sector involvement' in sovereign debt should be a rescheduling of principal and interest and NOT a haircut after only a few years of crisis. You can look up my arguments in my blog inventory (first item on favorite links on the right). Still, even if one opposed the haircut, one result of it was that Greece could shave about 60 BEUR off its foreign debt, which is not a piece of cake and certainly more than any country before Greece ever could.

      If I recall, the WHAT was stipulated by the EU so Greece didn't really have a choice in that. The HOW was managed by Greece and it was very, very well managed.

    2. Yes, Greece's immolation was very well managed by the Greek governments. The Papademos government wasn't even an elected one.

      And look, Greece wasn't having an external payment crisis in the same way that, say, the emerging markets are currently having an external payment crisis. The ECB caused the crisis, alright? It let the interbank market freeze, and it didn't support the debt of it's own member states (thus depriving the banking system of a risk-free asset that transmits the monetary policy).

      I mean, let's face it, if the other central banks behaved like the ECB, the whole planet would be bankrupt by now.

    3. Greece didn't have an external payments crisis? You should look up the stats from the Bank of Greece. The run on Greece began slowly in 2008 and accelerated very much in late 2009 (after the new government announced new deficit figures). Not only did foreigners stage a run on Greece; Greeks themselves reinforced that by sending their capital offshore. Anyone who has any experience with such matters knew that by early 2010 it was 'game over'. And, by the way, without the ECB, Greece could not have reached May 2010; that's for certain (I remember being with a Bundesbank director in early December 2009. He was urgently called away. When he returned, he told me that they just had to take the decision whether or not to let a Greek bank go under).

    4. Well, I guess you're right. Greece was having an external-payments crisis in.. it's own currency! Yup, totally what an external-payments crisis is all about.

      I don't know why you have such a big problem with admitting that the European crisis is a construction of the ECB. All the ECB had to do was: a) support the interbank market immediately post-Lehman, b) support the bonds of it's member states in the secondary market (no violation of it's mandate). It did the first in a problematic way and the second in a limited way only after the crisis had set in and hit the real economy. Too little too late.

      The ECB created the European crisis. You really need to have a more open mind about this and admit it..

    5. So, they enforced Papademos to ensure that new loans will keep coming (given that the rest didn't wish to bear the political cost of this decision) in and the debt is now at least double and much more if stated on GDP % since GDP has plummeted. Furthermore the PSI's main effect was mainly felt on our pension funds and the domestic Banks which however have been re-capitalised without the slightest loss for the shareholders contrary to what happened with the social security funds....This is a big conversation but another point is that you refer to reports from Bank of Greece, an institution which has been repeatedly caught 'mis- representing' data in order to achieve specific goals....The biggest was the initial entry in the eurozone....

    6. @Jim Sliip
      You yourself have given the best example of the difference between 'external' and 'internal', even in a currency union, when you pointed out the difference between bonds subject to Greek law and bonds subject to foreign law. For the former, Greece could enact (even retroactively!) CACs, for the latter, Greece could not do that and, instead, paid those creditors off. I did have a little proviso in my article ‘at least in a local currency country’ which you may have overlooked but the key issue is still national borders and national sovereignty & jurisdiction within those borders. That’s where EZ members differ from American states.

      Incidentally, if you really think that ECB monetary policy alone can solve the imbalances in the Eurozone, I suggest you wait a few years until the crisis hits France and then we’ll see if France can sell more cars outside its borders simply because the ECB purchases its bonds.

    7. @Doufou
      I have published over 700 articles in this blog and you will not find one of them where I supported the haircut. If you want to save yourself time, look at the section 'position on haircuts' below.

    8. @Klaus

      Whether France can sell cars abroad is a different matter altogether. What we're examining here is why the bond market was "attacked". It was attacked because the ECB allowed it to be attacked. Like I said, if the other central banks behaved like the ECB, then the whole planet would be bankrupt.

      The issue of providing liquidity to the banking sector isn't unimportant either. The ECB did that very poorly and that's what allowed the crisis to set in in the first place. This splendid article explains the blunders of the ECB:

      Indirectly you are admitting that the European elites allowed the crisis to happen so that some countries reform their economies. In that case I have three observations to make.

      a) If Greece is the specimen, then they did it very poorly. It should be clear by now that you can't reform an economy on fiscal discipline alone.

      Simply put, the world today is a free big place and you can't control where investments go unless you impose capital controls.

      For crying out loud, all this liquidity that the central banks have provided with their paper purchases and all they managed to do was a bubble in the emerging markets. Doesn't that tell us that the current model is totally beyond repair?

      b) It is still far from clear (as you have admitted) why the whole Eurozone should pursue export-orientated growth.

      c) Their plan could still backfire spectacularly since we still don't know how far both creditors and debtors are willing to go.

    9. I am really amazed at your approbation of Papademos, Klaus. This guy for his entire career has been a political stooge. It was he who paved the way for Greece to enter the eurozone when he was appointed Governor of the Bank of Greece -- with not one piece of research about the desirability of entry. It was he who was rewarded by the Germans by appointment as Deputy Governor of the ECB. Finally, he was put by the Troika as an unelected prime minister to make sure that Greece obeyed the dictates of the Troika and did not engage in any independent democratic political management of the economy.

      In power, what did he achieve other than the collapse of the Greek economy? On the other hand, his government was very beneficial for German banks. For the ordinary people of Greece, his contribution was entirely negative -- unless you consider a continued participation in the eurozone as a positive.

    10. Let's see is my memory serves well.

      In the autumn of 2011, Papandreou had agreed to the 2nd package. Back in Greece, he got cold feet and came up with the idea of a memorandum. Merkozy called him on the carpet in Nice and read him the riot act. And then Papandreou threw the towel.

      That was the key decision point for Greece to decide whether or not to go with the 2nd package. Had Greece not gone with it, a Grexit would have been almost certain. PASOK, in power, decided to go with it. If I recall, ND had to write a letter stating that, even though in opposition, they would also support it.

      That’s were Papademos came in. The job description was: fulfill all conditions for the 2nd package and when you are done with it, get out of the way. Whether the 2nd package was right or not (I don’t think it was; certainly not the part about the haircut) was not subject to discussion. Merkozy had clearly said ‘take it or leave it’. Whether Merkozy were fair or not is not an issue, either. They had the power. And whether Papademos was democratically elected or ‘installed’ by Merkozy is a moot point: the party with an absolute majority said he was the right man for the above job description (perhaps bullied by Merkozy).

      I think Papademos cannot be judged by what he did 10 years earlier nor by his impact on the Greek economy. He had a very clear job description and that has to be the basis for judgment. In fact, I don’t think that he was even involved in the negotiation of the 2nd package.

      That job description Papademos fulfilled admirably. I recall that tons of laws needed to be passed. And, above all, to put in place the kind of haircut which was demanded was an enormous achievement. At the outset, many observers felt that this would and could never get done. But it got done in a very smooth way.

      Again, I disregard the question whether the 2nd package was good or whether it destroyed the Greek economy. I also disregard the question of Papademos’ democratic legitimacy. All I concern myself with is the question of what was the job description and how did Papademos live up to it.

    11. We disagree on one basic principle (although I can see where you are coming from). That principle concerns the role of official positions such as President, Prime Minister, Governor of the Bank of Greece, etc.

      First of all, I do not think that anyone associated with the incompetent advice given to Simitis about Greece's eurozone entry should hold any position of power after the fact. Nobody has been held to account for their lack of professional skills, just as in the international banking world.The Governor of the Bank of Greece was the key advisor. His incompetence is an historical fact.

      Secondly, the jobs of Prime Minister does not have a job description as you wrote it. The job description if we were to write it down, would be something like "to lead the government of the country, to put first and foremost the people, institutions and territory of the country, and to defend it against foreign powers."

      Your job description reads more like" "to obey the instructions of Germany and the Troika, to abandon the people of the country, and to prioritise the interests of foreign powers and international banking."

      Sorry Klaus: that is treason, in any country of the world.

    12. My term 'job description' was used symbolically (which is why I put it in parenthesis) and I guess this term is what gets you excited. Of course, any PM makes an oath of office along the lines you describe. But to accuse Papademos (or anyone else who would have done that job) of treason is simply inappropriate.

      In a parliamentary democracy, the majority puts into government the people whom they consider capable of handling the job (I know am talking theory…). Now the question is how that majority sees that job. There can be no doubt that at least PASOK saw the job as doing everything possible in order not to chance the 2nd package. Whether Papademos was the favorite of PASOK or Merkozy is being debated (probably more of Merkozy than of PASOK). But the point is: in any financial crisis, any country which seeks continued support from its creditors must have a leadership which has the confidence of the creditors. That is a standard rule all over the world.

      I remember a couple of times where Papademos wanted to do something which went beyond his ‘job description’ and where he was immediately called back by PASOK (and ND, too, I believe). As soon as he had put the 2nd package into place, they couldn’t get him out of office soon enough. If that is not evidence that the absolute majority in parliament wanted Papademos for only one very specific task, then I don’t know what is.

      You should not mix cause and effect. Papademos was not the cause why the measures had to be implemented. The cause was that the Greek government (in the person of Papandreou) had agreed to these measures. Because of Papandreou’s flip-flop, one side lost patience and created more or less an ultimatum and the other side did not have the nerve to call for a show of cards. Personally, I believe that Merkozy’s nerves had been strechted so much (remember Sarkozy outburst of rage) that they would not have backtracked from the ultimatum.

      To repeat: after Papandreou resigned, Greece had only an either/or choice: either go with the ultimatum or reject it. The only thing Greece could have done would have been to bully Merkozy into some additional support for the private sector (see link below). For the choice of going with the ultimatum, someone like Papademos was the right choice. For the choice of rejecting it, Varoufakis would have been a lot better.

      Last point: suppose Papademos was convinced that the 2nd package was wrong for Greece but he volunteered for the job, anyway, to enhance his career and standing. Yeah, then I would share your criticism but that would really be carrying conspiracy thoughts a bit too far. A very good friend of mine is good friends with Papademos and he told me at the time that Papademos is a man of integrity.

    13. Klaus: I am not obsessing over the term "job description" but actually engaging with your argument directly. The situation that Greece found itself in was (and remains) a direct result of putting into positions of power persons completely unsuitable to hold and exercise such power. The prime culprit here is Giorgos Papandreou, and the actors concerned within Pasok knew full well by the time that he was elected leader of the party that he was a serious problem. This was communicated to me directly, when I asked questions about some outrageous nonsense he had given to the press in the mid-2000s. They excused it (in private) saying that he had gone against the expert advice and discussions of that day, and had simply gone home and written a press statement off his own bat. This arrogant and incompetent style became a clear pattern of behaviour, even before he was prime minister. Upon appointment, he proceeded to behave in exactly the same way and did not have the support of Pasok. This is why he was forced to resign over the negotiations of the First Memorandum.

      At that point, Greece needed a new political leader. The Germans took advantage of the fact that this was now a serious political crisis for Greece, and sought to impose their nationalistic solution to Europe's banking crisis by placing one of their political friends in power in Greece. Indeed you are right, they could not have found a better person than Papademos to implement German policy in Greece.

      As far as Papademos' personal character is concerned, I have no direct information. From a distance, he looks like a technocrat who conformed to the system, exploited all ot its opportunities to their full, and has a very successful career with multiple appointments in universities and central banks, a massive pension from the European Central Bank, and very little obvious talent. It is possible to have integrity and still do the wrong things, simply because that is how you are. Papademos was never anyone with leadership or vision: he was an employee who did as he was told.

      That you could view the prime ministership of Greece as a bureaucratic position means that you subscribe to the view that Greece had lost its political sovereignty and was (remains) under the control of Germany. Personally, I cannot condone the behaviour of Germany or the Troika, nor of the two political parties of Greece that betrayed their people. It is very clear that without Papademos, Greece would be in a very different situation than it is today -- with a more rapid resolution, one way or another, of the crisis. That resolution would allow Greece to recover economically, which it is unable to do even now, and for many more years to come. If that is not betrayal of your country, then I don't know what is.

  2. Thanks, will have a look