David Apgar: Trash Trichet’s Stockholdings to Save the Euro Zone

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By David Apgar, the founder of ApgarPartners LLC, a firm that helps companies and development organizations learn by treating goals as assumptions to be tested by performance results. He blogs at www.relevancegap.blogspot.com.

The best hope for the euro zone may be to find a few bank stocks rattling around in European Central Bank (ECB) Governor Trichet’s brokerage account. There’s no chance that the long-time French civil servant would compromise his policy views to benefit himself, but it’s the kind of made-for-muddled-media factoid that, if found, could put a quick end to the farce he and the ECB perpetuate in pretending Greece is not bankrupt. Europeans tolerate this farce and the crisis it prolongs only because it will suppress the euro and block export-led recovery in the US. And if there’s one thing more attractive to the Euro-policy crowd than ending a crisis of the euro, it’s blocking US recovery.

A leader in this week’s Economist lays out the dimensions of the problem. The editors write:

Both the Greek government and its European and IMF rescuers admit that the country has no hope of tapping private capital markets in 2012, a central assumption of the original plan.

That original plan was to give Greece €110 billion ($157 billion) more in loans to keep things running while Greece magically transformed itself into an economy able to pay debts one and a half times its output – something it must start doing in 2012. Everyone now admits no magic is strong enough to accomplish that.

So the choices between now and 2012 are either more-money-in or less-money-out. More-money-in means that the ECB and the IMF give Greece yet more cash to pay off bonds it cannot repay even with the last bailout. Irrationally, the ECB continues to insist on this option. But it’s worse than irrational. Those bonds are largely held by European banks. Why should Chinese, Brazilian, and Nigerian taxpayers pay European banks through the IMF to protect those banks from losses on their own investments?

With IMF President Strauss-Kahn detained in New York City, the IMF no longer has much to say on the subject. The ECB has no answer, either, but seems to believe that European banks are people, too, and very special ones:

The [central] bank’s officials have argued, in increasingly hysterical tones, that any tampering with Greek debt…would cause a crisis far worse than the collapse of Lehman Brothers in 2008.

And who are we to argue with the ECB about financial crises?

We are people who have been here before, that’s who. Starting in 1982, Mexico could not pay off its bonds to foreign banks. The Reagan Administration’s Treasury Secretary Baker insisted on badgering and threatening even small banks holding Mexican loans to lend yet more money so that Mexico could stay current on its old debt. That way no bank needed to recognize losses. But it left Mexico even deeper in debt, causing capital flight – and it left the banks no better off. This is essentially the ECB’s position on Greece, today.

In 1986, Senator Bill Bradley argued that banks needed to treat Mexico like any private-sector bankruptcy – reducing the terms of their loans for the borrower to regain enough health so that it could eventually pay at least a little more than it could afford under current conditions of intense distress – less-out instead of more-in. By recognizing loan losses up front instead of making new loans to cover them up, the plan avoided adding to Mexico’s external debt. And that would eliminate the cause of the capital flight that was further withering the country’s financial condition. Bradley’s position was eminently logical. But both the banks and Secretary Baker dug in – for very different reasons.

Like the ECB today, a broad array of banks and bank apologists screamed out that if Mexico restructured its debt it would never again borrow in private capital markets. Not only did the banks, the Federal Reserve, the various European national central banks, the IMF, and the banks’ lobbying organization paint restructuring as the first chapter of a financial apocalypse – but so did the Economist magazine! In fact, Mexico did restructure its debt using a plan agreed by Bradley and Baker’s successor Brady in 1989 – and the country was borrowing on competitive terms once again before the end of the year. The ECB is lying and knows it.

Meanwhile, the press had dubbed the 1986 version of more-in as the Baker Plan, thus neatly engaging the Treasury Secretary’s ego. Here again, history may be repeating itself. True, the Economist has changed its tune and now supports restructuring. In a powerful echo of the earlier episode, however, its editors have concluded that egos really matter in international economic affairs:

The still more alarming possibility is that, blinded by pride, the bank and its hitherto sensible president, Jean-Claude Trichet, are unable to accept that a euro-zone country is bust.

The very possibility that egos have driven bad decisions in both episodes makes the resolution of the earlier Mexican debt crisis relevant today.

The end of the Baker Plan was an accident. The Washington Post discovered Secretary Baker held most of his wealth in a trust containing bank stock. There is no chance that Baker hoped to feather his own nest by insisting on a foolish policy to let banks avoid recognizing losses at the expense of a sovereign borrower. Within one week, nevertheless, the Reagan Administration deftly moved Baker from Treasury to State, and rationalized its position on Mexico by advocating an orderly debt restructuring in cases where borrowers really can’t pay.

Now the ECB is threatening to block liquidity lines to banks offering Greek debt as collateral. Since that is most of the collateral that Greek banks can offer, the ECB is basically threatening to stop serving them. It would be like the Federal Reserve shutting the discount window on banks from Louisiana. It will force Greece to drop the euro and set up its own central bank.

For the sake of both Europe’s brave monetary experiment with the euro and US recovery – which still awaits a higher euro and a more competitive dollar – we must hope for that article finding a few bank shares in ECB Governor Trichet’s private brokerage account. That the man is purer than alpine snow is beside the point – it would be the kind of trivia that has brought financial folks to their senses before. It doesn’t even have to come from Le MondeLe Canard Enchainé would do nicely.

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  1. attempter

    For the sake of both Europe’s brave monetary experiment with the euro and US recovery – which still awaits a higher euro and a more competitive dollar – we must hope for that article finding a few bank shares in ECB Governor Trichet’s private brokerage account.

    That’s the most plausible scenario I’ve heard yet for propping up this zombie.

    And it’s characteristic of the actual thinking which thinks the euro is viable and which wants to continue to hold America hostage to globalization.

    Think of the horrors of the alternative:

    It will force Greece to drop the euro and set up its own central bank.

    Even better, Greece could go all the way with less-money-out and renounce these odious debts completely. As should all the “periphery”, i.e. scam mark, Eurozone countries.

    1. Jimbo

      Greece should leave the EuroZone, as should Portugal, Spain, Ireland and Italy. Can any of you identify one country which has been able to grow itself out of a Greek-like debt burden without its own currency?

      The worst thing for Greece and the other peripherals is to prolong the agony.

  2. Jim Haygood

    Today the spokesman for Jean-Claude Juncker, who chaired last night’s meeting of euro-area finance ministers, is touting the term ‘restructuration douce,’ a French euphemism for ‘soft default.’

    But so far, EU finance ministers are only admitting to the possibility of payment date extensions, not principal reductions.

    Extending Greece’s payment schedule is like a stay of execution for a condemned prisoner: it drags out the proceedings, but doesn’t change the outcome. Without principal reductions, Greece’s debt-to-GDP ratio not only remains unmanageable, but also precludes incoming investments needed for growth.

    It’s hard to say whether today’s ‘reprofiling’ chatter is progressive disclosure, or an indication that the EU remains in denial and delusion.

    Mark my words: one of these years, Greece is gonna ‘hard default,’ devalue, and proceed to boom like crazy. The EU will be left sputtering in indignation: ‘B-b-b-ut you can’t do that!!!’

    Oh, yes they can can. As the dismal aftermath of Versailles demonstrated, even sending in nonexistent EU tanks to occupy the Greek collateral would be of little avail.

    As the old saying goes, when you owe the bank a million, you’ve got a problem. When you owe the bank a trillion, they’ve got a problem.

  3. Random Lurker

    “[…] because it will suppress the euro and block export-led recovery in the US. And if there’s one thing more attractive to the Euro-policy crowd than ending a crisis of the euro, it’s blocking US recovery.”
    “[…] and US recovery – which still awaits a higher euro and a more competitive dollar […]”
    An export led recovery is, by definition, a “beggar thy neighbour” policy. It is obvious that both the USA and the EU would like to export more and import less, but you can’t say that europeans are evil if they push down the euro while americans have all the rights to push down the dollar.
    Also, the Euro is still very high respect to the dollar, IMHO.

    1. Cano doncha know

      I agree, Random Lurker.

      Hysterical article that makes me want a full disclosure from the author.

      1. ScottS

        The original observation seems factual to me. A higher euro is better for US exports and vice-versa.

        Are you saying that Europe would like to see a robust export-led US recovery? Germany relies on exports. Why would they want a tougher market for their exports?

        Anyways, why accuse the author of hysteria and bias over a non-controversial, factual statement?

  4. French Fry

    Although it has been said before == the simple solution is for GG, Greek Government to sell half its islands to BundesBuyer then use Euros from the sell-jobby to pay off interest and principal, Victoria!

  5. Hugh

    Egos, smegos. The goal was never to fix Greece. I mean seriously how long has the Greek situation and that of the PIIGS, and Eastern Europe being going on? And it still all bandaids and not even good duct tape. The truth is there as here if they were serious about fixing anything, our elites would have at least started a meaningfully effective policy to address these problems, but they haven’t. Their goal is just to keep the looting going as long as possible. It is kleptocracy when it happens here. It is kleptocracy when it happens there.

    The idea that Trichet is pure and isn’t on the take is ludicrous and simple-minded. He’s been on the take his whole life. You don’t think being head of the ECB isn’t a reward for services rendered and anticipated? For about the millionth time, kleptocracy is a system. It’s not just a few financiers. It is a corrupt system that needs government, politicians, media, and academia to run it and defend it. Trichet is doing his part. If he leaves nothing will change. Some other kleptocrat would be put in his place, much as happened with Dominique Strauss-Kahn just now when he was replaced by John Lipsky, the former chief economist for JPMorgan.

    1. ScottS

      The author makes the case that the scandal of finding that JCT has a personal stake in propping up Greece would put sufficient external pressure on this corrupt system to change the policy, as it did with the US and Mexico in the 80’s.

      I don’t think the situation is as similar as the author thinks. We’ve already seen rioting and low-grade anarchy in Greece. I don’t think the kind of scandal described in the piece would change the unstoppableness of the force or the immovability of the object. Bankers will not take “no” as an answer — least of all from their puppets in politics or the taxpayers.

      The PIIGS will leave the euro. Maybe Simon Cowell can organize a txt-poll to see who will be first.

  6. charles 2

    “It doesn’t even have to come from Le Monde – Le Canard Enchainé would do nicely.”

    Actually, “Le Canard Enchainé” is a more credible source than “Le Monde”. It is the only paper that is totally independent in France (owned by editors, no ads, always making good money). There is no journalist in France who, given the choice between working for Le Monde and working for Le Canard, would choose the former.

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