Partying on the Edge of the Eurozone Volcano

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The Financial Times has two heated articles (relative to the each writer’s normal emotional register) on the continuing Greece neverending bailout saga, one from Wolfgang Munchau, the other from John Dizard. Munchau and Dizard reach the same conclusion from different fact sets: the latest Greek patch-up exercise is only going to make matters worse, politically and economically.

First from Munchau, who has worked himself up to being shrill on the deal structure, which he compares to a toxic CDO:

If this was any other field of human activity, you would go to jail if you accepted, let alone made such an indecent offer.

This structure is still not quite so complex as some of the more elaborate CDOs we have encountered in the global financial crisis. If you take some time to work through the arrows and boxes, you see relatively quickly that this complex structure is not a private sector participation at all. Rather it is a private sector bail-out.

It is also inevitable that Greece will default on its coupon payment at some point…The complexity of the scheme is due to the need to persuade the rating agencies not to attach a default rating to Greek bonds.

The rollover agreement represents, from an economic point of view, nothing but a collateralised bond. It subordinates all other bondholders. The rating agencies would normally not hesitate to attach a default rating to Greek government debt…

Just why the Greeks would want to accept such a ruinous deal is not clear to me…..The acceptance of the terms of this private sector participation agreement was never part of the agreement with the European Union and the International Monetary Fund. They could therefore simply refuse, and throw the ball back to Europe’s squabbling finance ministers. I doubt they will do this..

Nevertheless, once the treacherous nature of this contraption is fully understood, I would expect the politics of crisis resolution in Greece to become even more difficult, and accident-prone..

We are not just “kicking” any old “can down the road” any more. This is a can of explosives.

Even Dizard, who normally affects a Greene-land savoir-faire and world weariness, has notched up his rhetoric into dismay and ire:

A revenge fantasy invented by the most Europhobic UK Conservative MP could not equal the damage done to the European Union’s reputation by its leadership during the Greek crisis….

Instead, the record of the euro area’s leadership is a sort of anti-Scout Manual of agreements to play with matches in a dry forest and tease nursing bears.

Dizard’s beef is that there are well debugged way of dealing with messes like this, a whole panoply of emerging market defaults and restructurings since the Latin American sovereign crises of the late 1970s. But the officialdom hasn’t merely ignored history but affirmatively rejected it:

One of the negotiators of the original Brady Bond framework told me that he had repeated meetings with eurozone heads and finance ministers, to no avail.

“They all kept saying that Europe was different, that the emerging market experience was irrelevant. It was incomprehensible to me. They have made a difficult situation a hell of a lot worse.”

Dizard contends it was a huge mistake to pursue fiscal stabilization and Eurozone integration at the same time. He is by implication firmly opposed to the brute force negation of Greek sovereignity. As if the asset stripping didn’t make the point clearly enough. Eurozone leaders like Jean-Claud Junker seem to relish the spectacle of a prostrated Greece:

But within hours of Saturday’s decision, Eurogroup chairman Jean-Claude Juncker warned Greeks that help from the EU and International Monetary Fund would have unpleasant consequences. From Reuters:

“The sovereignty of Greece will be massively limited,” he told Germany’s Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would be heading to Athens.

Juncker admittedly tried to sound merely paternalistic with his next remark, but I would not find his comments very comforting if I were a Greek citizen.

Dizard, by contrast, contends that a key lesson of past rescues is to at least maintain appearances that the country on the receiving end of a debt restructuring be seen to be in control of its destiny. Quoting William Rhodes of Citibank, far and away the most seasoned negotiator on this front:

It is imperative that a government be able to present the reform programme as one of ‘national’ origin to avoid the perception that it was imposed, rather than supported, by an outside source, whether the IMF or another political or international financial institution.

Geithner violated this precept in the Asian crisis rescues, which led to simmering resentment and a resolve across Asia never to be at the IMF’s mercy again. The result was that the Asian tigers plus China amped up their mercantilist trade policies, keeping their currencies artificially cheap so they could amass a war chest of foreign exchange reserves. The results were not so favorable to US workers.

Dizard makes a telling remark at the close of his piece:

One gets the sense that what the world’s political and speculative communities want is an excuse for one last, titanic, round of “stimulus” amphetamine. The collectors and dealers I saw last week at the contemporary art sales in London were astonished by the money in the room suddenly looking for something to do. I think they may be seeing the premonition of the mega bail-out to come.

This is 2007 thinking by people who should know better. It was evident that a lot of money managers then knew Things Would End Badly, but assumed they could make it to the exits when the market turned. But liquidity collapsed, and as the rescues attest, most traders were caught still long and wrong. Here it appears we have people one step removed from the action convinced that they can be fleet of foot, and if not, central banks will always watch their back. But the ECB is exhibiting a great deal of rigidity, and in the US, Dodd Frank limits bailout mechanisms. And perhaps as important, austerian thinking is all the rage, which means cheery assumptions about more gazillion dollar emergency measures may prove a tad optimistic.

Unfortunately, it is pretty certain that we will see how the last acts of this nail biter play out. The officialdom has failed to take heed of the warning of general Pyrrhus: “One more such victory will undo me.”

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  1. Alex

    Possibly something for the next round of daily links: In the recent Assange/Zizek/Goodman conversation, Assange says that he has not released the Bank of America documents he’s received, because of blackmail:

    …We are under a type of blackmail in relation to these documents. It will be dealt with over time, but it is quite difficult to deal with at the moment. So… I don’t want to specify what type of blackmail that is, because it might make it harder to address, ah, the situation, but it is perhaps something like people might guess… You know, there’s a range of possibilities, and it’s probably the first or second possibility if you’re guessing.

    I don’t know about you, but the first guess which comes to mind for me is that these documents are expected to have financially catastrophic consequences. It wouldn’t be the first time wikileaks has held back information for fear that releasing it would hurt innocent people.

    1. Glenn Condell

      And the second guess might be something like ‘you release that and we have something a little more serious than a trumped up rape charge in store, namely a one way ticket to Diego Garcia or a trip down David Kelly lane’

    2. R Foreman

      > It wouldn’t be the first time wikileaks has held back information for fear that releasing it would hurt innocent people

      Looks like the best place to be standing before this oncoming tsunami is with no financial net worth at all, and that would be the majority of people. The people who stand to get hurt most would be the higher net worth individuals, the crony capitalists, and this of course is what the ‘Powers That Be’ don’t want you to know.

  2. disgruntled observer


    I was searching for something to say. But I just kept remembering a post I read on:

    Waiting for the Tsunami

    by Franco (Bifo) Berardi

    Before the big one arrives
    Before the tsunami arrives
    Before the capsizing blow arrives
    Before the tsunami arrives
    You know how it works
    The sea recedes for a time
    That may be very short
    Or very long
    The wave recedes
    It leaves sand
    It leaves swamps
    It leaves a huge feeling of depression
    The sense of not being there
    The sense that everything is finished
    And that it may never begin again
    I have the impression that in this passage
    We are in the undertow
    And I can feel that the undertow
    Is preparing a comeback
    So overwhelming
    So frightening
    That we don’t even have the guts to think about it
    The guts to imagine it

    You can feel it around
    On the train
    On the bus
    In the streets
    You feel it distinctly
    This sense of every energy receding
    This sense of depression
    The cynicism
    The only element that remains in our culture
    But a cynicism made up of fragments of desperation
    Made of moments of deja vu
    Of an inexplicable undescribable unnameable world
    The cynicism
    The desperation
    The depression
    The sense of not being able to coordinate will and action anymore
    The sensation of a body incapable of movement
    Incapable of doing things that are desired
    For pleasure
    For communication
    Simply for freedom
    For the joy of being there
    All this has vanished
    The undertow
    Cynicism has nothing to do with irony
    It is the sensation that your body and mind as matter
    Have come undone
    Like matter that has forgotten coordination
    That ceases to be organism
    The body without organs
    Has transformed into a body in decomposition
    And the organs have folded themselves
    One on top of the other
    All together
    Disgustingly they feel each other
    As intolerable to one another
    It is the undertow
    Wait for the tsunami
    Wait – but get ready
    Because you have to think of something
    The clothes to wear
    A gesture to make
    A word to say
    The second before the wave
    Finally wipes you away

    1. Paul Handover

      That’s most apt. Some sort of ‘doomsday’ feeling was in my bones as I read the article and decided to comment. So seeing the Tsunami poem strongly resonated with me!

      In a much broader sense, it feels to me as though we have been partying on the edge of a global volcano for years and years. Greece is surely a metaphor for the craziness of so many countries.

      Continuing that broader sense, the period that we are in, from political, economical, societal, environmental and ethical perspectives, seems bust. Good will eventually come out of this transition, of that I have no doubt, but what a fascinating period in which to be alive!

      Regards to all,

      Paul H (born 1944!)

    2. Psychoanalystus

      Wow! Sounds like this Bifo guy really hit bottom.

      I say forget the tsunami, forget the depression, just reach for the pitchfork dammit!


      PS — ain’t nothin’ to psychoanalyze around here today, but I’d sure like to kick me some oligarchic ass.

  3. Jonathan Versen

    You know the famous saying, “this time it’s different.” I wonder what Americans think. I would say, “…wonder what the average American thinks”, but we have become so balkanized that it’s probably a meaningless thing to say.

    Nevertheless, I tend to assume the US media will continue to spin this as due to the Greeks being overfond of their welfare state, etc.

    1. psychohistorian

      Americans know the tsunami described in the comment above is coming but they are partying on the edge of the derivative neutron bomb, so what the hell.

  4. LRT

    Yes, this is a sensible assessment, and helpfully free of assignments of blame to either conspiracies to enslave or to membership of the euro, and focuses on the real problem, the bad debt and how to deal with it and the consequences of failing to deal with it sensibly.

    The comparison to previous developing country financial crises is spot on.

    In the end, Greece is going to default. The more the EU pretends that it has found some way of avoiding it, the worse it will be when finally it happens.

    1. Iolaus

      How is it that the outfit that rated the junkiest of junky CDOs triple-A in 2007 retains credibility when it comes to rating Greek debt in 2011? Just curious.

      1. Psychoanalystus

        Because it works nicely to drive down prices of Greek assets to be privatized.

  5. rd

    Wit hthe free-flow of money and labor in Europe, the solution to the Greek problems is very simple:

    The other European countries privatize Greece. If the locals show unrest and do things like strikes, then you just bring in excess immigrant labor from other countries to replace the Greek workers. Solves two problems at once.

    You then pay enough Greeks to hang out in tourist spots so that visitors believe they are visiting Greece, instead of, say Tunisia or Algeria. After all, if they had wanted to go to North Africa, they would have gone there.

    Problems solved. The banks get their money, the tourists have their vacation spots, and Greece can now be run as efficiently as a Club Med by German and French managers.

    1. coyoteyogi

      What a great idea Bernard! I’m sure there are plenty of unemployed Turks who will be willing to work for less money. Why do I think that won’t work well in practice no matter how efficient it appears in theory?

  6. Bernard

    Yes Maybe now they/Junker/EU can rebuild the Acropolis/Temple of Athena. lol. I”v often wondered what it looked like “complete.”

    the Tsunami is coming. it is in the air, that desperation described in that poem above. we can all feel it, just as to when it hits.

  7. Ransome

    Are liquidity crises caused by too much liquidity? Perhaps Tobin has written about this? The idea is that capital is stored in different forms. When capital is stored in a way that is too liquid, it leaves those holding other assets at a great disadvantage. Irving Fisher was flummoxed by the Depression and the stock market collapse. Stocks were assets that were stranded by capital flight. He developed the concept of debt deflation. Not only did capital flight strand those with assets, the assets were owned with borrowed money. Liquid capital leaves holes in markets when it comes and goes, a form of leveraged looting while leaving a trail of debt.

    Is it possible that the banks are trying to structure a Greek deal that can be off-loaded on investors, creating liquidity for the banks? It follows the pattern of converting an asset to a revenue stream into a security into liquid assets with the risk shifted to the investor in an unsustainable cash flow pattern of asset stripping (Imperialism).

    You can see the effect of liquidity on the commodities market. A liquid market is an unstable market, a liquid economy is an unstable economy because in a stable economy, capital is converted to long term assets that are productive and to a great degree have limited liquidity. Housing was considered a long term capital investment because housing was generally a limited liquid asset. As housing became more liquid, it became more unstable. There is a reason why not everyone should be allowed to own a house. A stable market requires a certain amount limited liquidity and only certain people can afford limited liquid assets.

    Our current economic problems are probably caused by too much liquidity, which punishes long term investment, inhibits economic stability and is reflected as unemployment. Accumulation and consolidation of liquid capital in a global free market is especially destabilizing. Money making money. HFT provides liquidity to the market, ya right.

    Taking a circuitous route to ZH, to Forbes, to 1902 Hobson’s “Imperialism”.

    List despised the economy of the South describing it as “buying weapons from your enemy, cheaply” A reverse Imperialism for which you volunteer, as speculators cash in. It is doubtful the politicians will ever wake up, they prefer to financialize American assets to pay for elections.

  8. Benedict@Large

    From Reuters: “Euro zone finance ministers have … signaled that [Greece] must expect significant losses of sovereignty …”

    Losses of sovereignty? How about losses of DEMOCRACY. Isn’t that what they really mean?


    At the end of WWI, the “winners” saddled the “loser” with crushing debt burdens. Twenty years later, the loser came back to crush its captors.

    At the end of WWII, the “winners” tried a different approach. It lasted sixty years. Now the winners once again saddle the loser with crushing debt burdens.

    Wanna place a bet on Europe twenty years from now?

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