Monthly Archives: November 2011

A Back of the Envelope Bailout of the Bailout

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Let us say that Greece survives the EU’s assault on democracy (Brüderle’s “It’s a strange thing to do [hold a plebiscite],” for instance), and the Greeks proceed with their referendum on whether they want the latest bailout.  Say, further, that the Greeks reject the bailout.  Now accept, arguendo, that all of the dire things EU leadership claims will happen, do happen: there is a 90% write down of Greek sovereign debt; the Greeks leave, or are dismissed from, the euro zone, and perhaps from the EU altogether; and the Greeks go back to using (a now severely devalued) drachmas.  Beyond these, some are even claiming, apocalyptically, that the future of the euro and of the EU are at stake.

What will, in fact, happen from these desperate consequences, and how might they be mitigated?

Looking at these in reverse order, it’s possible to achieve some clarity.  Greece’s economy is 3% of the EU economy, even in good times.  Greece is one small nation of 27 nations in the EU and 17 in the euro zone—the subset of the EU that actually uses the euro as their common currency.  It just isn’t that big a player.  The threat, such as it is, comes from the large holdings of Greek sovereign debt that private banks, investors, national central banks, and the European Central Bank hold—a total of some €340 billion—and the threat from this sum comes from the fact that those who hold this debt hold it as a central part of their assets.  If the debt becomes worthless, these holders’ survival—at least that of the private banks and investors—becomes problematic.  I’ll address these debt holders in a bit, but it’s clear that the failure of the EU or the euro as a result of a Greek rejection of the latest bailout—of a Greek default—is nothing more than hysteria for political purposes.

On the matter of Greece leaving the euro zone—what the hey, Greece leaves the EU—some other things become apparent.  One is the nature of the downside of Greece leaving and striking out on its own.  I see little beyond the disruption of the leaving process itself.  Greece’s Mediterranean culture and its economic principles and imperatives (large government involvement in its people’s lives, early retirement ages, vast social programs paid for with high taxes, those taxes routinely evaded, the budget deficits associated with this (even if the taxes were paid)) made Greece a poor fit with the northern European EU (with its different work ethic, smaller government and fewer social services, and lower tax rates) from the start.  This nature of this mismatch has made for a large, continuous movement of northern European private and taxpayer money into Greece in the form of those loans, in the unrealistic expectation that they actually would be paid.  Or, maybe the expectation actually was that only the stream of interest income would last long enough for a profit.  With these differences in mindset and in government and economic goals, though, the Greeks could not, and cannot, compete in the EU, and so long-term servicing of Greek sovereign debt, including final repayment, has always been a chimera.  Larger than this, it simply has been a losing proposition all along to try to force inhomogeneous economies and cultures to integrate.  The Greeks are better off on the outside, on their own, and so is the EU.  I’ll come back to how the Greeks are better off, beyond this no longer having to take part in a losing game, in a bit.

As an aside, this same set of differences, with the possible exception of tax collectability, can be said to underlie the relationship of the other major Mediterranean economies (which are, incidentally, the rest of the PIGS: Portugal, Italy, and Spain) with the EU.  And the result of this may well be the same.

Now we come to that write down of Greek debt.  First, let’s put that debt into a perspective.  The banks (private and government, including Greek banks) hold around €340 billion, as I mentioned above.  This is against an EU economy with a GDP of some €12 trillion.  The loss of those €340 billion would be disruptive, to be sure, but it’s not catastrophic.  What exacerbates the problem is the key role many of those banks play in the national and EU economies.  The EU claims that there are around 95, or so, “systemically important” banks, and the EU claims further that these must be propped up virtually at all costs because of that perceived importance.  These are the banks whose reserves are required by the terms of the present bailout proposal to be increased to 9%, an increase intended to enable the banks to handle the disruption from the 50% write down of Greek debt that this bailout envisions.  Oh, yes, one more little fillip: it’s only the private banks that must suffer the 50% loss; the governments’ banks are to be kept whole.

Now let’s look at how this might be handled.  Assuming a bailout ever is appropriate, assuming that it ever is optimal to ignore moral hazard and morality in favor of short term convenience, I offer this solution, which has the advantage of at least being a better targeted, more efficient bailout.

For simplicity’s sake, and in keeping with the back of the envelope estimating of this proposal, let’s take a worst case condition: the Greek debt is written down 100%, not 90%.  The European Stability Fund Facility, set up explicitly for a Greek (and ensuing nation) bailout, has around €234 billion left after the last round of Greek bailout, and it’s capable of borrowing to a current maximum of €440 billion.  Private banks hold around €200 billion of that Greek debt, and the governmental banks hold the remaining roughly €140 billion.  Since Brussels has said that 9% reserves is sufficient to handle the 50% write down of Greek debt, it must be so.  This leaves €100 billion of losses from a complete Greek default to be covered (again, assuming a bailout is at all appropriate).  These “systemically important” banks can be made whole, then, for just €100 billion from the EFSF piggy bank, leaving €134 billion to cover the governmental banks’ complete loss of their €140 billion holdings.  That’s rounding error, but if Brussels’ accountants get too upset, the EFSF easily can tap its debt capacity to borrow an additional €6 billion to top up the bailout.  And with the EU leadership’s views of national taxpayers, it’ll be a simple matter to adjust the national subscriptions to recover the ECB, and the nations can simply ask their taxpayers to pay a tad more for their own national banks.  This bailout is a piece of cake.  And the object lessons here will instruct the rest of the PIGS.

But what of the Greeks, now that they’re on the outside looking in?  To be sure, they’re in for tough times, but the “austerity” measures the existing and EU-proposed bailouts were putting, and are going to put, on them will create the same tough times.  Only without the EU props, now the Greeks will be forced to learn to stand on their own.  They’ll be forced, both their government and themselves, to learn to live within their means.  A cash and carry economy will teach that.  The Greeks will find it hard, as all bankrupts do, to borrow; they’ll be forced to earn their way, and success will come slowly at first, but with each success, the next will come more easily.  Over time (and in less time than will seem possible in the days after the default), the Greeks will earn their way back to respectability.  Borrowing will become possible, albeit expensively so.  With continued prompt repayment, made possible from the lessons of earning one’s own way (of necessity, since there will be no outside help available), borrowing costs will come down to a normal range.  Their newfound understanding of their responsibilities will prevent them from over-borrowing for several generations, as happens with all bankrupts, as happened with the American society after the Great Depression (whose cause was different, but the lessons of work and frugality are the same).

And Bob’s your uncle.

The Bailout, Again

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I’ve disparaged in other posts the Greek people’s response to their economic crisis.  However, the decision of their Prime Minister, Giorgios Papandreou, to put the latest EU offer of a bailout to a plebiscite—to let those Greek people speak directly and for themselves on whether they think the bailout, or its terms, are suitable—has led to an interesting set of responses from the other governments of the Union, and from within the Greek government itself.

On the one hand, there is a great deal of legitimate frustration on the part of those governments over the decision for a plebiscite of the people who would be the “beneficiaries.”  Regardless of what we might think of the bailout itself, a lot of hard work and political capital, and yes, sacrifice and good faith, went into working out the parameters of this latest bailout, and filling in the details will take much more of the same.  On the other hand, how those governments are expressing their frustration says a very great deal about their views of democracy.

French President Nicolas Sarkozy insists, “Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts….”  The Greeks really must have other nations’ permission to speak for themselves.  It’s a cute idea, though; thank you for playing.

Rainer Brüderle, a leader of the Free Democrats Party (part of Germany’s ruling coalition), says in all seriousness, “It’s a strange thing to do [hold a plebiscite], but all you can do is take precautionary steps in case there is a state insolvency in Greece.”  Indeed.  How alien a concept it is, this letting citizens speak and instruct their government.

The Swedish Foreign Minister, Carl Bildt, has Twittered,  “I truly fail to understand what Greece intends to have a referendum about. Are there any real options?”  Aside from the question of whether the Swede’s understanding is necessary to a Greek referendum, his professed inability to understand the matter says more about his understanding of the imperatives of democracy than it does about Papandreou’s decision to consult his employers.

Even from within Greece’s own government, we have a lack of clarity.  “I never expected Papandreou to take such a dangerous and frivolous decision,” huffed Dora Bakoyannis, an independent member of the Greek Parliament.  In the birthplace of democracy, it’s a frivolous thing to have the government’s employers speak up and tell their government what it must do.

Socialist deputy Hara Kefalidou wrote to Papandreou this, among other things: “I cannot back a referendum which is a subterfuge by a government that appears unwilling to govern.”  Letting her constituents, and the constituents of the rest of the government, speak is mere subterfuge, and not democracy in action.  And a government which fulfills this duty is unwilling to govern.  This is interesting….

Even support for the decision to hold a plebiscite is founded, not on recognition of the fundamental tenets of democracy, but on the purely utilitarian grounds of its political practicality: a successful outcome would silence, once and for all, opposition to the bailout in Greece.

Another, ulterior, motive for the EU leadership’s crocodile tears seems apparent.  “While Greece is threatening a vote, nobody will ever give Europe the resources for the enhanced [EFSF],” said Jan Poser, Bank Sarasin’s chief economist.  Those uppity Greeks are going to cause an embarrassment for the EU at this week’s G-20 summit. The EU members had intended to beat the wallets of the other members, especially China and Brazil,  for funding to bail out the now over-committed EFSF, so that it could bailout Greece, and then Portugal, and then Spain, and then Italy, and….  However, with those Greeks so rudely planning to speak for themselves, it seems there will be great difficulty getting anyone from outside the EU to support these efforts.

Apparently, the European view of democracy is that the citizenry very democratically vote politicians into their government, and then the citizens are to shut up, sit down, and let their government speak for them.  But when governments speak for the people, with no obligation to heed those people, governments instead speak in the people’s place.  And the people have ceased to have a voice in their own governance.

No.  Let the Greek citizens speak through their ballot box.  They’ve been speaking in the streets for months, and they’ve been studiously ignored.  It isn’t government’s role to protect people from themselves (leaving aside the minor fact that it has yet to be established that a popular decision to reject the bailout is something from which protection is warranted).  Especially when government does such a terrible job in the attempt.  And putting off the default will only make it worse when it happens.

America’s Future

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This isn’t as apocalyptic as it might sound; on the contrary, this is the first in an occasional series I’ll be writing on our foreign and defense policies, with the latter being approached both in its own right and as an arm of our foreign policy.

In this post, I intend to outline what I believe is the environment for these policies as we move through the 21st century.  Another post will address the framework of our foreign and defense policies, and future posts will look at necessary structures for each, actions for and by each, and how events of the day might be handled by the new policy(s).

The present and future periods seem sufficiently different from the period ending in the mid-20th century that such a rethinking and reformulation, central as foreign and defense matters are to our existence as a nation, seems in order.  Many of the seeds of these differences, certainly, were sewn in the latter half of the 20th century, a period dominated by the Cold War and by the ready view of combat in progress in the Vietnam War, which was carried out within that Cold War.

This Cold War period was characterized by political maneuvers that would have made Metternich blush, and by military confrontations that seemed on the surface to threaten the century’s third total war, but that were, in fact, proxy confrontations wherein both sides used small surrogates to do the fighting.  Here was a use of foreign policy as a means of outright conflict, and this use represented the beginnings of a diffusion of physical conflict across a more amorphous set of actors than had been the formally structured nation-states that had dominated war for the preceding two or more centuries.

The environment within which international interactions are carried out has changed radically, including through large extensions from those earlier beginnings.  We operate in the 21st century in a media age where the events of the day, wherever on the planet they may occur, become available for viewing, commenting, prognosticating in near real time anywhere else on the planet.  We can see the results of an earthquake near Indonesia, or of an earthquake and tsunami in Japan, or of a failure to pay an international oil bill in the Ukraine, within hours, if not minutes, of their occurrence on our televisions, on our telephones, via the Internet, through nearly any visual and/or audio medium modern technology can provide a consumer.

We operate in the 21st century in a communications age that brings news of the event, or conversations with our friends and neighbors and strangers, to us nearly instantaneously via dinky little cell phones, that same Internet, video and still cameras—portable enough to be standard equipment in those cell phones—and bring us that news and those conversations from wherever our friends and neighbors might be, including half a planet away, and wherever we might be.

And we live in a 21st century where the major actors are not limited to formal nation-states.  These actors include international corporations with operating budgets larger than many of those nation-states.  These actors include less formally or classically organized entities which do great ill—terrorist organizations like al-Qaeda.  These entities also often have budgets larger than some nation-states, and they have military establishments that are the envy of many nation-states.  It is the threat from these, the terror organizations, of which al-Qaeda is only the most well-known, that must inform our policy formation, for the point of foreign and defense policy is the survival of the nation.

To be sure, the prosperity of the nation also is a major purpose of foreign policy, but without survival, there is nothing.

In this new set of conditions, the old, formal arrangements are not optimal.  NATO has lost its designed foes—both the Soviet Union and its Warsaw Pact no longer exist—and it has gained no other purpose; although this defensive alliance has been used, clumsily, to project political and military power offensively.  The World Bank and the International Monetary Fund have descended into piggy banks for the profligate.  And so on.

Cropping up is an ad hoc arrangement of free trade areas, each of whose individual purpose seems as much to be to compete politically with other areas, both free trade and not, as to provide mutual economic benefit to the particular members.

We have a fractious, nonhomogeneous Europe trying to force itself, Procrustean-like, into a single coherent whole, of several layers: a Union of European nations loosely subordinating a poorly understood level of national sovereignty to a European “government;” a subset of that attempting to bind economies that operate from radically different moral and political imperatives to a single common currency; and a growing division among Mediterranean Europe, northern Europe, and eastern Europe.

We have a Russian Federation, perhaps in a demographically-driven last hurrah, that is attempting to reform the earlier Soviet empire, this time with a different arrangement of how Russia will rule from its geographically broad and vulnerable center.

We have a People’s Republic of China that perceives a political vacuum developing in Asia and the Pacific and so is rapidly expanding its military capabilities, and sopping up resources like oil and iron, in an attempt to fill that vacuum.

And we have a world that, on the one hand, demands that we spend our treasure and our blood in attempting a semblance of peace in the Balkans when Europe effectively refuses their moral duty in their back yard, and on the other hand that vilifies us for supporting an ally against threats to its very existence.  We have a world that lectures us on our proper economic or moral comportment.  The list goes on.

Accordingly, our policy principles must be informed by the following necessary underlying mindset.  Following George Washington’s advice, in spirit if not literally, we must be chary of entering into formal alliances too quickly.  In this light, we must review our existing alliances for their suitability to our national interests.  Further, we must make plain that our friends know who they are and that they have nothing to fear.  We will stand with them steadfastly through all of their—and our—trials.  We must also make plain that our enemies know who they are and that they have everything to fear; their existence is at risk.  They have complete control, though, over their status as our enemy.  Finally, we must make plain that those who sit on the sidelines and “comment” on American actions here or there, or in this or that milieu, are demonstrating their level of integrity and courage by standing on the sidelines.  Their words are unimportant, and we do not hear them.

We must also recover our recognition that the United States is an exceptional nation and our understanding that our 18th century liberal/modern conservative values of individual responsibility, individual liberty, entrepreneurship are what made us great.  Other nations, other peoples will benefit from these values, also, regardless of the form these might take when tailored to the specific polity involved.  Thus, it not only is in our interest to talk about these values in all areas of the world, it is in those areas’ interest to hear them.  And a more prosperous, freer world is in both our interests.

Within that, it is in our interest, also, simply to provide aid to nations and peoples that need help.  We need no consensus, we need no permission of consensus, to do this, our duty.  Americans are the most generous people on Earth, and that innate generosity works to our, as well as the recipients’, advantage.  For example, after the 2004 tsunami struck Indonesia and killed 185,000 around the Indian Ocean, American aid, delivered by our Navy’s hospital ships, with our Navy’s aircraft carriers providing critical helicopter transportation and supply in support of relief efforts, Indonesian economic and physical recovery were both made possible and accelerated.  And the Indonesian people altered their opinion of us—in the middle of our war against terrorism that, by its nature, mainly involves groups claiming to be Muslim.  Beyond that, our aid cut the Indonesians’ favorable opinion of Osama bin Laden by 60%.  Similarly, our aid to Pakistan after a 2005 earthquake in Kashmir had killed 80,000 helped Pakistan recover far more rapidly than would have been possible otherwise, and it altered the Pakistanis’ opinion of us almost as radically.  And today there is a measure of peace, if not necessarily of complete justice, in the Balkans because we acted.

In subsequent posts, I’ll expand on the impact these issues should have on our foreign and defense policies.