Crashed
Page 49
As the leaders of world finance convened in Washington for the annual IMF meeting at the end of September 2011, the mood was grim. The world’s financial institutions were staring into “the abyss,” they declared.29 From the sidelines Larry Summers, recently retired from the White House, declared: “Now, when these problems have the potential to disrupt growth around the world, all nations have an obligation to insist that Europe find a viable way forward.”30 The Europeans could not go on pretending that all that was at stake were matters of eurozone governance. The G20 premeeting issued a communiqué stressing that, in the face of the ongoing eurozone crisis, “[w]e commit to take all necessary actions to preserve the stability of banking systems and financial markets as required.” Geithner and his British counterpart George Osborne combined to demand an end to Europe’s “political crisis.” The emphasis on politics was telling. Canada’s finance minister expressed incredulity that the global gatherings had been talking about Greece since January 2010.31 Geithner warned of a “cascading default, bank runs and catastrophic risk” if Europe failed to build a big enough firewall. Lagarde, from her new vantage point in Washington, insisted that there was still “a path to recovery,” but “much narrower than before, and getting narrower.”32 And yet a week after the IMF meeting, the EFSF plan that Merkel would squeeze through the Bundestag was undersized, and Finance Minister Schäuble publicly denied any plan to increase it by means of leverage. The Europeans, and the Germans in particular, still did not “get it.”
In the first week of October, as if to demonstrate that the dark talk in Washington was not merely alarmism, a run began on the Franco-Belgian bank Dexia, one of the casualties of 2008 that was most exposed to peripheral eurozone debt.33 Once again the European Banking Authority had embarrassed itself. Over the summer Dexia had passed the third European stress test with flying colors. A postmortem revealed that the stress tests had failed to account adequately for losses resulting from a restructuring of Greek debt. Furthermore, they had ignored altogether the issue of liquidity. In 2008 it had been collateral calls that triggered the disaster at Lehman and AIG. In 2011 they did the same to Dexia.34 The bank had contracted a huge portfolio of interest rate swaps on which it now faced demands for tens of billions of euros in collateral. The Belgian and French governments were forced into an expensive bailout at the worst possible moment. Given the potential impact on French public debt, the governor of the Banque de France, Christian Noyer, was forced to deny claims that France’s credit rating might be in jeopardy.35
Meanwhile, from the other side of the Atlantic came news of trouble at the high-profile brokerage firm MF Global. American regulators had ordered MF Global to boost its net capital to cover against the multibillion-dollar position it had built in Irish, Spanish, Italian and Portuguese sovereign bonds. Inverting the legendary big short position that speculators had built against mortgage-backed securities in 2007, MF Global had taken a “big long” in eurozone sovereign debt. It was gambling that other investors were underrating the stability of the eurozone and the value of peripheral bonds. As institutional investors like pension and insurance funds and banks offloaded their eurozone securities, it was MF Global that bought them up. As had been true in the case of the big short, there was a race between market sentiment and the ability of the contrarian investor to stay liquid. In October 2011 time ran out on MF Global. The regulator’s call for more capital triggered inquiries into its balance sheets and revealed that to tide it over in the face of huge market pressure it had been dipping into client funds. By the end of October one of the most high-profile investors betting that the eurozone did indeed have a future collapsed.36
It was a bitter irony that it was precisely as MF Global filed for protection that the eurozone finally began to take steps toward a more decisive resolution of the crisis. On October 23 the European leaders held a gathering to sketch the outlines of yet another stabilization plan. It involved deep debt restructuring, new loans for Greece, an expansion of the EFSF, bank recapitalization—finally, all the elements of a solution were on the table. Indeed, the issues were beginning to be monotonously familiar. That, however, did not mean that the way forward was obvious or politically easy. On October 26 Merkel addressed the Bundestag to tell them that the expansion of the EFSF they had voted to approve a month earlier had not been enough and that the fund might, after all, need to be leveraged.37 On the promise that under all circumstances Germany’s liability would remain capped at 211 billion euros, Merkel again got the majority she needed. With Germany at least formally on board, European leaders assembled for a second time in Brussels on the afternoon of October 26 to finalize the third rescue package for Greece.
Composition and Estimated Bond Holdings of Creditor Committee (in billions of euros)
Steering Committee Members
Further Members of the Creditor Committee
Allianz (Germany)
1.3
Ageas (Belgium)
1.2
MACSF (France)
na
Alpha Eurobank (Greece)
3.7
Bank of Cyprus
1.8
Marathon (US)
na
Axa (France)
1.9
Bayern LB (Germany)
na
Marfin (Greece)
2.3
BNP Paribas (France)
5.0
BBVA (Spain)
na
MetLife (US)
na
CNP Assurances (France)
2.0
BPCE (France)
1.2
Piraeus (Greece)
9.4
Commerzbank (Germany)
2.9
Crédit Agricole (France)
0.6
RBS (UK)
1.1
Deutsche Bank (Germany)
1.6
DekaBank (Germany)
na
Société Gén. (France)
2.9
Greylock Capital (US)
na
Dexia (Belg/Lux/Fra)
3.5
UniCredit (Italy)
0.9
Intesa San Paolo (Italy)
0.8
Emporiki (Greece)
na
LBB BW (Germany)
1.4
Generali (Italy)
3.0
ING (France)
1.4
Groupama (France)
2.0
National Bank of Greece
13.7
HSBC
(UK)
0.8
Notes: Estimates of bond holdings refer to June 2011, creditor committee composition to December 2011.
Source: Jeromin Zettelmeyer, Christoph Trebesch and Mitu Gulati, “The Greek Debt Restructuring: An Autopsy,” Economic Policy 28, no. 75 (2013): 513–563.
This time PSI would be the cornerstone of the entire deal. The haircut would be deep. Banks and their shareholders would have to recognize tens of billions of euros in losses. Rumor had it that the Germans were pushing for 60 percent. The creditors, negotiating from offices in the basement of the EU’s Justus Lipsius building, held out for less, and they were a powerful group. Despite the ongoing sell-off of peripheral bond assets, in 2011 all the major banks of France, Germany and Italy still held Greek bonds. So too did Greece’s own banks, major insurance funds and American hedge funds.
To shift this weighty coalition of financial interests it took not only financial inducements but also a forceful personal intervention by Merkel and Sarkozy. At 4:04 a.m. on the morning of October 27, a deal on “voluntary bond exchange” at 50 percent was announced.38 The plan promised to reduce Greece’s debt below 120 percent of GDP. To tide it over Greece was to receive another 130 billion euros in funding, bringing the total in emergency loans it had received since 2010 to 240 billion euros, or more than 100 percent of Greek GDP. To contain the fallout from this momentous decision, all other euro area member states solemnly reaffirmed “their inflexible determination to honour fully their own individual sovereign signature.” The EFSF was to be boosted to close to 1.2 trillion euros by means of leverage or by using its resources not to make loans directly but as an insurance fund to cover losses on private securities. And Europe’s banks were expected to recapitalize to the tune of 106 billion euros, though it was left up to them how they raised the funds. At last, Europe had produced a package that at least in outline recognized the fundamentals of the problem. Debt reduction, recapitalization and backstopping were the keys. The questions of who would pay and how exactly the EFSF would be equipped still had to be settled, but before those essential technical issues could be broached, Europe had to deal with the political fallout.
IV
By the end of October 2011, after two years of economic disaster and financial panic, the Greek political system was coming apart. Unemployment now stood at 19.7 percent, up from 8 percent in 2008. The public mood was ugly. Since the onset of the crisis the Greek opposition—on both the left and right—had consistently refused to join with the government in facing the demand of the foreign creditors. The entire disastrous austerity program had been conducted on the strength of the majority that PASOK had won in October 2009. The party was paying the price. In the third week of October giant demonstrations across Greece challenged the latest round of cuts. The strikes were unprecedentedly wide-ranging. “[T]rash collectors, teachers, retired army officers, lawyers and even judges walked off the job.”39 A member of the Communist party was killed in clashes with the police. On October 28, the day of commemoration of national resistance, the venerable president of the republic Karolos Papoulias, himself a partisan veteran, was howled down by protesters in Thessaloniki. Seeking to regain the initiative, on the evening of October 31 Prime Minister Papandreou convened a meeting of his party and announced that it was time to call the majority of the Greek people into action and to shame the opposition into supporting the measures dictated by the troika.40 There would be a referendum—yes/no on the EU’s latest debt restructuring and austerity program.
It was a reasonable political move on Papandreou’s part, but did Greece still have the kind of freedom of maneuver a referendum implied? The complex deal that had been announced in the early hours of October 27 was the result of months of agonizing discussion between Paris and Berlin, Brussels, the ECB and the IIF representing creditors from around the world. Merkel had twice whipped the Bundestag. The July 21 plan had been ratified by every parliament in Europe. Now, without prior warning, the Greek premier was adding a further democratic hurdle. Markets aside, how were the other parliaments to react? What if the Greek voters rejected the proposal? Merkel, at least, had been given some prior intimation of Papandreou’s gamble. But October 31 was the first that Paris had heard of it and Sarkozy was incandescent. The Greeks were putting the entire stabilization package in doubt and France knew that it was no longer safe. On November 2 Papandreou was summoned to the G20 meeting in Cannes, not a forum to which Greece was normally invited, to explain himself.41
At a press conference in Cannes Sarkozy and Merkel laid down the law: If there was to be a referendum there could be only one question: “in or out” of the eurozone. “Our Greek friends must decide whether they want to continue the journey with us. . . . We want them to stay inside the euro, but they must obey the rules.” Otherwise, they would receive “not a single cent” from French and German taxpayers. In fact, the majority of the Greek political class and Barroso as commission president judged the proposition of a monthlong referendum campaign far too risky. On November 3–4, in side meetings at Cannes, Merkel and Sarkozy maneuvered with the Greek opposition and Papandreou’s ambitious finance minister, Evangelos Venizelos, to abort the referendum proposal and end Papandreou’s premiership. Papandreou was replaced by a safe technocratic pair of hands, Lucas Papademos. The new Greek prime minister was an American-trained economist and central banker, a former vice president at the ECB.42
But the real stuff of the Cannes meeting, once the Greeks were hammered into line, was the search for a fix for Italy. If the worst came to the worst Greece could be let go. Italy had to be stabilized. In a preemptive move to restore confidence, the IMF had proposed an 80-billion-euro precautionary program that would come with such tight financial provisions that it would rob Berlusconi of any wiggle room.43 Berlusconi refused the role assigned to him. The only public result that emerged from Cannes was an agreement by Rome to accept IMF monitoring on a voluntary basis, as a matter of pride and self-vindication, but not as the condition on a loan. Indeed, Berlusconi let it be known that he had rejected an offer of IMF money. Italy thus got the worst of all worlds: the stigma of having been considered for an IMF program and the duress of oversight, without access to new money.
This, at the time, appeared to be the dispiriting upshot of the Cannes conference: the removal of the Greek prime minister, deadlocked negotiations, no aid for Italy and a further faux pas by Berlusconi. Three years later it emerged that something far more dramatic had transpired. Lagarde’s Italian proposal was a sideshow. The real news was that Paris and Berlin were maneuvering to unseat the Italian prime minister. As Geithner put it in transcripts compiled for his memoirs: “The Europeans actually approach us softly, indirectly before the thing [Cannes meeting] saying: ‘we basically want you to join us in forcing Berlusconi out.’ They wanted us to basically say that we wouldn’t support IMF money or any further escalation for Italy, if they needed it, if Berlusconi was prime minister. It was cool, interesting.”44 Geithner could not hide his approval of the basic idea: “I really actually felt, I thought what Sarkozy and Merkel were doing was basically right which is: this wasn’t going to work. Germany, the German public were not going to support, like, a bigger financial firewall, more money for Europe, if Berlusconi was presiding over that country.” Unfortunately, a further page of Geithner’s candid observations was redacted. In his memoirs, Geithner says that he informed the president of this “surprising invitation” from Europe, but concluded, “[W]e couldn’t get involved in a scheme like that. ‘We can’t have [Berlusconi’s] blood on our hands,’” Geithner told the president.45
But whether the White House accepted the “suprising invitation” or not, Berlusconi’s days in office were numbered. His government was disintegrating from within. The Northern League was refusing to cooperate in the changes to the pension system demanded by the rest of Europe and the IMF. Finance Minister Tremonti was pushing for Berlusconi to resign.46 Alrea
dy in mid-October, Angela Merkel had made phone calls directly to the Italian president, Giorgio Napolitano, to explore alternatives.47 Napolitano, a longtime PCI apparatchik—Henry Kissinger’s favorite Eurocommunist—had agreed that it was “his duty . . . to verify the conditions” of Italy’s “social and political forces.” By November 12, with his coalition crumbling, Berlusconi lost a vote of confidence in parliament and resigned. What the “condition” of Italy’s “social and political forces” apparently demanded was rule by technocrat. The man who recommended himself was Professor Mario Monti.48 Like the new Greek prime minister, he had a background as an academic economist with exposure to the United States. As European commissioner for internal market and then for competition between 1995 and 2004, he acquired the nickname “the Italian Prussian.” After leaving the commission, Monti served as international adviser to Coca-Cola and Goldman Sachs and founded Bruegel, Europe’s most influential think tank.49 In 2011 he was summoned from his position as president of Bocconi University to become Italy’s prime minister. To make this elevation to the head of government possible, Monti, who held no elected office, received from Napolitano the honorary position of “life senator.”