Tag Archives: France

Now I know what they did last summer

I just read a detailed account of the backstage negotiations during last Spring and the dramatic, for the EU and especially for Greece, months that followed. It’s a must read for anyone interested. It is the product of a Wall Street Journal investigation, based on more than two dozen interviews with euro-zone policy makers. It reveals how the currency union floundered in indecision—failing to address either the immediate concerns of investors or the fundamental weaknesses undermining the euro. The consequence was that a crisis in a few small economies turned into a threat to the survival of Europe’s common currency and a menace to the global economy. Enjoy the reading. It’s long, even though slightly reduced by me, so go get some coffee and a couple of cigarettes.

At a closed-door meeting in Washington on April 14, Europe’s effort to contain its debt crisis began to unravel.

Inside the French ambassador’s 19-bedroom mansion, finance ministers and central bankers from the world’s largest economies heard Dominique Strauss-Kahn, then-head of the International Monetary Fund, deliver an ultimatum.

Greece, the country that triggered the euro-zone debt crisis, would need a much bigger bailout than planned, Mr. Strauss-Kahn said. Unless Europe coughed up extra cash, the IMF, which a year earlier had agreed to share the burden with European countries, wouldn’t release any more aid for Athens.

The warning prompted a split among the euro zone’s representatives over who should pay to save Greece from the biggest sovereign bankruptcy in history. European taxpayers alone? Or should the banks that had lent Greece too much during the global credit bubble also suffer?

The IMF didn’t mind how Europe proceeded, as long as there was clarity by summer. “We need a decision,” said Mr. Strauss-Kahn.

The dispute at the Washington meeting divided two of the Continent’s grand old men, both of them born in 1942 and both among the fathers of the euro.

Wolfgang Schäuble, Germany’s ascetic and irascible finance minister, understood the IMF’s ultimatum. The euro zone would have to draw up a second bailout package for Greece by summer, just a year after a loan deal for €110 billion, or $140 billion.

But this time, Mr. Schäuble said, “We cannot just buy out the private investors” with taxpayer money. That would reward reckless lending, he said, and it would never get through an increasingly impatient German parliament. Greece’s bondholders would be required to lend more money, Mr. Schäuble proposed, rather than take payment for their bonds at maturity.

Jean-Claude Trichet, the urbane French head of the European Central Bank, warned against forcing bondholders to put in more money, which would effectively delay repayment. “This is not a good way to go in a monetary union,” Mr. Trichet said. “Investors would avoid all euro-area bonds.”

Mr. Trichet, in the twilight of a 36-year career as a finance official, feared that if Greece didn’t honor its bond debts on time, the implicit trust that kept credit flowing to many weak euro-zone governments would shatter. More countries and their banks would lose access to capital markets, in a chain reaction with incalculable consequences.

The April meeting ended inconclusively.

Meanwhile, the cost for fixing Greece was rising. The Athens government’s budget deficit was stuck at a stubbornly high level.

Italian and Spanish borrowing costs were still affordable and stable. The yield on Spain’s 10-year bonds hovered around 5.3%; on Italy’s, around 4.6%.

The debate over making bondholders contribute to the new funding package for Greece—known as private-sector involvement, or PSI—divided euro-zone countries.

Germany had allies. In the Netherlands and Finland, new governments had promised voters they wouldn’t pay for problems in less-frugal Mediterranean countries. Breaking those promises would risk rebellions in parliament.

But France joined the ECB in resisting burden-sharing by bondholders. France’s banks had lent more heavily than Germany’s to Greece and other indebted euro nations, and France fretted about a Lehman Brothers-style banking-system meltdown. Italian officials also feared that a precedent for losses in Greece would scare investors away from Italy’s bonds.

Three weeks after the Washington gathering, on Friday, May 6, panic erupted. German news weekly Der Spiegel reported that Greece was thinking of leaving the euro zone, with policy makers heading to a secret meeting that night in Luxembourg.

The report was half-right. There was a meeting, but Greece was staying put.

Inside a country chateau, top euro-zone officials told Greece’s finance minister they expected deeper austerity and faster reforms in return for a new aid package.

Then Mr. Schäuble said he wanted to discuss how bondholder burden-sharing would work. The usually smooth-mannered Mr. Trichet lost his patience. “I want to put my position on the record,” he said: “I don’t agree with private-sector involvement, so I won’t take part in a discussion about the practicalities.” He stormed out.

Mr. Trichet’s assent was vital. If the ECB were to stop accepting Greek bonds as collateral for its lending to banks on the grounds that the bonds were in default, then Greece’s banks, which were stuffed full of their government’s bonds, would quickly run out of cash and collapse. That would radically drive up the cost of a rescue.

In Greece, a new wave of mass strikes and demonstrations was starting. Protesters, angry about Europe’s imposition of extra spending cuts and tax hikes, clashed with police in front of the Athens parliament in the biggest and most violent protests in a year.

Spanish and Italian bond prices remained stable. But Europe was at a dangerous impasse over Greece.

Many euro-zone governments hoped Mr. Strauss-Kahn could find a way to relax the IMF’s summer deadline. The IMF chief was due to discuss the matter with German Chancellor Angela Merkel in Berlin on May 15, and with euro-zone finance ministers in Brussels the next day.

Mr. Strauss-Kahn couldn’t attend. Police in New York pulled him off his Paris-bound flight and charged him with sexually assaulting a hotel chambermaid. (The charges were later dropped, and prosecutors said they doubted the maid’s reliability.) An aide phoned Ms. Merkel at her central-Berlin home that Saturday and told her the news. The astonished chancellor responded with a German idiom that translates roughly as: “You couldn’t make this up.”

The IMF sent a lower-ranking official to Brussels in his place who had no latitude to deviate from the IMF’s deadline.

In Athens, meanwhile, a tent city of the “Indignant” protest movement—a groundswell of anger at the country’s impoverishment—sprang up outside parliament. Spain’s bond prices began to wobble as investors worried that other countries might also face debt restructuring.

On June 1, Mr. Schäuble’s deputy, Jörg Asmussen, presented a German plan at a meeting of finance officials in Vienna, at the Hofburg palace of the former Habsburg emperors. It involved pressuring Greece’s bondholders to swap their Greek debt for new IOUs that would come due far in the future. That would cut the amount of European taxpayer funding Greece would need.

After a meal in a palace banquet hall, the officials quarreled into the wee hours.

For the ECB, Mr. Trichet’s deputy Vitor Constâncio, of Portugal, denounced the German plan as “dangerous.” Credit-rating agencies would declare Greece to be in default on some of its debts—a so-called selective default. In that case, Mr. Constâncio warned, the ECB would refuse to accept Greek government bonds as collateral, dealing a death blow to Greek banks. France, Italy and Spain all supported Mr. Constâncio.

Germany’s Mr. Asmussen shot back with a threat of his own. Europe needed Germany’s money to fund a new program of Greek loans. “Without private-sector involvement,” he said, “there will be no program.”

Greece was descending into chaos. Embattled premier George Papandreou’s slender majority in parliament was fraying. On June 15, a swelling demonstration in Athens’s central square veered out of control.

Alone in his office, Mr. Papandreou phoned the parliamentary opposition leader and offered to make way for a national-unity government. Talks broke down, and the Greek government limped on badly wounded.

Even Ms. Merkel had some doubts about her finance ministry’s hard-line insistence that Greece’s bondholders take a loss. On June 17, she discussed a softer plan with French President Nicolas Sarkozy: a gentleman’s agreement under which Greek bonds would be honored but the bondholders would volunteer to buy new ones.

Mr. Schäuble pushed back. The veteran conservative politician was Berlin’s biggest supporter of the European dream, but he was also the keeper of Germany’s purse. He was determined to make banks share the burden with German taxpayers, and he didn’t trust them to keep a gentleman’s agreement.

When finance ministers met again on June 20, Mr. Schäuble pushed harder. Greece’s bondholders should be told not merely to accept a delay in repayment, he said, but also to forgive some Greek debt—a so-called haircut.

As Greece’s economy moved toward free fall, its debts were soaring beyond the country’s ability to pay, the Germans and their northern allies argued. Mr. Trichet and the southern countries resisted. Talks dragged on for hours. The ministers knew they couldn’t leave without some agreement.

They tried to please everyone: Greece would get more aid. Bondholder losses would be substantial, to placate the Germans, Dutch and Finns. But as the ECB insisted, they would avoid pushing Greece into selective default.

Investors knew you couldn’t have it both ways. As the threat of a Greek debt restructuring sank in, Southern Europe’s bond markets grew volatile. Spain’s 10-year bond yield rose above 5.6%. Italy’s reached 4.9%.

Greece’s parliament debated the extra austerity measures that Europe demanded. Central Athens erupted in violent protests. Anarchist youths tore up chunks of paving stone and threw them at riot police, who fired back with tear gas and stun grenades. Café parasols burned.

Europe hadn’t resolved how to keep Greece afloat. The IMF—whose demand for a decision had set off the whole argument—softened its ultimatum. IMF officials said they were satisfied that Europe would sort out some kind of new bailout, and wired Greece its summer aid payment on July 8.

It wasn’t enough to calm markets. Spain’s bond yield hit 6.3%. Italy’s rose to over 5.8%. Such borrowing costs, if sustained, would make it hard for both countries to rein in their debts.

The selloff in bond markets forced leaders to call an emergency summit for July 21.

Determined not to let the summit pass without an agreement, Ms. Merkel invited the French president, who objected to the German push for bondholder losses, to Berlin. The pair and their advisers met for dinner in the German chancellery the night before the meeting.

Few of them had time to touch the duck breast and vegetables on their plates as they searched for a compromise. Finally, Mr. Sarkozy said he would accept the private-sector involvement—if Ms. Merkel dropped her resistance to giving the euro-zone bailout fund broad new powers to buy debt of weak countries directly and move to protect such countries as Spain and Italy from bond-market contagion. Ms. Merkel agreed.

One more person needed to sign off. Ms. Merkel phoned Mr. Trichet at his Frankfurt office. He took the last Lufthansa flight to Berlin and arrived at the chancellery around 10 p.m.

Reluctantly, Mr. Trichet gave his OK. But he set conditions. Governments would have to insure Greek bonds against default so that the ECB could continue to accept them as collateral. And they would have to make plain that no other euro country but Greece would have its debts restructured.

The trio’s deal was both complicated and vague. Their staffs had little time to flesh out details before the next day’s summit in Brussels. As leaders trickled into the European Union’s boxy headquarters, Ms. Merkel faced a challenge to placate the euro zone’s south, which thought private-sector involvement was dangerous, and its north, which thought it didn’t go far enough.

When the leaders assembled at the sprawling summit table, Ms. Merkel admitted that the specter of bondholder losses was causing market unrest. But, she said, some Greek debt relief was essential. Without it, the bailout’s tough austerity conditions—made tougher by Greece’s missing its budget goals—would be seen as unbearable.

“If Greece had met its program parameters in April,” she snapped, “that would have helped.”

All 17 euro nations had to agree to private-sector involvement. But presented with a calculation that the plan would reduce Greece’s debt by only about €19 billion out of more than €350 billion total, Dutch Prime Minister Mark Rutte balked. If it’s only €19 billion, he said, “I’m out. I need more.”

Finnish premier Jyrki Katainen also complained. His parliament wanted collateral in exchange for more Finnish lending to Greece. “No collateral, no agreement from me,” he said.

Mr. Sarkozy was peeved. “All our parliaments can cause problems,” he said.

Then it was Slovakia’s turn. Prime Minister Iveta Radičová was fighting to keep her coalition together over aid for Greece—a richer country than her own. Adding more powers to the bailout fund “would be suicide,” she said.

Greece’s Mr. Papandreou pleaded for help. “If we can’t solve even Greece, we won’t be seen as being able to solve anything else,” he said.

Hours later, the leaders had a communiqué. To appease the holdouts, it left key points broad and noncommittal, offering the possibility of collateral to Finland and describing the complex bondholder deal in a few strokes, vague language that would return to haunt the bloc.

Officials struggled to explain the new Greek bailout and the bondholder losses. Amid the confusion, Mr. Rutte dispensed muddled numbers. Bank analysts put out flawed reports.

Investor confidence faltered as it became clear that Europe’s compromise achieved the worst of all worlds. Greece would be pushed into a historic default—the first time in nearly 60 years that a developed, Western country wouldn’t honor its debts. But the default was so small that Greece was still left with a crushing debt burden.

And then official Europe went on vacation: Ms. Merkel to the Italian Alps, Mr. Sarkozy to the French Riviera.

Bondholders didn’t. They went on a rampage.

This article was written by Charles Forelle and Marcus Walker. Stephen Fidler, David Gauthier-Villars, Sudeep Reddy and Brian Blackstone contributed to it.

Wall Street Journal also produced this documentary, called “Europe at the Brink” in which WSJ editors and reporters examine the origins of Europe’s debt crisis and why it spread with such ferocity to engulf much of the continent and threaten the entire world.

The run-up to the Greek economic crisis (Part 2)

This is the 2nd part of Greek journalist Pavlos Papadopoulos’ article on the run-up to the current Greek economic crisis, published by “To Vima” newspaper (16/10/2011). To read the first part of the article, click here.

“George knew everything” admits to “Sunday’s Vima” newspaper a top government official. “Since February 2009, eight months before the elections, we knew that Greece was technically bankrupt. The actual bankruptcy was a matter of time”. In February 2009, there was a sudden increase in the difference of the interest rate (spread) between the Greek and the German state 10-year bond. That development, which panicked the Karamanlis administration, didn’t go unnoticed by the PASOK leader and his close associates.

After talking with Greek and mostly foreign experts (Economics Nobel Prize recipient Joseph Stiglitz and investor George Soros, to name but a few) Mr. Papandreou is said to have concluded that the dynamics of the public debt was so powerful that a catastrophic bankruptcy was certain. According to the same source, the PASOK chairman then thought the obvious thing: the states which are on the verge of bankruptcy address to the International Monetary Fund (IMF). However he realized that the capital which was necessary for Greece to avoid bankruptcy was five times more than what the IMF could offer. So he concluded that Greece needs an “international solution” and he started examining the initiatives that he could take.

“Our mistake was that we didn’t prepare the people” says the same party member, “and the Party either”. Mr. Papandreou underestimated the “domestic front” even though he knew that Greece was heading towards bankruptcy. He didn’t abandon his vision of “Green Development”, neither did he direct his Financial advisors to more “careful” declarations. In the summer of 2009, the total cost for benefits was 30 bn euros. A lot of the MPs have called 2009 as the “new ‘81”.

Mr Papandreou stubbornly insisted in a vague rhetoric. He reckoned that a combination of green development, institutional reforms and a (completely unspecified) international initiative would solve the debt problem without targeting the people. This is why the warning by George Provopoulos, Governor of the Bank of Greece, that the 2009 deficit would be a double digit figure didn’t mean much for the wannabe Prime Minister. What he actually believed was that Greece would go from over-borrowing to prosperity without walking the distance in between. And some accused him that, had he taken tough measures back then, he could have avoided the worse that followed.

There was no “socialist allergy” at the Finance Ministry when it came to austerity measures. The Minister often called confidential meetings. “Think of shock measures” was his request to his associates . He believed that the austerity measures were necessary to restore the international markets’ trust. One of his most radical and risky ideas that was heard in those meetings was the “10% haircut of the savings” for all the bank accounts which had more than 100.000 euros. They would implement it at the same time with the (French inspired) freezing of any account which would be instructed to send more than 100.000 euros abroad, in order to proceed to a tax details check.

These proposals, as many others, were triumphantly rejected. Mr. Papaconstantinou did not possess the political prowess to enforce a different policy, while he never recovered the control over the tax-collecting mechanisms. He was good enough abroad. Domestically he achieved the minimum while he didn’t avoid deficiencies and the equivocations which increased the insecurity and the uncertainty. The measures that were announced were like aspirins and even them were causing reactions. Like the reaction by Christos Papoutsis when they announced the freezing of salaries in the public sector for those whose paycheck was more than 2.000 euros (which was rejected by the Prime Minister too).

During the early period of his administration Mr. Papandreou visited Moscow and Paris in order to “surround” Berlin, since Angela Merkel didn’t want to accept, especially after her alliance with the Liberals, a “European solution” in co-operation with the IMF. Mr. Papandreou reckoned that, if he could convince Moscow and Paris, he could then take Berlin. Having his mind in an “international solution” he kindly avoided Vladimir Putin’s proposal of geopolitical significance for an interstate loan to Greece.

While waiting for the international solution to mature, it was preferred to flirt with Goldman Sachs and Deutsche Bank. According to banking sector sources, the Greek government appointed these two banks at the same time with the order to investigate the possibility of a 25 bn euros loan (private placement) from the markets. However the international practice necessitates that such orders are given only to financial institutions. At the end of 2009 Gary Cohn, CEO of Goldman Sachs, met Papandreou at the Pentelikon hotel in Kifissia suburb. At the beginning of 2010 the head of Deutsche Bank, Josef Ackermann, visited the Greek Prime Minister’s office. The players who were involved in these initiatives were having preferential access to the core of power. The initiatives failed. The two banks (and their middlemen) lost important commissions. And the markets’ lack of trust against the Greek government increased.

End of Part 2  – To read Part 3 click here.