PS: previous post in this series P1.
I was not so naive as to think that EU-elites would be experts at finance, particularly at financial restructurings of sovereign debt but I did make the mistake of thinking that they would be capable (and not too proud) to seek professional advice from the right people. Advice they sought, but they sought it from those who would be the greatest beneficiaries if their advice was followed – the holders of sovereign debt instruments, the creditors of Greece & Co.
I would have never thought that the creditors could pull off the kind of chuzpe which they did pull off — they presented themselves helpless. They had not made loans to Greece which they could now renegotiate, they argued. Instead, Greece had emitted public debt instruments, bonds, and such instruments have a life of their own in capital markets. Investors had bought those bonds under clearly established rules for public debt instruments and if those rules were not adhered to, there would be automatic default and a subsequent catastrophe in capital markets.
This was sort of like saying: “We would like to be helpful and reschedule our loans but we can’t because we don’t have loans. We have bonds and if a bond does not get paid, default will be declared automatically. There is nothing we can do about that”.
Joseph Ackermann of Deutsche Bank had the nerve to say in a CNBC-interview: “Measures must be taken that sovereign bonds are made risk-free again, which is what they should be!” I beg your pardon, Mr. Ackermann! Who ever said that sovereign bonds are risk-free? True, Basel-II stipulated that no reserves needed to be held against sovereign bonds but that doesn’t mean that they are risk-free. Sovereign bonds represent the full faith and credit of a national state; no less but certainly no more! And if you don’t agree with that, Mr. Ackermann, look up EU-treaties where it is stated clearly that the sovereign debt of one country will not be bailed-out by another country. Why should there be a “no bail-out clause” if there was no risk?
The creditors would have had a case if the bulk of Greece’s sovereign bonds had not been held by themselves but by anonymous private investors instead; but they weren’t. More than 90% of them were held by institutional investors who were known; banks, insurance companies, pension funds, hedge funds, etc.
True, bonds are anonymous public debt instruments governed by specific capital markets rules. De jure, one cannot involve the bond holders in a restructuring if those rules do not provide for such a restructuring. Nevertheless, when sovereign bonds are held almost entirely by known institutional investors, one can indeed involve those investors in a restructuring through “forceful persuasion”. If the private investors had caused problems, one would simply have paid them out since they represented such a small portion of the total. That would have been good use of tax payers’ money (and very little cost!).
When private creditors get into the kind of mess they had gotten themselves into with sovereign bonds, there is only one party which can help them — the government(s); the national governments and the EU. I would have thought that the governments would have been aware of their negotiating strength versus the private creditors. Message to private creditors: “You need help from us. So either we play this game together at our rules or you will be forced to stop playing”.
I would have thought that EU-authorities would have pursued one single objective in the beginning: to convert an uncontrollable situation into a controllable one. How would that have worked?
“Forceful persuasion” would have motivated the institutional creditors to participate in a new syndicated loan (or several syndicated loan packages) which would have prepaid the bonds they held and thus would have taken Greece’s sovereign debt off the public market. No more rating agencies. No more uncontrollable defaults. No more restraints to restructure the debt in an optimal way.
At the end of this exercise, every institutional creditor would have had the same Greek credit risk on its books as before. The only difference being that it would now have been a private loan and not a public debt instrument! Overnight, public discussion over “what happens with Greece’s debt?” would have disappeared because there would only have been private debt with private discussions. All private creditors, perhaps several hundred of them, would have fit into a large conference hall. They would have selected a Steering Committee with which debt restructuring negotiations would have been carried out.
Since EU-elites had exactly zero experience with a sovereign debt restructuring within the Eurozone, I would have thought that they would have recommended Greece to go to the IMF, the world-wide authority in the field of sovereign debt restructurings. I would have never thought that EU-elites would be too proud (or too arrogant) to allow for the possibility that in certain fields other authorities are more qualified than they themselves. The Spaniards call such a thing “tontos con iniciativa”. To really recognize the tragedy in all of this: I understand that Mr. Papandreou wanted to go to the IMF as soon as the crisis erupted but EU-elites prevented him from doing so.
Moral of the story
It’s hard to persuade “tontos con iniciativa” to not use their own unqualified initiatives and to let other more qualified ones use theirs. I would have never thought that EU-elites would be such “tontos con iniciativa”.
The final question
Could one have foreseen that EU-elites would behave like “tontos con iniciativa”? Based on the performance of EU-elites in Brussels in the past, yes, one could have. I did not.