Sovereign Debt Archives - Bankers Anonymous

August 22, 2016December 2, 2016

Hamilton And Sovereign Debt

How does a profane, hip-hop, hit of a show, and a chapter, dropped in the middle of a behemoth book on Alex Hamilton, by Ron Chernow capture the current zeitgeist, show us to treat our debt with sacred honor?

Hamilton, the musical by Lin-Manuel Miranda, swept through my household this Summer like a hurricane, buffeting us as if we lived in a forgotten corner of the Caribbean. While the beautiful nerds of my household joyfully sing about the Revolutionary War, I tackled Ron Chernow’s biography Alexander Hamilton, upon which Miranda based his amazing show. A story Chernow tells about national debt illustrates Hamilton’s particular genius.

Serving President George Washington as the first Treasury Secretary of the United States, when the new country flirted with financial ruin, every action Alexander Hamilton took carried particular weight. He faced a terrible choice.

Soldiers in the Revolutionary War had received state IOUs in return for their military service. Years after the end of fighting with the British, many of these debts remained unpaid. In addition, different states had repaid debts to different degrees. Virginia was nearly debt-free for example, while Massachusetts still owed tremendous amounts to soldiers.

Some believed this new federal government would not, and could not, pay off its debts to soldiers. Chernow writes that these debts traded at fifteen cents on the dollar as former soldiers sold early, in part because they needed the money, and in part because full payment seemed doubtful. Speculators bought the debt at extreme discounts, hoping to make money if the young government could restructure the debt somehow. At that price, even a settlement of thirty cents on the dollar offered a financial windfall to debt-buyers.

What kind of deal would Hamilton, as Treasury Secretary, offer on the debt? Should he restructure it and offer a lesser amount? Should he seek a way to punish the speculators? Could he track down the former soldiers who had sold their IOUs, to compensate them, instead of the investors? Wait for it…

Let’s pause for a moment and really wallow in the awful optics and politics of Hamilton’s choice. Nobody deserved more respect than the first patriots who suffered and died under Washington, when his “ragtag volunteer army in need of a shower” defeated a global Superpower, in Miranda’s purposefully anachronistic phrasing. But most of the government debt issued to soldiers wasn’t owed to them anymore, but rather to buyers of their debt. These were some of the least sympathetic people. You know, Wall Street-type people.

jefferson_madison — Jefferson and Madison

The most powerful member of Congress, James Madison, and the Secretary of State, Thomas Jefferson, vehemently opposed rewarding the speculators. As Virginians, they also argued that consolidating the debts at the federal level would reward less prudent states at their state’s expense.

Picture, as well, Hamilton’s childhood as a near-destitute orphan in the Caribbean. He was not a natural friend of Wall Street. He’d served as a captain of an artillery company under fire in the Battery in Manhattan and the Battle of Kips Bay; he had personally led a bayonet charge on an entrenched position of Redcoats at Yorktown. Was Hamilton prepared to honor commitments that would enrich these greedy speculators who bought government debt at pennies on the dollar from his fellow soldiers? Wait for it…

He was, and he did. He consolidated the states’ debt into federal debt. On his first and second days after confirmation as Treasury Secretary in 1789, he took out fresh federal loans from the Bank of New York and The Bank of North America in Philadelphia.

Hamilton understood the value of communicating a policy of honoring one’s debts, a policy that strengthens the nation. “In nothing are appearances of greater moment than in whatever regards credit. Opinion is the soul of it and this is affected by appearances as well as realities,” he wrote in his 40,000-word Report on Public Credit, delivered to Congress in January, 1790.

He further set the precedent that the government does not interfere in private transactions of its public securities, even if the optics and politics would make it expedient to change terms, after the fact.

As Chernow reports, Hamilton reframed the moral issue into one of honoring private property and “security of transfer.” The soldiers were not as heroic as they seemed, nor the speculators as greedy. Investors after all, had risked their capital. The ex-soldiers, in turn, had shown little faith in the government. That the buyers of soldiers’ debt made extraordinary short-term fortunes was, in the far-seeing perspective of Hamilton, irrelevant to the more important work of establishing a solid financial footing for the country. Meanwhile, Madison and Jefferson fumed.

The United States has never defaulted on its debt. Not through the ruin of a burned capital in 1812, nor through a crippling Civil War, nor the World Wars and Depression of the Twentieth Century. Hamilton’s honoring of national debts – against all the political, fiscal and moral pressure of his day – bolstered us as a nation. It set us up for national prosperity.

As the fictional Jefferson of the Hamilton musical ruefully admits: “I’ll give him this: His financial system is a work of genius. I couldn’t undo it if I tried, and believe me, I tried.”

Or the fictional Madison: “He took our country from bankruptcy to prosperity. I hate to admit it, but he doesn’t get enough credit for all the credit he gave us.”

Contemporary debates

Shifting to 2016 for a moment, what would Senators Bernie Sanders or Elizabeth Warren have done with Hamilton’s conundrum? Historical hindsight isn’t necessarily fair, but I’ve listened to their views on Wall Street, the industry where I previously worked, and which they consistently attack as a cesspool of greed, corruption, and speculation.

We also have GOP presidential candidate Donald Trump’s views on the record on our national debt. In stark contrast to Hamilton, Trump presented his approach in an interview with CNBC in May. He explained “I’ve borrowed knowing that you can pay back with discounts. [As President,] I would borrow knowing that if the economy crashed, you could make a deal.”

See, that’s not really how the bond market works. Hamilton had the foresight to know that once you default on debt – which is what “pay back with discounts” means – you set a precedent for how lenders view your credit in the future. I would even argue that once you even say that out loud – if anyone takes you seriously – you risk submarining your nation’s future ability to borrow.

Think about how lucky we are to be alive right now, with Hamilton on our side.

A version of this post ran in the San Antonio Express News.

Please see related post:

Trump: Sovereign Debt Genius

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May 12, 2016August 12, 2016

Donald Trump – Sovereign Debt Genius

One of The Donald’s great strengths is that he latches onto a partial truth – or an unspoken but widely held belief – and then expands upon it for his own purposes. Obviously this can veer into disgusting territory, when it comes to expressing sexually insecure men’s feelings about women, or insecure workers’ feelings about economic threats from China or Mexico. As Matt Taibbi eloquently expressed, he effectively uses this same talent of partial truth-telling to bash government and media elites who do, in fact, disdain, misunderstand, or ignore ‘regular Americans.’ Trump scores these points against Establishment elites because really, we sense some truth in what he says, that others before him won’t say.

Earlier in the week Trump stepped in a pile of it when he expressed truths about US sovereign debt which political leaders cannot openly discuss. Unconstrained by good taste, judicious character, or political consistency – he can pop off in any direction, occasionally hitting on an important point that more people should understand. The Donald said:

“I’ve borrowed knowing that you can pay back with discounts. I’d borrow [as President, on behalf of the US] knowing that if the economy crashed, you could made a deal.”

This is so crazy that he said it – as a person running for President – that you kind of have to laugh at his gall. On the other hand, he’s right. This is what happens when countries borrow too much. And also, we don’t really know – or have any kind of open discussion in this country – about what constitutes too much national borrowing.

When I worked as an emerging market bond salesman in the late 1990s – slinging bonds from places like Pakistan, Ukraine, Ecuador, Argentina, Russia, and Ivory Coast – we used to put out economic research for our clients that pointed out that a 70% Debt/GDP ratio marked a kind of scary ‘Do Not Cross’ line. If the total amount of sovereign debt exceeded 70% of the economic output of country, you might have to start worrying about whether that country could reliably pay back its bonds. Once you hit 100% Debt/GDP, history seemed to show, emerging market countries would enter a red-zone of risky sovereign renegotiation, or possible default. Their cost of new borrowing would rise, which in turn would hurt their ability to service their existing debt. At between 70% and 100% Debt/GDP, countries could get into a vicious death-spiral of borrowing, ending in sovereign debt restructuring.

At that time, Japan alone among rich countries represented a weird exception to that guideline, with seemingly ‘safe’ bonds offered at very low interest, while maintaining a Debt/GDP ratio of around 100%. Post 9/11, the US and Europe embarked on a new low-interest era, and developed countries seemed to be able to borrow a greater amount than ever before, without adverse consequences. Debt was cheap, borrowing levels rose, and many more countries – developed, and emerging – breached ‘the red zone.’

Present-day debt levels

These days, the US (seemingly comfortably) shoulders a 100+% Debt/GDP ratio, while Japan’s ratio has climbed to 180%. Are either of these ratios too high?

By way of comparison, Greece – which effectively restructured its debt with the rest of Europe in recent years – only had a 150% Debt/GDP ratio. The US now enjoys a previously unthinkable Debt/GDP ratio, seemingly without consequences. I point out these ratios to say that it’s also not impossible that the US would have to renegotiate its debts at some point. Which is why, crazy as Trump is, he’s sort of inadvertently pointed out an important thing.

Don’t get me wrong. In no way do I ‘predict’ a US sovereign debt crisis is imminent.¹ Permabears and goldbugs like Peter Schiff like to talk about a coming US debt crisis like it’s a guaranteed future – like it’s a rational reason to:

1. Start buying gold and

2. Buy empty farmland and build bomb shelters.

It’s not. Shortly after the 2008 Crisis in particular, commentators tried to argue that increasing our national debt at our post-Crisis rate would lead to financial Armaggedon. It didn’t.

I just think that – without any current limits on US sovereign borrowing, we might have the impression that we could borrow indefinitely.

Trump’s comments recently made explicit the problem of excessive borrowing that other countries have dealt with on a semi-regular basis. Greece, Pakistan, Ukraine, Ecuador, Argentina, Russia, and Ivory Coast – to name a few – have faced the problem of excessive debt in the past two decades and done exactly what Trump talked about. You sit down with your creditors and have a difficult, adult conversation. We “US exceptionalists” think this is ‘unthinkable’ but really it shouldn’t be. It happens and has happened on a regular basis with many countries. Plenty of unpleasant but semi-banal developments (war, recession, political instability, a Kanye/Miley Cyrus Democratic Party platform in 2024) could put the US’ ability borrow and pay its debts at risk.

Currency control

One of the great advantages Japan and the US hold over Greece (and the rest of the Eurozone) and many emerging market countries is that we control our own currency. Here again, The Donald is our resident genius, in explaining why this is such an advantage:

“First of all, you never have to default, because you print the money. I hate to tell you, okay, so there’s never a default.”

Again, this is totally irresponsible of him to say this out loud as a person running for President, but he’s technically correct and therefore to be credited with bringing complicated unspoken semi-truths to the surface. Dollar-denominated debt becomes only half as expensive in real terms, if you just double the amount of available money, or experience a quick bout of 100% inflation.

There are some nuances here that would make that harder than it sounds coming from Trump’s mouth. Like, you don’t get to trick your lenders more than once this way, because they (the lenders) quickly raise future interest rates to adjust to inflation.² Also, significant sovereign debt obligations like Social Security, Medicare, federal pensions, and TIPS (an inflation-linked type of bond) adjust payments upward with inflation. But like I said, I admire Trump for bringing up an important unstated half-truth about currencies and sovereign debt.

The US also enjoys another huge advantage relating to its currency – the fact that everybody in the world still wants dollars as a preferred method of trade, and store of value.

The ‘Reserve Currency’ Advantage

In addition to our ability to inflate away too much debt, we enjoy the advantage of a special ‘reserve-currency’ status in the world which acts as an amazing kind of subsidy for our profligacy.

What do I mean by that? I mean something kind of like that joke about the two hunters and the hungry bear. We don’t have to run a great economy or run a great political system, we just have to run our operation better than all the other choices.³ So if you can create (at least the illusion of) the Rule of Law (China and Russia can’t), Growth (Europe and Japan can’t), and Political Predictability (Africa and Latin America can’t) at a Big Scale (Canada, Switzerland, New Zealand can’t) then you get to be the country that controllers of massive amounts of capital want to be invested in.

We attract excess Chinese, Saudi, Singaporean and Norwegian money into our bonds because where’s else can they park huge amounts of wealth? We may have deep structural problems, but so does everywhere else, to an even greater extent. From a sovereign debt perspective, we can outrun the bear better than the others. At least for now.

That’s the part, unfortunately, with which The Donald is not actually helping, though.

Some Ways In Which The Donald Isn’t So Genius

He’s perfectly correct in saying that if the US got in trouble with too much borrowing, we could sit down and renegotiate our obligations. Lots of countries have done this. He’s also perfectly correct that our control over our own currency allows us to ‘inflate away’ the problem, to some extent. What he’s absolutely putting at risk, however, is our special ability to ‘outrun the bear’ in the form of maintaining (at least the illusion of) the Rule of Law, Growth, and Political Predictability.

The following policies will not help our reserve currency status, which is really the key to the US’ sovereign borrowing advantage:

Building giant walls along our border
Threatening to default on our bonds
Threatening to massively devalue our currency
Forbidding entrance to and/or deporting people based on their religion
Threatening aggressive trade wars with major bond funders, like China
Promising to rewrite libel laws in order to quell journalistic enemies
Encouraging violence against political enemies during public rallies

Now, of course, The Donald will probably say he’s just kidding about all these things. He’s really a more serious person than that, you know he went to a really good school, and he’s really smart and handsome. Lots of women, and even the hispanics, you know, they like him. Maybe bond investors don’t take his little jokes and threats that seriously. Fine, maybe he’s just kidding about all that stuff.

But in my experience, the people who control real capital – the few thousands of wealth managers and bond traders on this planet who ultimately decide whether to continue to roll over the US debt every month – until now rolling it over like clockwork at attractive, low interest rates – in my experience they don’t fuck around.

And by “not fucking around,” I mean they really don’t appreciate heavily-indebted countries, led by hucksters, pushing trade wars and closed borders. They can choose whether – or not – to invest in bonds of countries led by an unserious racist xenophobe who jokingly threatens debt restructuring and inflation. Believe me, they don’t appreciate the joke.

I like our reserve currency advantage. We’ve built a good track record over time of responsibly handling our massive national debts. We’ve been a good bet, and just as importantly perceived to be a good bet up until now, for paying everyone back.

There’s quite a bit at stake here.

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predictions like this are always made by cranks and people with things to sell you ↩
As our poet-President W. Bush once mumbled “Fool me once, shame on…shame on…You…fool me, can’t get fooled again.” ↩
At the risk of over-explaining the joke/analogy: We just have to outrun the other hunter. ↩

January 16, 2014November 12, 2016

1930s Style Debt Defaults?

A sometime gold-coin buyer and a frequent reader of Bankers Anonymous sent me a message a few days ago, linking to the CNBC headline “1930s-style debt defaults likely, says IMF,” and with the simple question: “Mike – True?”

Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff’s latest paper, commissioned by the IMF and published in December 2013, re-raises the specter of sovereign default in the so-called ‘developed world,’ warning of restructuring, restrictive capital controls, and debt write-offs.

Their paper was rewarded and echoed with headlines from Business Insider like “Extreme Debt Means 1930s-Style Defaults May Be Coming to Much of the Western World” and CNBC’s “1930s-style debt defaults likely, says IMF,” the headline that prompted my reader’s email to me.

This seemed like a great opportunity to reflect on the problem of different, confusing, contradictory messages constantly streaming from the Financial Infotainment Industrial Complex.

Academia, Click-bait, and Markets

Those headlines, loosely based on the Reinhart and Rogoff IMF paper, are a great example of the giant gulf between financial academia, click-bait, and actual markets. Each information source follows its own rules and logic – but mixed up together provide a cacophony of worse-than-useless dis-information.

First, academia on its own terms

Professors of international economics should consider a wide variety of scenarios, and they should present historical data, as Reinhart and Rogoff have done, with their book This Time is Different: Eight Centuries of Financial Folly.

[I confess I have not yet read this, but I suspect I will find this a useful addition to other books I have enjoyed on sovereign debt defaults, such as A Century of Debt Crises in Latin America: From Independence to The Great Depression 1820-1930 by Carlos Marichal.]

I enjoyed the Reinhart and Rogoff paper, with its useful historical data, reminding readers that sovereign debt defaults in Europe are not particularly rare. In addition, sovereign defaults sometimes come hidden in sheep’s clothing – as when a combination of capital controls, high inflation, or forced ‘savings’ from captive sources such as workers’ pensions effectively bail out overly indebted governments.

As a former emerging markets bond guy I read Reinhart and Rogoff’s work with much interest. Here’s a summary of their main points, and my reactions:

Drastic sovereign debt restructurings are historically more common than many realize, and come in a variety of forms. [Totally agree]
Financial repression, while brutal and inefficient, probably reduces financial excess, and therefore financial crises. [Totally agree]
The 5 year-old crisis we are in will involve more explicit restructuring of sovereign debt in the so-called ‘developed’ world, presumably peripheral Europe. [Mmm. Squinting. That depends. Doubtful.]
We will see a return of ‘financial repression’ in the ‘developed world.’ [I see no evidence of this. Or, I guess it depends how you define ‘financial repression.’]

But what about the click-bait?

Reinhart and Rogoff are legitimate economists (at a reasonably decent University) so it’s not surprising that they have produced serious work on historical sovereign debt restructurings. I wonder, however, to what extent they anticipated (and even encouraged?) the click-bait aspect of their paper.

“1930s-style debt defaults likely, IMF says” is a totally misleading version of their report.

“Ex-Goldman bond salesman may make billions blogging his random opinions, says blogger,” is a headline I could write about myself, but it would have as much relationship to the probabilistic truth as that CNBC headline has to the IMF report.

Unfortunately, CNBC – and the rest of the Financial Infotainment Industrial Complex – runs on nonsense click-bait, so people like my reader who sent me the email query get pummeled with emotionally-charged or scary bullshit, on an hourly basis.

Market Data

How do I know that – on a probabilistic basis – both the click-bait headline as well as points 3 & 4 of the Reinhart-Rogoff paper can be safely ignored?

Because what neither academia, nor the click-bait-setting members of the Financial Infotainment Industrial Complex typically take into account is that we have a ton of aggregated financial information available in markets about exactly their topic. Right now. At all moments.

The bond market

At any given moment – with updates on a minute-by-minute basis – the most–informed people in the world on sovereign risk – with the most to gain or lose financially – are indicating the probability of default on all sovereign debts.

Bond traders – at mutual funds, hedge funds, banks, insurance companies, and broker-dealers – control the flow of capital into or out of investments in sovereign debt.

Yield or bond spread indicate aggregate market perceptions of risk by the most knowledgeable and interested people in the world.

The constant buying and selling of bond traders sets a price, in yield terms, that tells us a lot about what the odds of default are. The higher the yield, the higher the controller of capital is demanding to take the risk of the bond. In aggregate, the self-interested decisions of bond traders give a very full view of the total risk associated with these bonds.

The most common way bond traders compare the relative risk of sovereign debt is through a ‘spread,’ which means the additional yield investors receive over the yield of a riskless bond yield.[1] A 1% bond yield spread, or as bond traders would actually say, “100 basis points”[2] spread over an equivalent riskless bond, indicates that highly informed and highly interested investors find the bond mildly, but not extraordinarily, riskier than a ‘riskless’ bond

Most of us do not see the minute-by-minute information on government bond spreads but we can access it, updated at least daily, on the global government bond yield pages of financial news sources like The Financial Times or Bloomberg or The Wall Street Journal.

Why so much about the bond markets?

Why am I going into this excruciating detail about the bond markets? Because if you know something about how the bond markets work, and what information they convey, you can interpret both the Reinhart-Rogoff thesis on defaults and the Financial Infotainment Industrial Complex’s click-bait headlines for what they are.

In sum:

Reinhart-Rogoff: Improbable

CNBC’s headline: Nonsense

How do I know this? Because the bonds markets give us bond spreads on the sovereigns they reference. Here are some select 10-year bond spreads this week from The Wall Street Journal’s global government bond page:

Italy: 97 basis points (less than 1% yield premium)

Portugal: 225 basis points (2.25% yield premium)

Spain: 88 basis points (less than 1% yield premium)

The bond market is saying, with these spreads, that it finds these European bonds mildly risky, but not terribly risky. Default, while possible, is highly improbable over the next ten years.

Of course, Greece already restructured its sovereign debt, so Reinhart-Rogoff’s ‘prediction’ came true. But since they published their ‘prediction’ in December 2013, however, they really can’t take credit for being nearly 2 years late.

So, no, 1930s-style defaults are neither likely to happen nor likely to be widespread, as implied by the IMF paper, and by CNBC’s headlines. Of course, anything can and will happen with markets, but the smart money’s not betting on that, and you shouldn’t either. Leave the fear-mongering to Harvard economists and click-bait headline writers.

and upcoming related post on Reinhart Rogoff: The irony of political affiliations.

[1] Among bond traders primarily trading in US $ Currency, a ‘riskless bond’ for the purpose of determining bond spread, is usually a similar maturity US Treasury. Bond traders in Europe or Japan might use a different riskless bond as the basis for comparing risk in their own currency. We can argue about whether US bonds, or Japanese bonds, or German bonds are actually ‘riskless,’ and traders do, but traders also need a convention for comparison, so US Treasuries often serve that purpose regardless of whether its truly ‘riskless’ in the absolute sense.

[2] A basis point is 1% of 1%. Hence, 100 basis points for every 1% in yield or yield spread. If we say 5 basis points, or 5bps, (pronounced “5 bips”) that means 0.05% in yield, or spread terms.

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July 17, 2012July 3, 2013

Interview Part II: Greek Businessman On European Sovereign Power vs. Local Greek Power

Podcast: Play in new window | Download

Please click above to listen to full interview.

In the first podcast with Mihalis, we discussed the excessive size of the Greek government, and the challenges and opportunities of entrepreneurship during the Greek crisis. During that same conversation Mihalis went on to discuss with me his solutions for Greece. He envisions a radically strengthened European Union, in which the Greek state withers in favor of more unified control from a federal Europe. Combined with that, ideally, he imagines local politics still under Greek control. Finally, and interestingly to me, Mihalis spoke about his father, a prominent businessman who took over as mayor of Thesssalonika, Greece’s second largest city.

Mihalis: I have many radical views. I don’t want to, you know, take them public yet.

You know Greece can, as it did in the 18th century, the Greek ideal, the Greek nationalism. Greeks were used by the European nationalists in the 18th century to create the nation state. In many ways you know the ideas of democracy, a nation that creates its own state, it was formed – it was inspired – by Greek ideals. And now there’s a second opportunity in which Greece can become the, an example of deeper European integration. With loss of sovereignty, national sovereignty. Because at the end of the day the solution is very simple but no one wants to tell it like it is. You have to sell assets. And it’s not very easy to do. It’s not very easy, but it’s not too hard to do, if you want to do it.

Politicians are afraid that if anyone’s going to say that, they’re going to be blamed for being traitors or whatever.

Mike: have Greeks benefited from unification with the rest of Europe?

Mihalis: Of course! That goes without saying. Not only because of the level of standard of living, it’s also a question of giving us access to a much larger market. It’s become a lot easier than before. It is made tourism a lot easier – more transparent, more efficient. We think about Greece as basically three things to offer. Shipping, which is a main area of excellence in the world; Tourism – we have good real estate; and the products that this real estate produces: good wines, olive oil – good stuff to eat because it’s a blessed place.

And these things have become more accessible with the euro than before. Of course, they become more expensive as well because in Greece we didn’t have a good adaptation. So when we did switch from the Drachma to the Euro, there was a hidden inflation that really ravaged society.

Mike: As you know, my parents vacation in Greece and they’re the classic tourist – for a month a year they spend their retirement money in Greece. But it got about twice as expensive when they joined the Euro. As my mom has worried to me about “what happens if they leave the euro?” I said “that is something you should look forward to. If they’re back in Drachma everything is half price again!” Which is the way it was when they first were going to Greece. From a balance of payments, or tourism perspective, shouldn’t they just leave the euro?

I know you disagree, but I’m trying to play devil’s advocate a bit.

Mihalis: I don’t disagree, it’s more a question of a better remedy. It really depends on how you assess the symptoms. If you have to amputate you have to amputate. Leaving the euro for Greece would be tantamount to an amputation. It’s something that’s really wrong, if it’s the only way to save the patient is by cutting off his arm. I still feel there are other remedies. Although I’m a pessimist by nature I still hope that there are some healthy forces in Greece that can team up with more visionary – more powerful forces in Europe – for deeper integration because there are more benefits than disadvantages to deeper integration overall, for the whole.

My radical view is that, if you had Greece lose part of its sovereignty so it could be the experiment of European integration. It might be unrealistic or utopia what I’m saying but, I don’t see any other way out. Because if you don’t create some radical changes, in the way the political system works and in the way culture affects self-government, it’s not going to work. So you’re right. There’s no reason to help, so kick them out. Let them not be part of our problem. And whoever has connections to Greece… Maybe let the tourists go there, and find the Drachma was cheaper and that’s it.

But there are two forces inside Greece that are still fighting since the inception of the state in 1821. It’s between

Modernity and Westernization, versus
Orientalism, and Backwardness, and no change.

It’s kind of like the Euro is a conviction, a belief, that we could be more modernized. We can be more close to what Europeans and the West expect us to be.

The most admirable thing about the US – and that is why the US has become so strong – is that you have a local government which can take care of things efficiently, and then you have a federal government that deals with the outside and inside whole of the body. In Europe you could take that example. Greece could already have institutions to run regional governments that could fertilize or be pollinated by European experts, people who run things well abroad, take best practices. The problem is we don’t have the best practice rule; You call in someone who has made it in some way, who succeeded in doing something, and really try to make it work. And then you have a blended society that has a common goal in mind which is to make it work.

MIHALIS ADVOCATES FOR RETAINING LOCAL GREEK CONTROL FOR CERTAIN THINGS LIKE CITIES, BUT CEDING SOVEREIGNTY TO THE EUROPEAN AUTHORITIES OVER BANKS, BUDGETS, AND BORDERS. THE LOCAL CONTROL ISSUE IS PARTICULARLY INTERESTING WITH MIHALIS BECAUSE HIS FATHER GIANNIS, A WELL-KNOWN BUSINESSMAN, RECENTLY BECAME THE MAYOR OF THESSALONIKA, GREECE’S SECOND LARGEST CITY. GIANNIS IS A KIND OF ANTI-POLITICIAN, WILLING TO SHAKE UP THE STATUS QUO TO CHANGE OLD BAD BEHAVIORS. I ASKED MIHALIS IF HE THOUGHT HIS FATHER WOULD BE DRAFTED TO BECOME PRESIDENT OF GREECE.

Mihalis: There’s been a lot of talk about it in Greece. Writers and journalists and many people have proposed, have just tossed his name as a potential independent guy that could come and sort of create a stable platform on which different forces can be synthesized. But I think he knows, he’s aware of his limitations and he always wants to focus on his scale. And his scale is at the city level and I think he is committed to that. You know he didn’t run into politics for the power trip. I think he ran because he felt that he could offer and do and make a difference at the city level. I don’t think he could make that difference at the national level.

But I think he’s an example of what I’m talking about. The global/local combination where you can have people like him who fight corruption who fight this venality built into the parliamentary system in Greece. Who have run successfully a business, who can fire people at the local level and hopefully improve things at the local level which are relevant to the people in their everyday life. Then you can have people of much larger magnitude that can run the larger federal institutions of Europe.

For example the immigration problem is not a Greek problem, it’s a European problem. Instead of sending an army to Afghanistan, why don’t we have an army that actually goes out to Greece’s frontiers because these are actually Europe’s frontiers. Just an example. Why have 6% of Greece’s GDP being squandered in armaments? For God sakes! Who are we scared of anymore? Turkey? Why is Turkey going to invade in the Greek islands? Why are we afraid of the Russians anymore and we’re going to keep a big standing army in Greece which is useless anyway? It’s money used for corruption with German suppliers of arms and big politicians facilitating the sales. We’ve seen it. Where the big money is it should be federal. I’m not saying that you don’t have corruption at the large scale in the US or another federal system but I think you can put checks in place that are more transparent, and more rational, more systematic.

If European leadership could rely on people like my father at the local level to keep people happy in their everyday life, and they can then run macro-economics, to stabilize economies and create a little bit of a new a new growth model.

Mike: My impression is after reading New York Times profile of your father that he’s the type of person that if he was in the United States and we were going through the crisis that Greece is going through, he would be immediately drafted as a leading contender to run the country. At least the United States, everybody loves the anti-politician. And the guy who just, practically, gets it done. For 20 years that I’ve known you, I know your father’s never been involved in politics. And yet here he suddenly shows up running the second largest city. It’s fascinating to me.

Mihalis: Yeah but he was always, always involved in collective affairs. He always cared about the collective. He ran for the Communist Party eight years ago. In the local politics. My mother had cancer, I had kicked him out from the office when I took over the business with my brother. And he needed to do something. So he said okay I’m going to offer what I have of my time to local politics.

He ran with the Communist Party because he didn’t believe in what the big parties were doing. Because the big parties were basically reshuffling the cards. Exchanging votes for jobs. And the Communists never had power. So he wanted to, say, be clean. Of course he didn’t really share the dogma of Communism. His ideology is basically “you care for the guy next to you.”

He always you know when he was a big businessman they used to call him the “Red Industrialist” because he was helping the suppliers or vineyard growers establish their own vineyards, estates, and wineries and brands. So he basically undermined his own power. But he knew that that was an evolutionary stage, that his road was to encourage, rather than be opposed to it. He knew it was going to happen anyway. I mean there were 50 wineries in Greece 30 years ago and now there are 500. And there might be even some more. Small-scale mom-and-pop operations like in Italy and France. So Greece is becoming more Europeanized. It hasn’t been a straightforward road but it’s happening.

Mike: MIHALIS, MY PHILOSOPHER FRIEND, CONCLUDED OUR DISCUSSION BY TALKING ABOUT WHAT GREECE MEANS TO EUROPE, AND WHAT EUROPE MEANS TO GREECE.

Mihalis: I do think Greece has always played inspirational role. Greece could become the model for the post-nation-state Europe. If you think about it, since the imposition of the King in France until today we’ve run on the same model. Two world wars, European unification model, using the paradigm of the nation state. And now we see the need for a more multilateral kind of model. And Europe has a lot to learn I think both from China and the US as to how a more pluralistic federal system can be established. And Greece would be the hardest place to run it. If you can do it in Greece you can easily do it in any other country. For the cultural reasons I mentioned, because Greece is also a very Oriental country deep down. It’s not part of the homogeneous core group of Europe.

Yes, from an economic point of view, exiting the euro would be a short-term good solution to the crisis. But it would signify, and it would imply, a sort of refutation of Europeanism and of what Greece could become in the future. So I would like to hope and insist and keep fighting for more European success on Greek soil. Because Europe – what Europe stands for – is something I believe exemplifies the highest values of human societies today. The combination of achievement in terms of social organization and balance between society and the individual is really coveted. It’s really envied by the rest of the world. And I would hate to lose that. I would want that for Greece.

But maybe it’s not meant to be. Maybe Greece has to remain sort of an oddball. It takes a little bit of social engineering to get there. And right now I’m not occupied with this. I’m trying to sell some wine. That’s my contribution to the problem.

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July 11, 2012July 3, 2013

Interview Part I: Greek Businessman on the Government’s Bloat, and A Solution

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Please click above to listen to full interview.

Part I – This conversation is not with a banker in recovery, but rather an old friend of mine named Mihalis who comes from a prominent Greek family. Greek finance is the tail currently wagging the European dog, and Mihalis is one of the most insightful people I know. I figured he could explain what’s going on. I started by asking him about recent Greek Parliamentary elections.

Mihalis: Maybe it’s my personal bias but you know Parliament the way it works it’s really like the HR department of Greece Incorporated.

Mike: The HR department employs as many people as possible?

Mihalis: Yes, its votes in exchange for jobs and that’s the root of the problem.

Mike: you are saying the Greek Parliament is an HR system essentially for the country.

Mihalis: Yeah the whole public finance was used to give salaries to people. If you looked at the workforce of Greece, basically you have 1 million employees directly or indirectly dependent on the state. You have 1 million self-employed people and 1 million people who work in companies as employees. In Greece you have about 800,000 companies, so the average FTE – you know full-time equivalent – is something like 2 1/2. In Europe or America that’s like 100.

So essentially out of these 3 million you now about 1 million unemployed. So the situation is really, really bad.

MIHALIS BEGAN TO EXPLAIN TO ME THE CORRUPTION AND BLOAT OF THE GREEK GOVERNMENT, AND THE UNHOLY ALLIANCE BETWEEN POLITICIANS AND THEIR BANKING ENABLERS, AND THE CAPTURE OF THE POLITICAL SYSTEM BY BANKERS.

Mihalis: Half of the people… You know, you walk into a government building and you see half of the officials, they are honest people, they would like to work, they have some ideals they have some skills. But, they are completely demoralized, by the other half, which are jaded lazy, they bought their position because of a vote, and they pollute the whole system. So, you can’t easily distinguish the two, so you’ve got to let a little bit of the forces to weed out the good from the bad. And the only way to do that is to reset it. They been trying to cut down the state, no one has really wanted to do it so they haven’t succeeded. All they did was to displease the people. Because they lowered their salaries, they’ve cut their benefits. They started saving, doing a little bit more oversight on things. But all they’ve ended up doing is creating an even higher resistance to change.

Mihalis: The voters suddenly said well…So long. We’re not going to vote for you anymore. We’re going to vote for somebody who promises us even more jobs. The guy promised 100,000 more jobs after the election if he wins the election. Crazy. Right now the Greek government could function with 100,000 people. And it has 800,000 people.

In many ways, you know you have a few bankers, mostly of Greek origin, in the Greek desks of the big banks in Europe, maybe about 100 people, and they were just lending money to corrupt politicians. For nothing, just to cover up the problems of every year’s budget. And this happened for like 15 years in a row at least. And then you had a collusion, with the politicians that want to appear you know with numbers that are smooth, attractive, and you start lying with statistics and blah blah blah and again Greece in the periphery was not a problem to worry about it was too small. And that’s a recipe for disaster.

It’s a matter of popularity yes, in order to be a politician you need to be popular. To be a good politician you need to actually make some wise decisions. The problem is today politicians are neither wise nor make decisions. They’re sort of dragged along by bankers. The banking system is the backbone of the world, and they’re driving political decisions today. And it’s sort of putting the carriage before the horse, in many ways.

Mike: as an ex-banker myself I always, well, one main motto “Follow the money.” Or if you’re wondering why the politicians are doing certain things, it’s generally wise to figure out what are the bankers asking them to do. It’s a good rule to follow. Wondering why people are acting like they’re acting, I find.

I ENJOYED HEARING MIHALIS, WHO I KNEW TO BE A PROGRESSIVE, LEFT-OF-CENTER GUY, SOUND LIKE WHAT WOULD BE IN THE AMERICAN CONTEXT A TEA-PARTY TYPE APPROACH – RADICALLY SHRINKING WASTEFUL GOVERNMENT TO ONE EIGHTH OF ITS CURRENT SIZE. I WANTED TO CHECK WHETHER HE HELD SIMILARLY RADICAL VIEWS ON THE IMPORTANCE OF ENTREPRENEURSHIP AND SMALL BUSINESS AND GETTING THE GOVERNMENT OUT OF THE WAY OF THE ENTREPRENEURIAL SPIRIT TO REVIVE THE GREEK ECONOMY. IT TURNS OUT, IN A STRONG SENSE HE DOES.

Mihalis: You know, the Greek are realists. With a built-in distrust for the state. Because the state treats you as a liar and as a thief and you treat the state back the same respect. You know I don’t respect you. I don’t expect that you give, that you will protect my wealth. I actually expect that you will take away my wealth because in Greece since the 1980s the whole notion of entrepreneurship has been demonized and we haven’t reached the point yet where we de-penalize entrepreneurs.

Mihalis: There was a model in the 1960s of entrepreneurs that were [taking advantage] of the laborers, and taking the money out, and not paying taxes. There were a few examples like this but they were ruined. This became one of the popular themes of the Socialist government that we don’t like business people, we don’t like capitalists. Because they keep all the wealth for themselves and keep everyone else unwealthy. Again that was an abuse, that was Greek hyperbole. Deep down if you don’t have entrepreneurs you cannot have growth. And that has been part of the stifling of the Greek economy. Rather than boosting or helping entrepreneurs, it’s always there fighting against them. So you have then entrepreneurs fighting back. Evading taxes, trying to find any kind of way to protect themselves.

Because they know sooner or later that the state is going to go against them. Because it’s a small market as well, the scale is so small. In the US if you’re an entrepreneur you have such a big market. You don’t have to fight over the stakes. Fighting is fierce when the stakes are low. You fight over nonsense because there’s little to go around.

And we’re talking about the key problem. Let the economy run. The Greeks can do very well in a very, very chaotic environment. They don’t need a society. They don’t need the comfort of the state like the Germans do, or the Chinese do. Greeks can survive no matter what. All you need to do is get the big state out of the way. Because the Greeks were like, they chose the easy way. The easy way which is o, the state can feed me and I can give my vote to it. And everything can’t be fine. But this doesn’t work and somebody has to publicly say that the people. And if the money flow has to stop, it has to stop.

TO MY TEA PARTY FRIENDS WHO THINK AMERICAN FREEDOM UNIQUELY SUPPORTS AMERICAN ENTREPRENEURSHIP, MIHALIS SEES THAT GREEK ENTREPRENEURS HAVE A SIMILAR CULTURAL CALLING.

Mihalis: It’s a byproduct. Freedom was born in Greece. Greeks are free and I think that’s a byproduct.

MIHALIS AND I SPOKE EXTENSIVELY AFTER THIS ABOUT HIS OTHER SOLUTIONS TO THE GREEK CRISIS, EUROPEAN INTEGRATION, AS WELL AS THE ROLE HIS FATHER CURRENTLY PLAYS ON THE NATIONAL POLITICAL SCENE IN GREECE. I’LL LEAVE THOSE FOR A FOLLOWUP PODCAST IN PART II. IN THE MEANTIME, MIHALIS WOULD NOT LET ME PAINT HIM AS A RADICAL RIGHT WING GUY IN THE TEA PARTY MODE.

Mihalis: I mean you’re talking about an abuse of things. There’s been an abuse of the state. Of the welfare state. I’m definitely pro-welfare state, because I feel that the world is not perfect. The right wing guys are privileged, strong, they never had to suffer, and that’s why they see the world in their own eyes. And the world is not like that. You need a welfare state.

There are ways and ways of funding it. In the Greek case it’s been abused.

In PART II of this conversation, Mihalis discusses further European integration, and his father’s role in Greek politics today.

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