Greece On The Brink: Notes From The Island


Editor’s note: The following is from The Banker’s Editor-in-Chief, aka Mom.

Mom spends a month every year on a Greek island, populated by ex-pats. She has watched the island move from the drachma-economy of extremely cheap living, to a much more expensive, but possibly unsustainable, economic model. All sides blame others for this crisis. In the details of her note are some hints at the causes and tensions of the crisis.

Greece is in the midst of a financial panic, likely the last few moments before they officially leave the euro and default. 1



From Mom, June 28, 2015

Afternoon update – I left the beach and went to the port village hoping to use the ATM to get euros for my return to Athens and then the States. Empty.

Morning update – Two summers ago, at an island luncheon, a Greek central banker remarked that in light of the ongoing crisis, Greeks would have to start paying the taxes they owe. But now, as default looms in a few days, I see little change here. Only about half the restaurants give bills rung up on cash registers; the rest still write them down on paper and presumably do not report them as income.  On my way here, one taxi driver from Athens proudly submitted his bill to me with the tax listed, but he is a notable exception. All encounters with bureaucracy, whether at the bank, the town hall, or the ferry ticket office take enough time to infuriate me and that inefficiency may discourage tax-paying. The Greeks, mostly self-employed entrepreneurial taverna owners that I deal with are delightful, helpful, and fatalistic about a bankruptcy over which they have no control. A few consider themselves and fellow countrymen to blame for overspending and over-borrowing, but others talk about the rape and pillage of Greece by the Germans in WWII as a reason for not paying the current debt. The majority of the island residents voted for the current government, which has said the existing debt terms are unacceptable because of the suffering of so many unemployed Greeks.


The Brits, Dutch, and Germans who have summer houses here love Greece and the Greeks they know, but they are very annoyed that their high taxes, funneled here through EU projects, have been wasted by poor planning and execution as well as by outright corruption in Greece. Lots of unhappy jokes about the 22 million euros spent on the new island reservoir that leaks and the small amounts for hiking paths that tourists use that are now overgrown and have rotting picnic tables. The Europeans are keeping only a bare minimum of euros in their Greek bank accounts so they won’t lose much if those accounts are converted to a devalued “Drachma.” A German partner of the retired local priest who lives here year round, however, has resisted that euro flight and proudly kept significant savings in the local National Bank of Greece.

Some historical context on the strong views from Greece

When I first came to the little Greek island – where I spend a month every summer – 30 years ago, the Old Village (high on the mountain) had no electricity, one telephone, no paved roads, but many tavernas with beautiful views and fairly quiet generators. Now, especially since joining the EU, and having years of a huge influx of Northern European cash, we have too many cars and scooters, but tourism has never been truly busy since the conversion to the Euro. When the super-cheap prices of tours using the drachma finished, those tourists moved on to Turkey and Bulgaria. Other Europeans and the few adventurous Americans who can afford the new Euro prices either don’t find Greece “shaped-up” enough or resent the ugly things some Greeks have been saying about them as “pillaging” creditors.

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  1. Either default ‘again,’ or default ‘officially’ for the first time on their sovereign debt, depending on your view of what happened over the past few years of debt restructuring and debt extension.

Hedge Fund as Pirate, Seizes Argentine Navy Ship

Earlier this week hedge fund Elliott Associates seized the ARA Libertad, a tall ship from the Argentine Navy in a Ghanean harbor, as partial payment for unpaid sovereign debt dating back to 2001.

I love this story, because I’ve got some history with both sides of this dispute.

Argentina’s debt default, of course, is why I ceased selling emerging market bonds at the end of December 2001, and became a mortgage bond salesman.  At the time, Argentina’s was the largest sovereign default in history, capping a financial train wreck we had watched develop for the entire previous year.  My emerging markets desk at Goldman shrunk from 13 salespeople to 3 salespeople in the few short weeks following Argentina’s default.  I moved from a bi-lingual, exciting dream job to pursue my passion for devising weapons of mass financial destruction for AIG.

More interestingly, Elliott is a former client of mine, and they’ve been doing this kind of unpaid debt enforcement thing successfully for a long time.  In the Fall of 2000, Elliott successfully and single-handedly threw the Peruvian government into temporary sovereign default, for similarly failing to make good on its defaulted debt obligations owned by Elliott.

The lead-up to that Peruvian event, like this week’s seizure of a tall ship in Ghana, also took years in the development.  The Harvard Law School case study is available here.[1]

To win the Peru situation, Elliott first had to overcome and overturn on appeal a century old law – called the Champerty Doctrine – that forbade New York lawyers from purchasing debt for the purpose of initiating a lawsuit.[2]  Since Elliott, as a distressed debt investor, does purchase debt obligations that it knows will involve litigation, it needed to prove that the Champerty Doctrine did not apply.  Instead, Elliott made the courts agree that it had purchased a valid Peruvian debt, and the lawsuit was merely the enforcement of the valid debt.

Next, Elliott managed to force bond payment servicers, first Chase Bank and later the bond-payment system Euroclear, to withhold payment on all Peruvian bonds, if the Elliott-owned debts remained unpaid.  Elliott got the New York and Belgian courts to recognize that it’s illegal to treat holders of equal-status debt unequally.

This forced Peru into default on its September 7, 2000 bond payments, despite the fact that Peru had the willingness and ability to pay all its bonds – at least all those bonds not owned by Elliott.

Elliott’s timing was also impeccable, in the sense that Peru’s strongman President, Alberto Fujimori, faced a political crisis at home that same week with a corruption scandal involving his closest ally, and Fujimori would flee the country by November 2000.  After about a week of political and financial squirming under the forced default, Fujimori’s government found the $50 million or so it owed Elliott and the problem was solved.

The seizure of the Tall Ship in Ghana this week is just another sign that Argentina will pay, one way or another, on the debt it owes Elliott.  The hedge fund reportedly owns $1.6 Billion in unpaid, unrestructured Argentine debt dating back to the 2001 sovereign debt default.

Obviously though, this story of the seized Argentine Navy ship raises as many questions as it answers.

  1. Will the 200 sailors reportedly aboard the ARA Libertad ever be able to hold their head up in a port town again after they got overwhelmed and seized by a nerdy hedge fund?  I mean, how does that happen?
  2. Will Elliott Associates’ Paul Singer challenge John Devaney’s Positive Carry to a real-life game of Battleship?
  3. Can the ARA Libertad offer Elliott’s outside investors the ultimate offshore vehicle?
  4. Is it true Johnny Depp will play Paul Singer in the movie?

[1] You can tell from the narrative that Elliott acts with extreme patience and careful, dogged determination.  As a betting man, I am sure they’ll get paid by Argentina in the end.  In the meantime, they’ve got that cool ship!

[2] The original idea of Champerty was that lawyers might try to generate unwarranted legal fees through the trick of purchasing debt and initiating litigation.  It was not meant to prevent the enforcement of valid debts, although Peru successfully argued the application of Champerty for a while, before losing on appeal.

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

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

  1. Modernity and Westernization, versus
  2. 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: 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.


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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