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Sunday, April 22, 2012

Learn from those who have experience!

From the beginning of the crisis, I have strongly criticized EU-elites for being so arrogant as to not seek advice from those who have practical experience when it comes to countries with external payment problems. As Country Manager first in Chile and then in Argentina, and as the representative of one of the largest US creditor banks of both counties, I was intimately involved in the rescheduling negotiations with these countries during the 1980s.

The then Citibank chaired the Steering Committees and their William R. ("Bill") Rhodes turned himself into a legend by almost singlehandedly developing solutions which worked. At the same time, it was a case study of how rescheduling banks not only worried about getting their money back but, even more so, focused on new economic plans so that the countries would become stronger and be able to service their debt. Here are descriptions of Chile and Argentina.

EU-elites were serenely above the experience level of emerging markets. Bill Rhodes and people who had worked for him during major reschedulings of the last decades offered their advice but were politely told off on the grounds that experiences in emerging countries do not serve as examples for the Eurozone. Or, as Prof. Adres Velasco put it at the INET Conference in Berlin recently: "The sociology of knowledge is such that when it comes from countries like Chile, Argentina, Taiwan, etc. it is not worth thinking about".

Prof. Velasco's presentation at the INET Conference was a brilliant piece of advice to those EU-elites who are convinced that they know it all better. By the way, how could they know it better when they never had to deal with such a crisis before?

Prof. Velasco also, and very subtly, calmed persecution theories on the part of the Periphery quite a bit. He pointed out that none of these countries had to face a real financial crisis in the order of Latin American or Asian countries yet. A financial crisis, he said, is when the flow of money stops. When that happens, a country must cut imports overnight and the living standard collapses (and more). Nowhere in the Periphery has the flow of money stopped since the beginning of the crisis.

In all these countries, the current account deficit remained at 4% of GDP on the low end up to almost 10% on the high end (Greece). Thus, someone must have provided funding. Prof. Velasco described this as evidence "that perhaps German citizens have not been quite as ungenerous as some people at this meeting have made them out to be".

Obviously, it was the Bundesbank who provided the bulk of this funding so far. I am not talking about the LTROs. Instead, I am talking about the Target-2 claims which represented 615 BEUR of the Bundesbank's assets at March 31, 2012. Of that total, 107 BEUR were claims against the Bank of Greece (only 7 BEUR 4 years earlier). Thus, the Bundesbank alone has lent to Greece 100 BEUR during the last 4 years out of the ordinary course of business (Target-2). LTRO-funding of recent months and EFSF-funding of the banks' recapitalization would come on top of that.

Had the Bundesbank not done that, Greece would have had to stop the imports of many things dear to Greeks quite some time ago. No more cars, motorbikes, smartphones, etc.? Not really, but certainly a lot less!

Real national austerity is when a country which desperately depends on imports needs to cut imports overnight. Government austerity means that the usual suspects (those who have always paid taxes) have to suffer. National austerity means that everyone suffers, and in a harsh way!

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