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Jason Manolopoulos combines his experience of the global financial system, European politics and Greek society to demonstrate how one of the EU’s smaller countries played a catalytic role in a crisis that threatens the future of the euro, and possibly even of the European Union itself.
He explores the historical legacy and psychological biases that have shaped an ongoing drama. While leaders of the European Union criticise ‘the markets’ for destabilizing the single currency, Manolopoulos interrogates the shared beliefs of the EU and the investment banking community – and how they colluded for a decade in the illusion that lending huge sums to peripheral eurozone countries was safe.
Policy and investment errors bear marked similarities with earlier financial crises – in particular the Exchange Rate Mechanism system and the Argentine debt crisis. This inability to learn history’s recent lessons begs fundamental questions of policy making, which this book discusses.
Greek society also comes under scrutiny, as shocking details of a kleptocratic political class and a wasteful public sector are revealed. Manolopoulos traces these developments back to dictatorship and civil war, but argues that there is no excuse for their continuation in a modern democracy.
About the Author
Jason Manolopoulos is the co-founder of the emerging markets hedge fund Dromeus Capital, an alternative asset management firm focusing on macro and special situations investments in emerging markets.
Read an Excerpt
Greece's 'Odious' Debt
The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community
By Jason Manolopoulos
Wimbledon Publishing CompanyCopyright © 2011 Jason Manolopoulos
All rights reserved.
FROM BUENOS AIRES TO ATHENS
Keeping books on social aid is capitalistic nonsense. I just use the money for the poor. I can't stop to count it.
— Eva Perón
As the eurozone crisis reached a critical phase in late 2009 and early 2010, one of the accusations most certain to provoke the fury of representatives of the European Union was the comment that 'Greece is like Argentina'.
Why the comparison, and why the anger? There are many parallels. Argentina and Greece appear to have followed a similar trajectory in their recent histories, not just in the past two decades, but in the entire period since the Second World War. Both suffered under military juntas who justified their actions by anti-Communism. Both have a socialist, clientelist ethos in which interest groups have sought, and often received, direct assistance from the state. Elections and parliamentary decision-making returned in 1974 after seven years of dictatorship in the case of Greece, and in 1983 in the case of Argentina. In both cases, military humiliation at the hands of a foreign power was a major factor in the collapse of the regimes.
Both countries have a history of being the most advanced economy in their region, and are conscious of this status. Overseas visitors to Athens and Buenos Aires have the experience of visiting an advanced economy: both have a grand, modern airport, impressive boulevards and shopping malls. Athens in particular, since the infrastructure improvements for the 2004 Olympics, boasts a modern metro and freeways. The contrast with some of the poorer neighbouring countries in, respectively, the Balkans and South America is sharp – though some of these unfashionable nations may be catching up with, or even overtaking, their illustrious neighbours.
More recently, both countries have relinquished monetary flexibility by respectively pegging their currency to the US dollar and joining the euro. Both enjoyed a honeymoon in the early years of the currency regime, with a superficial appearance of economic success, but in both cases there was a progressive underlying loss of competitiveness. Both experiments featured a lack of the sort of structural reforms needed to adapt to life in a strong currency area, with clientelist practices continuing and being facilitated by easy credit arrangements and high levels of government borrowing. The two economies experienced international economic crises, the Asian and credit crisis respectively, followed by governmental debt crises and International Monetary Fund (IMF) intervention. In the case of Argentina, it ended in default and crisis in December 2001.
This is most probably the reason the comparison causes such fury in Brussels. But the Argentine economic crisis predated Greece's crash by ten years: so were no lessons learned? In economics, we are often tempted to envisage what the long-term scenario may look like. In Argentina's experiment with the peg to the dollar, the long term is now. While every national context is unique, the parallels do seem sufficient here to merit further inquiry as a means of understanding some of the dangerous economic dynamics at play in Greece and the rest of the eurozone, and how they might play out in the next few years.
Exchange Rate Stabilisation
Argentina in 1991 and Greece in 2001 effectively entered exchange rate stabilisation programmes. In the case of Greece, of course, the notion was that it was taking part in a full and permanent currency union. The idea, however, that there was economic convergence with the rest of the eurozone as part of an optimal currency area was fiction, as I shall discuss further in chapters 3 and 8. Essentially, it was a currency peg like Argentina's, with an unreformed economy.
Several studies of exchange rate stabilisation programmes have concluded that they tend to be effective at curbing high inflation, but have dangerous side effects, especially when essential reforms are postponed. They should be used as a short-term emergency measure by a government determined to use the breathing space created to reform the public sector and improve the supply-side. In practice, complacency often creeps in, as the economic data in the first couple of years can be flattering. This was certainly the case in Argentina and Greece. A common pattern is
1) real appreciation of the exchange rate
2) investment and consumption boom
3) deterioration of external accounts.
Argentina: Background to the Dollar Peg
In January 1991 the Chilean Lake District enjoyed perfect summer weather. Thousands of tourists, mostly Argentinian but including a few Europeans, enjoyed the stunning views of shimmering lakes, verdant mountain sides and snow-capped volcanoes in the picturesque resorts of Osorno, Puerto Montt and Chiloé Island, enjoying day after day of clear sunshine in a country completing its first year of democracy following the years of the Pinochet dictatorship. On one day towards the end of the month, however, the resorts suddenly became close to deserted. The weather and Chile's politics were unchanged, but the beaches and lakeside hotels became strangely empty. Puzzled, the few remaining North American and European tourists asked the hotel staff what had occurred. The Argentinians, they explained, had had to return home. There had been a plunge in the value of their currency, the austral, and they could not afford to be abroad for a day longer.
Even this shock was not the peak of hyperinflation in the South American country; two years earlier the consumer price index for Buenos Aires had reached more than 5,000 per cent. An estimate of the longer-term impact of hyperinflation was that, by the time the new peso replaced the austral in 1991, one new peso was equal to 100,000,000,000 pre-1983 pesos. The end of the twentieth century and beginning of the twenty-first witnessed a dramatic fall for what had been the most prosperous country of South America, and one of the ten richest nations in the world in the first half of the twentieth century. By the 1980s and 1990s, a stream of Argentinians of Italian descent were returning to Italy to look for work, in a poignant reversal of the journey their entrepreneurial parents and grandparents had made to one of the more promising of the 'New World' countries.
Some Argentinians will confess that by the late twentieth century the economy had developed the dimensions of a dwarf 'con una cabeza gigante pero un cuerpo pequeño' ('with a giant head but a small body'). The airport and capital city were everything that you would come to expect of an advanced economy, but there was not the backbone of medium-large enterprises and successful business clusters that one finds in the USA, France, Germany or Japan. It had Yankee ambitions for regional leadership based on a Confederate economy – income based primarily on agriculture and commodities.
When Carlos Menem was elected as president of Argentina in 1989 the country had been suffering from hyperinflation, a recurring problem since the return to democracy six years earlier. He initially pursued some crude anti-inflation measures, such as the confiscation of short-term, high-yielding bank deposits and their replacement with long-term bonds, but these had only short-term effects, and by the end of 1990 inflation had returned, accompanied by a plummeting exchange rate that was to prompt the sudden exodus of Argentinian tourists from their summer holiday destinations.
Early in 1991 Menem changed course. Though from a Peronist background characterised by protectionism, he surprised many critics by following many elements of the orthodoxy of the Washington Consensus: major privatisation programmes, an end to tariffs, and anti-inflation monetary policies. The end of January 1991 saw the appointment of Domingo Cavallo as the country's finance minister, who was about to embark on a bold monetary experiment designed to crush inflation. The idea was brutally simple: in a modern version of the Gold Standard, Argentina introduced convertibility: one peso equalled one US dollar. The system, which began in April 1991, required that the central bank kept enough dollars or gold in reserve to back the total amount of pesos that had been printed.
It fitted perfectly with Argentina's psychology of regional leadership and with recent anxieties over the value of the currency. One of the experts Cavallo consulted was Horacio Liendo, who had written a doctoral thesis on social and economic emergencies. In his account of the crisis, Paul Blustein notes that Liendo was struck by the apparent success of the monetary rule that the Argentine government had adopted in the period 1899 to 1929, the 'three most successful decades' in Argentina's history.
There appear to be some cognitive biases at play here. Liendo may have been misled by an apparent correlation between adoption of the Gold Standard and economic development that was no more than a coincidence. It appears to be a case of confirmation bias – the tendency to interpret information in a way that confirms one's preconceptions; and problem of induction – making an unsafe inference from an apparent correlation. The 'three most successful decades in Argentina's history' that he noted, between 1899 and 1929, may have been created by a combination of rising immigration, increasing agricultural productivity and wars and revolutions in Europe that affected output in the old continent, creating a strong demand for imports from South America. A currency arrangement can bolster a strong economy, but it cannot create one – a narrative fallacy we will encounter again and again in the course of this book. It could have been a spurious correlation.
Clientelism: The Legacy of Peronism and its Hellenic Counterpart
A major contributory factor to the problems in Argentina and Greece is the phenomenon of 'clientelism' – essentially, interest groups within society requesting favours from politicians as clients, often with little regard to a reciprocal contribution to the economy. This occurs in all societies, of course, but for different historical reasons interest groups have been particularly influential in these two countries. In the case of Argentina, clientelism is inextricably linked with Peronism. Understanding this Argentine phenomenon is essential to our being able to understand both the hyperinflation of the 1980s and the currency peg that followed in the 1990s, as well as the problems associated with reform during that decade.
Unfortunately, Argentina's image in the West has been distorted by the romantic view of Eva Perón in the sentimental hit musical Evita. The reality was more complicated. Juan Domingo Perón was first elected in 1946, on a mixed programme of support for the working poor, protectionism, patriotism and nationalisation. He sought a 'third way' between the USA and USSR at a time of cold war tension. He tried to establish aircraft and car manufacturing through nationalised initiatives. This was hugely ambitious, and he could not achieve in nine years the kind of industrial development that had taken many decades in North America. In effect, the state tried to occupy the role that an entire social class of industrialists and financiers fulfils in an advanced economy.
While Perón's industrial initiatives failed, the practice of subsidies and favours to certain interest groups remained. The thrust of Peronism became disbursing funds, not creating wealth. Under Perón and the dictators, the state exercised control on businesses, requiring start-up permits, import licenses and so on. This encouraged corruption and the establishment of conglomerates.
Perón's concessions to the trade unions in the 1940s created an inflexible labour market in which it was difficult to fire workers. This was long lasting, and President Carlos Menem baulked at reforming many of these measures in the late 1990s, when the IMF urged labour market reform as part of the economic restructuring deemed necessary to ensure that the currency peg to the dollar would be effective.
In an advanced economy, wealth is created by industries that become concentrated into 'clusters' of specialist providers. Some of this wealth may then be used to support certain political movements. With Peronism and other forms of clientelism, the money flows in the opposite direction: politicians seize revenue from whatever sources are available – oil, soya exports, borrowing from capital markets – and give it to favoured interest groups to buy votes.
This inverted dynamic remains ignored by policymakers in Brussels and in the IMF, and such oversight has been an historic error in policies towards Argentina and subsequently Greece. It is a fundamental mistake of analysis caused by looking at headline financial data, rather than the economic dynamics that lie underneath. True economic convergence is essential to the creation of an optimal currency area as a precursor for monetary union, as I shall discuss further in the next chapter.
Peronism's mixture of apparent opposites – a bizarre coalition of social democracy, Communism and fascism – makes it a difficult phenomenon for those in Western Europe or North America to understand – and indeed it subsequently split into left-wing and right-wing factions. It did not create fertile ground for the development of a strong private sector. But worse was to follow. Economic problems, combined with a suspicion towards Perón from the church and the upper class, contributed to the military coup of 1955. Between that date and the fall of junta in 1983 Argentina suffered brutal dictatorships and relative economic decline. In 1950, the country was economically on a par with Australia or Canada. Argentinian GDP per capita was 84 per cent of the average of developed nations; by 1973 the figure was 65 per cent, and by 1987, 43 per cent. Greeks should heed this warning from history – indicators of relative wealth can fall as well as rise. Greece had a GDP per capita of just US$ 11,580 in 2000, soaring to US$ 31,954 in 2008. By 2009, according to figures released by the Organisation for Economic Co-operation and Development (OECD), the Greek GDP per capita was 88 per cent of the eurozone average. This is likely to prove to be Greece's peak for many years to come.
Impact of Peronism on Business
Gerardo Saporosi, an Argentinian businessman who has kept his franchising business going despite all the economic upheavals of the past 15 years, says that the impact of Peronism and dictatorships was disastrous for industry in what had been an entrepreneurial country:
Argentina was an industrial power at the end of the nineteenth century and the start of the twentieth. In that era, you could regard Argentina as being equivalent to Canada or Australia. It was in the process of becoming a great power – more advanced, for example, than Brazil, Russia, India or China, the famous 'BRIC' powers of today. The process was abruptly halted by the appearance of Peronism, and various right-wing dictatorships that were backward and nationalist. The country closed itself to the world and is still paying for that dearly.
Also, during the 1960s and 1970s, Argentina was, like other countries around the world, a theatre for operations of the Cold War, in that the USA and the USSR launched their exercises in left-wing terrorism and right-wing counterrevolutions. The result: flight of foreign capital and local savings during the last 40 years. Industries could not re-invest at the rate of the depreciation of their assets, and quietly were liquidated. The policy of convertibility of the 1990s finished off those who were left.
The country is very ambitious, and her entrepreneurs as well. However, it is going to be several decades before Argentina receives inward investment at a level necessary to re-start the process of industrialisation. I doubt that the money of the Argentine diaspora living overseas is ever going to return.
Excerpted from Greece's 'Odious' Debt by Jason Manolopoulos. Copyright © 2011 Jason Manolopoulos. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
1. From Buenos Aires to Athens; 2. Getting Lucky; 3. The Euro: A Hard Sell, or a Mis-sell?; 4. Western Branding, Eastern Legacy: A Country on a Fault-line; 5. The Looting of Greece: Scandals, Corruption and a Monstrous Public Sector; 6. Getting Unlucky: It All Begins to Unravel; 7. The Euro in Practice; 8. Liquidity Boom; 9. The Entertainers; 10. A Temporary Bail-out? A Crisis Made Worse by Satisficing; 11. The Man in the Arena; Notes; Index; INDEX 2
What People are Saying About This
'The graphic portrait of a deeply troubled country and the shocking story of the failure of past and present economic experts to grasp the nature of the problems.' —Thomas Mayer, Chief Economist, Deutsche Bank
'A fascinating account of the crisis-ridden saga of Greece and a wider European economy prompted by the superficial nature of Europe’s political process, its institutions, and the impunity of its leaders. Psychologically insightful and gritty in his practical recommendations, Manolopoulos possesses a knack for chiselled and punchy prose – all of which make the read a pleasurable must.' —Guerman Aliev, CEO of Altpoint Capital Partners
'Incisive and engaging, this book provides a unique perspective on the Greek crisis by combining a thoughtful analysis of Greek society and economy with one of politics at the EU level and of global financial markets.' —Dr Dimitri Vayanos, Professor of Finance and Director of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, London School of Economics
'Manolopoulos brings the Greek debt crisis into historical perspective, providing an insightful analysis of what went wrong. This book is essential reading for everybody who wants to understand the challenges the Eurozone is facing.' —Michael Ganske, Head of Emerging Markets Research, Commerzbank
'Through a critical but accessible discussion of key conventions in economics and finance and ample presentation of anecdotal material, this book offers a unique introspective look into Greek socio-political culture and how this, combined with the fallacies and excesses of the international financial system and the EMU architecture, led to what the author calls ‘Greece’s Odious Debt’.' —Dr Vassilis Monastiriotis, Hellenic Observatory, European Institute, London School of Economics