Klaus Kastner replies – On the Versailles Treaty parallels

Klaus Kastner photoContinuing the discussion we began on modern parallels to the Versailles Treaty (the Greek Bailout, as I claimed here, or Maastricht, as Klaus Kastner juxtaposed here – see also my rejoinder here), Klaus Kastner takes stock with this, latest, missive. 

After reading the comments, I need to clarify (I was very glad to see that one commentator, Uwe Bott, understood where I was coming from!).

My issue was ‘perceptions’. I wasn’t saying that Le Figaro was right. I am not saying that the German perception is right. Neither am I saying that the Greek perception is right. All I have tried to point out is that there are two sides to everything; different perceptions of the same facts. If my business/management career has taught me anything, it has taught me that one must try to understand the perception of the other side if one wants to make constructive headway.

For example: if the Greek side describes itself as the victim of modern day Versailles, it is only natural for me to also present the view from the other side. If this had started with a German blog describing Germany as the victim of modern day Versailles, then I would have presented the Greek side. If the readers of this blog would know the articles I write and the comments I make about Greece in German/Austrian media, they might conclude that I have a twin brother (one of my first articles about Greece was titled “A Nueremberg Trial for EU Elites!”).

The only part where I came close to making a point was, ‘incidentally’, the primary surplus. As long as a government has a primary deficit, it needs to borrow for both: domestic expenditures and foreign debt service. Once it breaks even on the primary level, it needs to borrow only for debt service. Once it is in surplus on the primary level, it can decide – unilaterally, if it so desires – about the application of that surplus — for domestic expenditures or for foreign debt service. That’s why I was saying that Greece, until it registered a primary surplus, could not have been prioritizing foreign debt service over domestic expenditures because the money which Greece had to borrow to cover all of its expenditures had to be borrowed abroad and was not freely at Greece’s disposition. Almost 80% of that money was lent to Greece with the proviso that Greece would turn around and give it back to the lenders as debt service. Thus, there could not have been any prioritizing (or avoidance thereof).

On a more general level: no, I don’t believe in ‘crime & punishment’ when it comes to financial restructurings. For the simple reason that it doesn’t work. On several occasions, I have participated in ‘bankers’ meetings’ where we bankers faced a borrower who had literally taken us for a ride. Who had terribly cheated us. Where our gut told us to drive his company into bankruptcy and to send him to jail. And when reason returned, we had to recognize that we would only be shooting ourselves into the foot. When the borrower is a corporate, the ‘shooting in the foot’ is easier to recognize because the corporate can go bankrupt. When the borrower is a sovereign and since there are no bankruptcy laws for a sovereign, the ‘shooting in the foot’ is often not recognized at first. In the long run, the foot will be shot. Any financial restructuring has to be an unemotional give-and-take if it is to work well. And, yes, it does help if one understands the other side’s perceptions.

12 Comments

  • Not being sure this is the right forum for my following question, I decided to put it anyway, because it has been bothering me for months.
    With respect to lending of governments the MMT position (R.Wray, B.Mitchell, and many more) is that a sovereign government (with a sovereign currency) is not like a household: the money is spend first and later taxed back. So by nature there should be an increasing government deficit, at least in relation to a growing economy, but also as the result of automatic stabilizers during an economic downturn. Now, of course, the euro system is set-up as a kind of pseudo gold-standard within which national governments are not sovereign (currency wise) and including the idiotic 60%/3% deficit limits. And of course even with an MMT-like vision at the euro-level a surplus recycling mechanism would still be needed for systemic differences between the euro-nations. And of course the United States with the global dollar standard has possibly a certain arrogance with respect to its deficits towards the rest of the world, which I feel is sometimes reflected in MMT (W. Mosler might come to mind).
    Even with all these caveats the basic point is that a sovereign currency-issuing government never needs to borrow money from the private sector (although it might do so to drain reserves). Government spending can be increased until the output gap is closed before inflation becomes an issue.
    Somehow I don’t see these themes, which I think are quite essential, reflected in the discussion about the Greek deficits above.
    What am I missing?

    • Dear Frank,

      You are missing the fanatical zeal of Mr. Kastner and our host, Yannis, about our “union by currency”. They are both, along with many others, Believers in a grand Idea–that of a Europe without borders, and are afraid of anything that may threaten the Idea, in any way.

      So, it’s not about not knowing or forgetting these essentials you find missing, they do both know and remember them better than all of us; it is acknowledging them they find difficult, lest they threaten the Idea.

      But don’t think harshly of them on behalf of what I say, after all they are both economists, and also good people, with the best intentions.

    • @Frank Lansdorp

      National Central Banks in EZ are not like the Central Bank in USA, they are not sovereign. They are more like individual private banks under the FED that almost all failed in 2008, only FED saved them. EZ national banks have their on CB – ECB, but only with a mandate to record their transactions, not to provide them with the funds as they need. Do you know how much did FED lend to their banks in order to keep them afloat in last 6 years? FED over time lended them about 30 TRILLION $US. How much did ECB lend their national CB over this time? almost nothing.
      National CB in EZ are able to borrow only from private banks, they can not get funds from ECB as Bank of America can get cheap funds from FED.
      National CB in EZ do not control cost of funds as FED does across the USA. FED controls interest rates to private banks and by that also controls interest rates to itself or to USA. Greek Central Bank does not control at what cost it can borrow from private banks, and with that what cost will be for Greek debt.

      Since 2008, media and politics control cost of borrowing for individual states in EU. They influence the perception of perifery’s Central Banks by private banks that provide funds to states. Negative campaigning against states raises the borrowing costs to states which itslef makes them even more vulnerable. Negative campaigning feeds on itself untill it caused full stop to finance Greek debt. Only Mario Draghy’s (ECB) “I will do all it takes” somewhat saved rest of the EZ and lowered perifery’s borrowing cost to acceptable levels.

      It is the negative campaign by politicians and media that prevents Greek from borrowing at acceptable cost from banks that are owerflowing with funds. It is not fundamentals, it is negative campaigning that is creating the crisis. The fear it creats of borrowing to Greeks.
      FED controls the cost of borowwing for USA while Greek Central Bank does not control borrowing cost to itself. This is what makes a country sovereign and with it sovereign currency. CB for US$ is FED, CB for euro is ECB, but they have different mandates and abilities. ECB can only record transactions while FED has unlimited funds to provide to USA banks and keep them afloat. Would Bank of America survive the crash of 2008 without FED? No, it would not because other banks were not willing to provide funds to each other due to bad campaigning against each other.

    • @Vasilis
      What Yanis and Kastner have to do with creating ‘union by currency’ and position EU finds itself that they only write about?
      They are writing about real conditions and suggesting solutions to the problem.
      The fact that they did not create EU or EZ or ECB or write the rules of such institutions does not impinge on your thinking “Believers in a grand Idea” that they want the same.

      How do you want to go from here? to make more mess or to solve the problems?
      It seems that you want to go back in time and by some miracle undoe everything that happened since 1999. How do you imagine to achieve that? By disolving EU?
      Will that get rid of debt? Will that get rid of people that already moved to other countries thatnks to creation of EU only? Will that get rid of people that were born into such conditions where they can travel freely? WIll that get rid of unemployment?
      How do you imagine we can go from here to the conditions of as 1999-2008 never happened?
      By traveling back in time? That is the only way that i can think of.

      If you want to know, Yannis and Kastner are using fundamentals of banking system in the EU to solve the problems which you accuse them of ignoring. You just can not see that, you are looking for moral indignation in order to express your rage about problems in EU against people that had nothing with creating problems.

    • @Jordan from Croatia

      What I actually said is that, among many others–perhaps youself?, Kastner and Yannis try to “… us[e] fundamentals of banking system in the EU to solve the problems…”, but ignore structural solutions, like a return to state-level monetary policy. I believe this is bad economics, and I also believe they would agree in principle, but are worried that their Big Idea of a Europe without borders will be hurt by returning to state-level currencies (Yannis at least has clearly said so in his writings, about Mr Kastner I am not sure).

      As for offering “…moral indignation in order to express [my] rage…” I resent this accusation.

      As for how to go from here to where I would like to go, if time-travel is all you can think of, you still have some thinking to do. I suggest that you start by weighting less exotic alternatives than time-travel. If you are interested in a technical discussion, we can have one.

      Best,
      V

  • It seems to me (and I do not claim to have read all of them) that the posts and comments about Greece’s crisis, their lenders and the purported “punishment” by the bosses in the EU and all the talk about restructuring of the Greek economy, have I believe failed to mention the following very simple and largely undisputed facts:

    1. The majority of the Greek people employed in the private sector have for years been dutifully paying their taxes, the high cost of money (ie loans and credit cards) both before and after the Euro, etc. Now these people have been incriminated for taking part in the sinking of Greek economy, have been thrown out of their jobs, and are being asked to pay through the nose for income that they have not earned, and for assets that produce zero income that are been appraised at some very high theoretical level of worth that simply does not exist today.
    2. Most of the above goes for the people employed in the public sector, with the significant difference that they have not lost their jobs (yet). They have, however taken a hefty hit in their income.
    3. The same goes for the pensioners of both public and private sector after their respective funds took a debilitating financial blow after the PSI “voluntary” affair.

    I could go on but I think you get the point.

    If the EU had a “beef” with the Greek government (and they really should) they had the obligation under everything the EU stands for, to protect the innocent – EU citizens – and punish the guilty by taking away their illegally acquired wealth (and believe me the EU knows exactly who was doing what to whom and why., they ought to know and they undoubtedly do.)

    The situation in Greece is far worse than that conveyed by the media both foreign and domestic. The only “plan” than makes any sense at all in the current state of affairs and the non-existent outlook for the Greek economy is that of utter, mindless, indiscriminate destruction of the Greek economy (what’s left of it) and of Greek social structure (this is a bonus, not really part of the “plan” or is it?)

    • “If the EU had a “beef” with the Greek government (and they really should) they had the obligation under everything the EU stands for, to protect the innocent – EU citizens – and punish the guilty by taking away their illegally acquired wealth ”

      Are you talking about the same EU that on 2012 June elections, on a great manifestation of their democratic values, was threatening “Gods and Deamons” that if Greek people do not vote for the very same parties that brought Greece into this situation then “the gates of Hell will open”?
      Dont be naive. Nobody cares about the Greek middle class (or maybe that was the target all along)

    • Couldn’t agree more. Although the severe punishment of the politicians that drove the country to the ground should be the top priority of its own people and not some international body. Of course the fact that the EU happily supported them in a “better the devil you know” way is revealing. Then again so is the fact that the Greeks voted for them again after all. So there. The only suggestion I have for Klaus is to stop paying attention as it seems he is doing to the local media for his information. the situation is as you describe and of course it bears absolutely no resemblence with what the media are trying to spin. It’s true that it’s good to know where everyone is coming from (although I still find his concept of the misled international bankers when it comes to Greek debt completely ridiculous) if we are to find common ground.

    • Hi Stefanos & Others,

      I agree with what you have written here and I am sure that if you read the posts on this site dating back to 2011 you see the that clear warnings were given by Yanis & others of what would occur to the Greek social economy if the so called “Memorandum of Misunderstanding” was implemented as it was! As I live in Melbourne, Australia and have been subjected to the G20 circus, I just wanted to add that the EU propaganda machine has worked wonderfully in convincing most Australians and radio hosts that the “German Elites” are doing their best to deal with the crisis in a rational & humane fashion. Indeed a prominent Melbourne ABC Radio host, this week, said that Merkel & her team are holding “Europe together “ thru coordinated actions in both the social & economic spheres…how can a rational & compassionate person like me battle with this river of endless lies??

  • “The only part…Thus, there could not have been any prioritizing (or avoidance thereof)”.
    Herr Kastner are we gonna continue straining at gnats and swallowing camels, for long?
    In such a context even the so called primary deficit itself and the targeting and “achievement” thereof, is the product of prioritising foreign over domestic needs/demands.

    You are one of the few publicly speaking intellectuals, analysts, former bankers, let alone, of the German speaking ones, who have spoken out about the external nature and character of the Greek debt (FYI: you have been cited in a relevant wikipedia article on this issue).
    For what is worth, I the anonymous commenter, respect you greatly because of this.

    Please emphasise the important issue, don’t focus so much on derivative or lesser or minor details, when people (in Greece and abroad) STILL can’t tell the difference between external and domestic debt (public or other) and between debt in a national currency and debt in a foreign one!
    Please!!!!

  • Frank, read Bill Mitchell’s book “Eurozone Groupthink” coming out in early 2015 (with Elgar Allen, I think ,but not 100% sure). You will find one answer.