CDS buyers, feminists and Marx: Odd bedfellows in the era of the euro crisis

“Here is our offer: Accept a 50% haircut on your Greek bonds. If you choose not to consent, and it is your prerogative not to, we shall give the green light to Greece to declare a 100% default.” This was in essence the deal that Mr Dallara accepted in the wee hours of the morning on 27th October on behalf of bankers that had lent to Greece prior to the May 2010 ‘bailout’. In Hollywood parlance they might as well have told him: “we shall make you an offer you cannot refuse!”

Following the deal’s announcement a debate began on whether  the International Swaps and Derivatives Agency, the ISDA, whose job it is to declare credit events that trigger off CDS contracts, should accept that Mr Dallara’s capitulation was voluntary or declare that he was coerced. In what follows, I shall not delve on the financial repercussions of the ISDA’s decision (For my views on this click here.) Instead, I dedicate the following lines to a delicious irony that stems from the bankers’ predicament: Perhaps for the first time in history, they find themselves in the same camp as feminists and assorted leftists. I shall try to argue below, the ‘deal’ imposed on Mr Dallara by Mrs Merkel plunged (unwittingly) the bankers, the financial press, the world’s hardnosed financial experts, the whole of Wall Street and the City of London, into the kind of debate that is, normally, the privileged realm of feminist and Marxist intellectuals.

How come? Come to think of it, from the very beginning (at least since Mary Wollstonecraft, if not much earlier) feminists made it their business to debate the limits of consent. Does the fact that most women consented to (indeed, played a hand in reproducing) their inferior social status mean that the latter is freely chosen? Does consenting to a violent husband legitimise wife bashing? These were the questions that spearheaded the feminist critique of liberal thinkers’ tendency to identify consent with freedom.

At around the same time, the Left (ploughing a fertile furrow first dug up by thinkers like Marx, Bakunin et al) disputed the notion that the labour contract (between employer and employee) is free and fair simply because the employee consents to its terms and conditions. Marx’s poignant argument was that desperate people, lacking any real access to alternative ways of eking a living, will consent to desperately awful wage offers and to misanthropic working conditions. Indeed, he added that, in such cases, consent under duress reveals precisely the opposite of free choice: it is nothing short of coerced imposition on the one of the iron will (and grubby interests) of another.

Much more recently, the Canadian political theorist C.B Macpherson (see his brilliant 1973 book Democratic Theory: Essays in retrieval) revamped the standard liberal definition of freedom. He argued that we must desist from identifying freedom to enter into an agreement with the requirement that one must consent to that agreement. Instead, he offered the alternative definition according to which an agreement is genuinely free if one has the option not to consent to the offer the other side proposes.

Suppose, for instance, that I make you an offer; e.g. to ‘relieve’ you of something you own at a given price. The litmus test of the purity and fairness of the exchange is whether you have the option to say ‘no’ and not whether you actually say ‘yes’. You are, in this sense, free to turn down a contract provided you have alternatives. If your alternative to signing a declaration passing all of your property to me for a glass of water (while on the verge of collapse in a desert) is dehydration and death, then such a contract is hardly an example of voluntary, free trade. In short, you must have alternatives before your choice can be declared free. And since what constitutes a reasonable feasible set of alternative options (prior to agreeing or not to an offer) is a highly contested terrain, proclaiming that the CDSs of Greek debt should not trigger now (following the Greek haircut) is philosophically equivalent to proclaiming the labour contract and patriarchal relations between men and women to be free and fair.

And here lies the irony: It took the euro crisis to put bankers in the shoes of radical activists who, quite rightly, have been protesting for yonks that the worst forms of slavery is that which one consents to.

Note: The above line of argument is a simplification of a number of papers written some time ago. For an example see a 1995 paper, published in Science & Society, and entitled Freedom within Reason. See also a response to a critique of this paper entitled Reason without Freedom.


  • Yani:

    Let’s consider the facts:

    1. An agreement to agree at a later day is not an agreement. This 50% agreed haircut is beyond a joke, as it is both voluntary and unenforceable. Just chalk it off to theatrics and forget about it.

    2. Merkel is self-congratulating for engineering an 1/40th solution to the total problem (4 Trillion euro problem vs. 100 Bil. of “imaginary” haircut savings).

    3. there is not even a remote chance that some economic upstarts (Germans et al) could dictate terms to the international markets. You can simply forget it. In today’s globalized economy the power of sovereign governments is rapidly shrinking and whatever is left can be found in purely internal politics. Countries – in this new globalized game – are nothing more than airports where the planes of global business can land or take off. All governments can do is improve the airport conditions because the planes of global commerce are neither theirs nor of their own flight control. The mere thought that poor Germany can regulate capitalism is beyond laughable (whether capitalism is an optimum or adequately regulated system is not the topic of discussion today. It is what it is and you deal with it as a country the best you can.)

    4. Germany is violating every logical principle in her Quixotic attempt to frustration. The Americans have an expression – “pissing in the wind” – for it. The Chinese wisdom also says “Never force solutions to problems, because you only create new problems”). Germany has embarked into a foolish quest which will result in a humiliating defeat (another humiliating defeat) for Germany to be recorded in the books of history.

    In short, Merkel has no clue what she is doing.

  • So that we don’t lose focus here.

    What Germany is asked to do is to provide an effective and permanent solution to a 4 Trillion euro problem.

    Germany needs to stop – right away- from trying to fine tune irrelevant details, such as PSI contributions (imaginary or not).

    Let me define the task for Germany:

    Without counting on PSI, find an effective mechanism that addresses systemic liquidity. The only credible answer to such task is the Eurobond (or the pooling of EU sovereign debt).

    To Merkel et al:

    Quit pandering to the private sector and concentrate on 95% of the problem which is dependent on your own delayed and inappropriate actions.

    And do so fast, before a collective global slap lands on your face that will make your head spin faster than you can say why.

  • Wonderful analysis of the underlying truth of their actions; placing the debate right at their feet.

    But once again Yanis, will they listen; or are they surely blind to their own stupidity?

  • Wonderful. Quintessential Varoufakis–the rich ironies of the present moment through double lens of philosophy and history. Puts me in mind, among other things, of my FAVORITE passage from Capital:

    “When we leave this sphere of simple circulation or the exchange of commodities, which provides the ‘free-trader vulgaris’ with his views, his concepts and the standard by which he judges the society of capital and wage-labour, a certain change takes place, or so it appears, in the physiognomy of our dramatis personae. He who was previously the money-owner now strides out in front as a capitalist; the possessor of labour-power follows as his worker. The one smirks self-importantly and is intent on business; the other is timid and holds back, like someone who has brought his own hide to market and now has nothing to expect but–a tanning.”

    Remember when bankers used get their tanning at the beach?

  • A consent like this is like a “con-cent” a counterfeit no-value coin presented at a high-street shop to pose like a millionaire-in-action. No fooling though, the trader has been around longer than the poser…

  • SInce you referred to Mcpherson and the idea of freedom, you reminded me of some people that Greek liberals (at least those who present themselves as such) do not want to know , Pettit, Skinner, Sandel and others. The goog thing is that from what I heard Sandel’s book on Justice did and is still doing very well in Greece. Inside Information from Politeia that is..,%2012(1)_11%20-%20Full%20Text.pdf

  • The analogy with Marx and Feminists is not correct. The bankers knew that default was a possibility, even if it looked remote at the time, when they made the loan contracts on a very voluntary basis. Lest we forget, these were the days when banks developed Marketing and Sales Dpts, and were actively chasing borrowers. Also, many of them were making (apparently not so) easy money by putting up Greek bonds as a collateral at the ECB and then lending the Greek government at (what seemed like) a very good spread.  Now the bill is presented.

  • To put in plain English:

    The so called “50% haircut” is only a 20% haircut, because only private holders are impacted while the majority of Greece’s sovereign debt is in public hands. As a result a 20% haircut does absolutely nothing for Greece (other than completely destroy its banking/insurance sector).

    Futhermore, for some banks the CDS payment would be better than taking a 50% haircut. So it will be in those banks’ interests to not tender their debt for the haircut but to hold out and wait for a credit event. And the more banks that hold out the more likely a credit event becomes.

    Bottom line: Germany not only has produced nothing of substance in terms of rescue but has also completely dynamited the Greek economy.

    • So now they are on the same level of achievement as Greece. I still did not see any selling of state assets.

      Looks like a real successful program…

      Neither haircut nor asset sales will help Greece. Either wages are cut substantially again and also for non government employees or the currency is exchanged into a typical club med currency.

    • Dear Dutch-Jack, Your posts are becoming increasingly useful as testimony to the macroeconomic illiteracy of parts of N. Europe.

    • So if the South is so smart why is the mess an uncompetitiveness in the South? I rather belong to a group that has their things in order and is considered illiterate by members of a group of people who pay EUR 8 billion retirement benefits to dead people…

    • Dear Dutch-Jack. It is now crystal clear to me that your visits here, on my blog, are bereft of any intention to enter into a frank but well humoured debate. You are committed to a biggoted attitude that sees the world, or Europe, as an ‘us’ (Northern Europeans) versus a ‘them’ (Southern scum). You are, of course, perfectly free to pursue that sad fantasy. But do it elsewhere. As of this moment, you have been barred from this blog. Good riddance.

    • I don’t know the rest of his history on this blog as I follow it sporadically, but did Dutch-Jack touch a nerve here?

      As a third party observer I can see that while he took great care to be accurate in his phrasing (“I belong to a group that…”, “members of a group that…”) while you were the one making generalizations (“macroeconomic illiteracy of parts of N. Europe”).

      Anyway the reason I visited was that I wanted to read your reaction as G.Papandreou seems to have finally followed your advise regarding the recent haircut and wants to allow it to be rejected and shock the Germans. (i remember you proposed to do something similar through his MPs). Waiting with great interest.

    • Kostas, you are absolutely correct.

      Actually, what freedom of speech is concerned Yanis is about as bad as the German Nazis 70 years ago. He belongs to the Europhiles who should actually be called “EURO Nazis”. They have this wet dream of a socialist superstate in Europe and want to install it at all cost.

    • I allowed this comment because I believe in your right to have a final word, following my own comment in which I explained why I shall accept no more comments from you. Good luck in spreading biggotry elsewhere.

  • Ambrose Evans-Pritchard puts it like this:

    Italy in turn has been told to balance its budget by 2013, even though it has a primary surplus and one of the lower debt levels (public and private) in the OECD club. This risks pushing Italy into a slump that sets off the destructive debt dynamic so widely feared.

    It misdiagnoses the problem. Italy is in crisis because it cannot compete. It is in the wrong currency.

    The EU refuses to confront the core issue, instead seeking to buy time for the South by conjuring a €1.2 trillion bail-out fund (EFSF) that seeks uber-leverage through “first loss” insurance of bonds.

    This concentrates risk for creditors. It further endangers France’s AAA rating, the foundation of the fund. It almost guarantees faster contagion to euroland’s core. Europe has resorted to this twisted device because Germany has vetoed all moves to fiscal union, Eurobonds, debt-pooling, or ECB activism. It is a Hail Mary pass, a last gamble when all else fails.

    • The EU refuses to confront the core issue, … instead … conjuring a €1.2 trillion bail-out fund (EFSF) that seeks uber-leverage through “first loss” insurance of bonds.

      Don’t forget the special purpose investement vehicle (SPIV).

      The EU leaders fooled the stock markets for a day.

  • Yannis irony scores. The only difference is that workers and suffragetes never chose to be born in this state, where on the contrary bankers manifested their problems on their own. Still a powerfull image that of a banker arrested on a demostration against… haircuting 🙂

    But i think Yannis shouldn’t ban our Dutch friend. I believe he is just a fan of Lucretius who once said “It is pleasant, when the sea is high and the winds are dashing the waves about, to watch from the shores the struggles of another”.

  • @Máté

    Thank you for the links to those fascinating articles on contested exchange. As an unemployed/under-employed person, it was heartening to read political economists discussing something which anyone who’s ever been unemployed knows intuitively! Following through, that journey somehow ended up for me with Hirschman’s “Exit, Voice and Loyalty”.

    Perhaps the best thing to come out of this crisis might be a renaissance in which “ordinary” people (perhaps with an amateur interest, like me) educate themselves in economics – to at least try to understand _why_ things have come to this point – realise that the world we’re struggling in is NOT as we’ve been told it is, and challenge the Established Church more and more?

    I can’t help seeing the end of feudalism and the Reformation as inspiring parallels; when an entire, self-consistent worldview started to crumble away, revealed as bearing little relation to reality and thus having no legitimacy.

    Yanis’ blog has been great for me in that respect. (Yanis, your political economy book is waiting for me at the bookshop – academic price-tag unfortunately!!!!! – I look forward to a lot of heavy and stimulating reading).

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