The race to lend Greece: A short story by Klaus Kastner

In this remarkable short story, Klaus Kastner (Kleingut) offers a fictionalised account of how Europe’s banks channelled billions to their Greek counter parties. It makes for excellent cross reading with my recent take on the Ant and the Grasshopper fable. [Click here for Klaus’ original post.)

Greece’s foreign debt was 399 BN EUR by mid-2011. It was composed of 174 BN EUR in the central government; 208 BN EUR in the banking sector and 17 BN EUR in other sectors.

Many people ask these days how foreigners could lend so much money to Greece. Let me tell a tale how this could have happened. Any similarities with actual persons and/or banks are strictly coindicental.

Imagine that there are 3 major banks in Europe: the Merkel-Bank AG; the Sarkozy-Bank S. A.; and the Cameron-Bank Ltd. Each of them has a country-desk for Greece headed by Horst at the Merkel-Bank, Jean-Pierre at the Sarkozy-Bank and the charming Charlotte at the Cameron-Bank. All three of them feel very important because, after all, the entire Greek exposure of their respective banks is under their responsibility. They also know each other from meetings, presentations, road shows, etc. where all international bankers having an interest in Greece get together.

Their colleagues responsible for domestic lending operations in each of their banks think of them “overpaid wine-tasters” because in their view, Horst, Jean-Pierre and Charlotte spend their time like diplomats who mingle amongst their own kind and who feel like being above the dirty day-to-day business of a normal bank.

Let’s take Horst as an example. He is in touch with his Greek customers (mostly bankers like himself) almost daily via phone or email. But two or three, or even four times a year he takes a trip to Greece to meet with all of them personally. They call that “relationship management”.

So, as Horst prepares for his next trip to Greece, he gathers information from all marketing departments within the Merkel-Bank as to what their business activities with Greek customers are and what their business development interests would be. His Syndications Group might complain that they are being left out of good Greek deals because the Sarkozy-Bank and the Cameron-Bank take a much more aggressive posture. His Trade Department might tell him that they would like to transact a lot more documentary business with Greek banks but that they are always told that such business is allocated to the lending banks according to their exposure and that the Merkel-Bank is not quite up to where the others are.

Horst also requests input from his Risk Management Department. They send him the latest summary of the Merkel-Bank’s country limit and actual usage thereof as well as an economic analysis of Greece. Horst studies all the input from the marketing departments as he prepares for his trip. The input from the Risk Management Department he leaves on the side, to be read on the plane and/or in the hotel room once he has arrived in Athens.

By the time Horst has reviewed all the input from his marketing departments, it is clear to him that he cannot return from his trip with empty hands. Instead, he has got to come up with some more business in order not to fall too much behind the Sarkozy-Bank and the Cameron-Bank.

On the plane to Athens, Horst starts flipping through the reports of his Risk Management Department. He doesn’t get very far because, great surprise, Charlotte from the Cameron-Bank is on the same plane. So he postpones the reading until later on in his hotel room and chats with Charlotte about the big picture of Greece.

Horst reads the report of his Risk Management Department in his hotel room. He doesn’t quite get it. These bean-counters write at length about Greece’s budget deficit which seems to be heading out of control; about Greece’s current account deficit which seems to blow all conceivable proportions; about the staggering growth in Greece’s foreign debt. Horst remembers that Charlotte had told him completely different things on the plane and he puts the report to the side.

The next day, Horst has appointments with 3 Greek banks: a breakfast meeting in the morning; then a luncheon; and the third one for late afternoon to be continued with a dinner at Mikrolimano. Since Horst doesn’t speak Greek, he is most impressed by the fluency in English of his Greek counterparts and by the way they handle themselves. He often thinks that if only his primitive domestic banking colleagues could see the type of top-notch internationalist people he is dealing with and how he can handle himself with them. And how well he speaks English!

His counterparts do not request any new loans from Horst. Instead, they talk about how great the Greek economy is developing and how other banks recognize this by increasing their Greek exposures. They express their full understanding that the Merkel-Bank is not quite up to the Sarkozy-Bank and the Cameron-Bank but, somewhat sadly, they say that, because of this, the Merkel-Bank should not be surprised if it gets less documentary business and/or capital markets business from them.

The lunch takes place at the executive dining room of the bank. The dinner in Mikrolimano lasts until the early morning hours and, by the time they all go home, they have promised each other to be best friends for the rest of their lives. Horst wonders if the Chairman of the Merkel-Bank ever has such business experiences.

The next days of his business trip unfold in similar fashion. None of Horst’s counterparts requests credit. All they do is to point out how much market share the Merkel-Bank is losing by not being a bit more aggressive as regards lending to Greece.

In one of the meetings, Horst hears that Jean-Pierre from the Sarkozy-Bank had recently had a personal meeting with the Minister of Finance. Embarrassingly, Horst has to admit that he has never had the opportunity to meet with the Minister. His hosts say that they could arrange such a meeting but they point out that the Minister does not like to waste time. If he agrees to a meeting, he would like to know beforehand that there will be some outcome.

By that time, Horst is convinced that he is running far behind Jean-Pierre and Charlotte. He better do something to convince his Greek counterparts that the Merkel-Bank is in no way junior to the other banks. As he looks forward to the meeting with the Minister, he briefly does remember that his Risk Management Department was very concerned about taking on more Greek risk but he quickly dispels this thought. After all, those bean-counters are acting from ivory towers and he, the Country Desk Manager of the Merkel-Bank, was truly “in the field” and could assess what the risk really was.

The Minister tells him at the meeting that Greece was about to give the mandate for a new bond issue. The Sarkozy-Bank and the Cameron-Bank had already made their pitches and both looked really good. But if the Merkel-Bank really wanted to improve their standing with the Greek government, this would be the chance to show colors. But they would have to do that soon. The Minister assumes a fatherly role and promises Horst that if his bank made an interesting proposal, he would personally favor it over other offers. Horst leaves the meeting convinced that he now has the chance to really put the Merkel-Bank on the map in Greece.

Waiting for his return flight at the Athens airport, Horst runs into Jean-Pierre who has just arrived and who is in great spirits. Jean-Pierre tells Horst that he would be having meetings at the Ministry of Finance to discuss an upcoming bond issue. At this point, Horst knows that the race was on.

On his flight back, Horst organizes all his papers and starts preparing his upcoming Committee Presentation mentally. When putting together the numbers, he sees that, with the new Greek deal, he would exceed his annual budget quite substantially. He starts making some first bonus calculations in his mind.

Back at Head Office, Horst finalizes his Committee Presentation. One small hurdle is that the Merkel-Bank’s Risk Manager wants to have a conversation with him about the presentation.

That conversation turns out to be less pleasant than the dinner at Mikrolimano. The Risk Manager wants to know of Horst why he recommends such a substantial increase in exposure when the economic analysis of Greece was not favorable at all. Horst has to control his temper. In his mind, the Risk Manager is the epitome of a bean-counter. Horst argues that, regardless of what the economic analysis said, Greece was rated A/A-1/Stable by S&P which made it investment grade. Also, Basel-II did not require any reserves to be held against sovereign bonds of Greece because sovereign bonds were considered risk-free.

The Risk Manager asks why Horst is going for approval of such a large amount. Horst explains that they first had to subscribe the full bond but that they were expecting a large sell-down to end-investors with only a reasonable final take. Who will be the takers, the Risk Manager wants to know. Horst answers that, above all, the Sarkozy-Bank and the Cameron-Bank would take large amounts. He had just recently had discussions with each of them and they were bullish on Greece.

The Risk Manager insists on the question of why a bond and not a loan. He argues that with a loan the bank would have much more direct influence on the borrower whereas with a bond the bank had virtually none. He points out to Horst that he had argued on previous deals that there would be large sell-down’s and at the end of the day they ended up with most of the deals on their books. Horst has 3 answers to that: first, the Syndications Group had messed up the distribution of the previous bonds; secondly, the bank was earning good margins on those risk-free assets so that they were very well off holding them; and, finally, the bank should be guided by what the customer’s interests are and not only by its own. And the customer wanted a bond.

Risk Management adds a critical view to the Committee Presentation but no one takes serious note of it given the investment grade rating of Greece and the new business potential. The deal gets approved and Horst is praised for his accomplishment. And the Minister of Finance accepts the proposal by the Merkel-Bank.

Once the deal is closed, Horst passes it on to the Syndications Group with specific instructions to start the down-selling with the Sarkozy-Bank and the Cameron-Bank. Much to his surprise, he receives feedback that neither of these two banks wanted to take any part of the bond. Horst is confused and places calls to Jean-Pierre and to Charlotte.

Both answer him the same way. Yes, they say, they still had plenty of Greek exposure available but their policy was to reserve that exposure for deals which they had generated themselves. Also, each of them say, they had just arranged a major bond for Greece and they didn’t want to go back to their committees with a new request so soon thereafter. That comes as a bit of a shock to Horst because, until that time, he thought that Greece had only done one deal and that he had outmaneuvered both the Sarkozy-Bank and the Merkel-Bank.

Horst then has a brainstorming meeting with the Syndications Group to plan a new strategy for down-selling. At the end of the day, they can place some portions of the bond with German Landesbanken and second-tier banks of other countries but the bulk of the bond stays on the books of the Merkel-Bank.

During this time, Horst once runs into a colleague from the domestic lending operations of the Merkel-Bank in the bank’s cafeteria. Horst proudly explains what a large deal he had just concluded with Greece. His colleague from the domestic lending operations inquires what the purpose of that financing was. Specifically, what Greece was going to use the money for. Horst doesn’t even reward that petty question with an answer. Such petty questions could obviously only come out of the narrow minds of domestic lenders.

By the time 2008 comes around, the Merkel-Bank, the Sarkozy-Bank and the Cameron-Bank (and many other banks) have gone through this process several times. With the crisis of 2008, the banks’ liquidity comes under pressure and their appetite to increase bond volumes on their books declines. Also, by mid-2009, the foreign debt of Greece surpasses the 400 BN EUR mark and it begins to look substantial. An election campaign is under way in Greece and the banks want to await the outcome of the election.

Shortly after coming to office, the new Greek government shocks the world with revised budget deficit figures. Hectic breaks out among board members of the Merkel-Bank. They urgently request presentations of the bank’s total exposure to Greece. Horst as well as his Risk Management Department are busy compiling all the information.

The Board Committee expresses surprise at how large the total Greek exposure is. The Risk Manager points out that they had reviewed and approved the frequent exposure increases themselves. The Committee feels that action must be taken. The first action will be to reduce the exposure limit to current outstandings so that at least no further money would go out the door. Then they want to hear proposals as to how the current outstandings could be reduced.

As it turns out, most of the outstandings are bonds which the Merkel-Bank holds on its books and the Syndications Group informs that there aren’t really any buyers offering reasonable prices in the market. So they turn to the loan outstandings which represent short-term lines of credits to Greek banks for the purpose of trade financing. These lines are so-called “internal lines”; there are no written loan agreements and, thus, they can be cancelled any day. Horst is assigned to “run down” those short-term internal lines of credit.

Horst then calls one Greek bank after another to inform them of the Merkel-Bank’s new policy. The Greek banks are shocked. They remind Horst of the dinner at Mikrolimano where they had promised each other to be friends for the rest of their lives. That, at that time, they were doing him the favor of giving him business which other banks had wanted as well; that they now had the impression like Horst was selling umbrellas when the sun was out and was now running away as soon as the first raindrops fell. Horst has no better explanation than to say that he is instructed to implement the bank’s new policy.

Billions and billions of Euros are called back by the Merkel-Bank and by all other banks during this period. Had the Greek banks not been able to get refinancing from the ECB, they would have gone under.

Meanwhile, there are new developments at the Head Office of the Merkel-Bank. Their chairman, one of the most prominent bankers in the world and a key advisor to the German government, had convinced policy makers that the ECB should buy Greek bonds. Otherwise, the markets would collapse. Eventually, the ECB agreed to do this and the Merkel-Bank manages to sell off, at near-par rates, a large part of its Greek bonds.

Horst received a very good bonus twice. The first bonus he received when he had successfully run up the Greek exposure and the second bonus he received for successfully calling back the short-term lines for Greek banks and for unloading such a large amount of bonds to the ECB. Unfortunately, he lost a few “eternal friends” in Greece, but Horst is happy.

A year later, a new challenge comes up for Horst. The bank’s chairman had to grudgingly agree to a socalled “voluntary debt forgiveness” in the order of 21%. That is not good news for Horst. However, the basis for calculating this 21% had not been clearly established. “Forgiving 21%” means that the Merkel-Bank will receive a new bond with EU-risk for the other 79%. Horst is now charged to come up with proposals as to how a formula could be implemented which would assure that the damage to the Merkel-Bank would be as small as possible.

Horst comes up with a net-present-value calculation (NPV). An NPV-calculation is routine work for Horst. Essentially, it means adding up all future cash flows from a loan (interest, principal) and transforming them into a net present value applying a discount rate. The higher the future cash flows and the lower the discount rate, the higher is the amount to which the 79% will be applied.

Horst is very clever and he constructs long tables of numbers using certain assumptions. At the end of this exercise, it turns out that the Merkel-Bank’s voluntary participation in the debt forgiveness will be less than 10% of the nominal value of the bonds which it has on its books.

This is when Horst is awarded his third bonus.


  • Yanis, I find this post rather amusing especially because no serious person truly cares about how the interaction took place amoung the many EU bankers and their Greek counterparts. What you are describing is a behaviour and an example no different in other parts of the world and this should not be taken a extra-ordinary! Instead, you may wish to post solutions and not macro one’s either but details that need to be implemented for this country to get back on its feet. I am so incredibly tired of the blame game and its become rather old now. The facts remain, Greece was all too wiling to accept loans over the last 30 + yrs, the question that should be addressed is “what did the country do with such loans ? What oversight if any was implemented to ensure that capital was being used appropriately ? Finally and not limited only to these questions, what are current plans being made by the Greek leadership to ensure the country can be competitive while re-shaping the political and economic environment for a country with some future prospect. Please stop the blame on how the “outsiders” impacted Greece but instead address how the Greeks were incapable of addressing the countries interests ….

    • The facts remain, Greece was all too wiling to accept loans over the last 30 + yrs, the question that should be addressed is “what did the country do with such loans ?

      Yes, Abe, and not to take away from the importance of your question above or your other points, but there are also two other nasty facts to consider. One, the lenders willingly lent to Greece. Now if the Greeks can’t repay (these unsecured loans), it’s the lenders who have the responsibity to deal with it. Remember: For every reckless borrower, there is a reckless lender (you know, like a junkie – dealer relationship).

      Two, even if the Greeks lied or juiced the numbers, so what. It would not change anything. The EU or bank auditors were not born yesterday — they knew what the Greeks were up to. A party knowingly participating in a lie cannot seek any recourse; in other words, they had it coming.

    • To add to what @lastgreek wrote, let us not forget the assistance Greece had from the likes of Goldman Sachs in altering their books to cover up the levels of debt they were taking on.

  • Another excellent post by Klaus. It really helps us understand the reasons behind the humanitarian intervention by IMF & Co. to save poor Horst, who was entangled in a web of deception.

    Looking forward to his next post. I bet it will be about some politician named Theodoros (randomly picked name) who was unwillingly caught up in a vicious game of tit-for-tat and was forced to take part in the electorate’s “eating” spree.

    Way to go, Yani. Keep us posted. (NOOOT!)

  • “The higher the future cash flows and the lower the discount rate, the higher is the amount to which the 79% will be applied.”.

    This statement alone shows embarrassing lack of knowledge about the NPV concept.

    Cash flows are cash flows and are estimated/calculated for a chosen periods independent of the discount rate.

    The discount rate applied has nothing to do with the size of cash flows. The correct discount rate is the weighted average cost of capital. Each business or government has a different weighted average cost of capital based on its skill, experience and credit rating.

    A triple AAA business can have a low weighted cost of capital but not necessarily. It depends on its sources of funds.

    The NPV approach is very straight forward. Cash flows are discounted to the present using the appropriate discount rate. The highest NPV points to the project that the business company or country should undertake in order to maximize value. Very simply put, you always chose the project with the highest Net Present Value.

    There are further nuances if the projects are of unequal time length but there are formulas to compensate for such. For example the NPV of a project that yields cash flow for 10 years @ a certain discount rate can not be compared at face value with the NPV a project with only 3-year cash flow which dries afterwards. There are formulas to equalize the unequal time length so that the highest NPV can emerge.

    • Dean:

      I’m going to take a wild stab in the dark here and guess that you work in or around the finance industry. These technical details you list are fine but what do they really tell us that the story has not already covered? Yes we know there are technical aspects to this that only a finance professional can understand. But the fact remains that the banks massively increased their exposure and that massive increase in exposure has caused an enormous problem for a lot of us that were not involved in any direct way in these transactions.

      Stated another way: I really don’t care about your NPV projections and I don’t care about your discount rates. I will take it as written that these as carried out by the banks were either inaccurate or ignored. Either way, the effect was the same.

      My main quibble with the story is that it may have overlooked one other aspect. Before 2008, the story may well have gone this way. But there is evidence, and MF Global is a case in point, that the banks started betting on a Greek bailout. Whatever NPV calculations they used to justify these bets, and bets is what they are, they clearly saw more profit there than they saw in making loans to business that would create jobs, or good mortgage loans to consumers that would create wealth for someone other than bankers.

      They have become parasites. By definition a parasite lives off the wealth of others, whether that wealth is blood taken out of a mammal by insects like mosquitos or money taken out of an economy as with the investment banks. Maybe a better way to put it is that we have allowed the banks to become like a fungus, like athletes foot. We need to spray them now and get them under control. Restore them to what they are meant to be: servants that enable the rest of us to get on with producing goods and services.

      At the moment, our economy is distorted and we all serve the servants.

    • David Scheiner:

      You raise a lot of good points, which I am not sure I can all address satisfactory(in length) in one reply.

      The lending crisis started on American shores. It was the Bush(patented ignoramus) response following the WTC attacks. His untrained, undisciplined approach was to flood the US market – and by extension the world – with cheap money that needed to be invested somewhere quickly. Real estate was the bubble victim and the securitization of loans that ensued.

      In such an environment of herd behavior, if you are a bank you need to engage in similar behavior to other banks otherwise your valuations suffer. I am not saying it would not have been prudent, but it would have been exceedingly difficult to explain to your board of directors why you are not engaging in similar lending to the bank next door or next continent.

      We all know this is an American problem which came to a crashing halt in 2008. The problem is with the European reaction that ensued.

      In a “monkey see, monkey do” world of finances the Europeans took the valid criticism of US intelligencia against Wall Street as an all out call against the world banking system.

      Enter now Germany into the picture, a country which directly benefits from the lowest possible euro value as an exporter and is now the only European country that has benefited over the last 3 years and continues to benefit from this crisis.

      Merkel, pretending to be a crusader against greedy bankers, refuses to solve the problem created in other EU countries due to the single currency and continues to pursue policies that only benefit Germany at the expense of all others. The Wall Street establishment is well out of reach from Merkel’s demagoguery and Germany’s moralizing to a European patient that is bleeding to death is beyond criminal.

      The moral of the story is very simple. Just like Hollywood pictures can not spawn an equivalent film industry in Europe (of at least equal of better global recognition), a Wall Street crisis is a poor substitute for European responses resembling American ones. One has to be an incredible idiot to believe that Europe has the antidote for something that is of clearly US origin and for a problem that all the brightest minds who could possibly cure it are on American soil.

      That fact that talking against European banks is fashionable, does not make it a potent European remedy. And all smart citizens of Europe need to ask of Germany this simple request:

      Merkel, stop scapegoating populist and imaginary enemies for the sole purpose of using a crisis to your sole advantage. This is like a grand deception while performing a dark and unforgivable deed.

      P.S. In the case of Greece what is left of the Greek banking system is beyond sad. Instead of supporting the Greek banking mechanism to get back on its feet and assist in the economic reconstruction of the country, criminal Merkel is destroying the Greek economy under the pretext of saving it.

    • My main quibble with the story is that it may have overlooked one other aspect. Before 2008, the story may well have gone this way. But there is evidence, and MF Global is a case in point, that the banks started betting on a Greek bailout.

      Like our fictional Horst, they deluded themselves into believing that sovereign debt was risk free. Then, the margin calls came.

      It was I guess a good bet, but when you are leveraged like there is no tomorrow (via repo-hypothecation) … well, you are in effect a “Lehman” time bomb , waiting to detonate at the slightest economic shock.

      David, there is a great article on this by Christopher Elias: MF Global and the great Wall St re-hypothecation scandal

  • By the way, it is very evident that Klaus does not understand what is really going on. Not even close.

    I can easily explain it but I am not in the mood right know. In fact I am really upset that we are framing the problem in a manner that clearly points to not having a clue of what we are talking about.

    And because this blog is about give and take, I am not going to tell you until someone gives me these numbers so that everybody can follow the proper framing of this issue.

    This is what I need:

    Total Greek sovereign debt: (a verified number somewhere in the 350-400 Bil euro range).
    Amount of Greek Sovereign held by ECB: (say around 100-130 Bil. euro)
    Amount of Greek Sovereign held by others: (say around 200-250? Bil. euro)
    Amount of Greek Sovereign held by Greek banks: (say around 80 Bil. euro)
    Amount of Greek Sovereign held by Germany: (say around 6 Bil. euro)
    Amount of Greek Sovereign held by France: (say around 45 Bil. euro)
    Amount of Greek Sovereign held by all others: (fill in).
    Current rate charged by ECB on Greek debt: between 4 to 4.5%
    Rate asked by the PSI participants: 8% per English law
    Rate offered by Greek state on PSI participants: 6% per Greek law
    Total debt service for Greek debt (interest only):

    Once you give me some reliable numbers I can explain the whole thing in less than 5 minutes.

    Klaus can you get those for me and double-check with another source to be sure?

    • By the way, it is very evident that Klaus does not understand what is really going on. Not even close.

      Your unfettered arrogance becomes you. Too bad you don’t have the “capital” to pull it off. Like the banksters, you’re way overleveraged, fella.

      Btw, have you forgotten that in a recent posting you didn’t know that the Swiss franc was pegged to the euro?

      And because this blog is about give and take…

      Exactly. So how about participating without being rude and obnoxious? Because, otherwise, you are detracting from the discussion at hand — not to mention that you are ruining the users’ experience of this fine blog.

  • Thank you for this. It’s a good personalization of how all these bonus-chasers generate a tsunami of bad loans. SO reminiscent of the subprime bundling flunkeys chasing bonuses here.

  • Interview with Vernon Smith:

    Vernon L. Smith, Ph.D. was awarded the Nobel Prize in Economics in 2002 for his groundbreaking work in experimental economics

    “The strong countries of Europe are being asked to foot the bill for the profligate countries and that is not a sustainable policy. The weak countries are de facto bankrupt, should face that fact, and default, if necessary, on their debt.”

  • I almost felt pity for poor (!) Horst. Was it a set up? It makes me want to cry… But only because, at the end, they ask ME to pay the bill !

    A story about games grasshoppers play between them. With other people’s money. And suddenly “truth” hits them and they are shocked … Wow! Poor grasshoppers!

    What about a different version of the famous story?
    “Aesop was lying! There are not only ants out there and grasshoppers know it. In order to control ants and make it easier to steal their labor’s fruits, grasshoppers used to spray them. Lots of spray. But at the end all this chemicals end up to mutate some of the ants to something grasshoppers have never seen before. Something new they do not know how to control. Something deadly dangerous for grasshoppers because the mutated ant has immunity to any spray they know. And as if this was not enough, the legend tells us that this mutated ant can even eat grasshoppers, alive! But this a different story we have to tell sometime”

    I only wish this metaphor could really happen, but I am afraid this version of the story is pure science fiction…
    (I apologize in advance to the economic minds of this forum that my contribution to it is more to the fictional side of the science)

  • The Risk Manager insists on the question of why a bond and not a loan. […] Horst has 3 answers to that: first, the Syndications Group had messed up the distribution of the previous bonds; secondly, the bank was earning good margins on those risk-free assets so that they were very well off holding them;

    Excellent point, Klaus: The delusion in thinking that sovereign debts are risk-free assets. And it’s this delusion — and a willful delusion, I might add — that leads to the off-balance sheet games played by the likes of MF Global.

    Keeping with MF Global … Jjust as the Risk Officer in Klaus’s short story clashes with Horst over controlling risk, so in real life did MF Global’s Risk Officer clash with Corzine.

    Thank you for posting, Klaus. Indeed, it was an “excellent cross reading” with Yani’s recent take on the Ant and the Grasshopper fable.

    In art: Where is the money, Lebowski!

    In real life: Where is the money, Corzine!

    • That made me laugh, Maria. Thanks 🙂

      Btw, “Ari” rhymes with “Aki” if you get my meaning 😉

  • Thank you for this Yani and Klaus, and thank you Yani for such provocative and useful pieces.

    This is my humble thought or translation of another’s thought and song:

    My working class take–not new, but war via finance; tanks are no longer necessary in many cases.

    Tritos Pagkosmios–Third World . . . (War)

    Petros, Johan and |Franz
    Worked in a factory building tanks.
    Petros, Johan and |Franz
    Inseparable they became building tanks.

    Petros, Johan and |Franz
    Worked for Brown, Fischer and Kraft.
    Brown, Fischer and Kraft
    Inseparable they became building a trust holding banks.

    Petros, Johan and Franz
    So carefree did they become working on the tanks.
    That never did they read Marx.
    They had no idea about trusts and crashes.

    Brown, Fischer and Kraft
    Separated into Brown, Fischer, and Kraft
    Brown, Fischer, and Kraft
    Having become enemies and dissolving the trust.

    Before they learned what was written by Marx
    Petros, Johan and |Franz
    They were conscripted as soldiers
    Dying as heroes under the tanks.

    Brown, Fischer and Kraft
    Thought and realized it was all the fault of Marx
    Brown, Fischer and Kraft
    They got together again and set up a trust.


  • Yani, I forgot the closing italics tag in reply to David Sheiner. The first paragraph should be in italics only:

    My main quibble with the story is that it may have overlooked one other aspect. Before 2008, the story may well have gone this way. But there is evidence, and MF Global is a case in point, that the banks started betting on a Greek bailout.

    I wouldn’t be bothering you with this trivial matter if it did not mess up the posts that follow the missing end tag.

    My sincere apologies 🙁

  • Lastgreek- you make a very good point concering the lenders responsibilities but the reality is unfortunately very different. The fact remains that the country is a mess and in some ways ungovernable given the austerity measures and the peoples unwillingness to accept the measures. Sure, its easy to relinquish responsibility and tell the N.Europeans to stick it but we dont live in a bubble and the implications of such a move are well known. My questions above have more to do with the greek mindset and accountability as well as their responsibility as stewards of the greek people and thier obligation to serve the interests of the state. The core issues in Greece have little to do with Germany and the surplus economies but what did the Greek leadership do to create a better environment for the Greeks when they were recieving Billions in grants, subsidies, and low interest loans? Lets call it for what it is and simply state that the stewards of the greek state did no one any favours and this is why they are here today.

    • Please allow me to indulge for a moment.

      Those 300 Spartans were something, eh, Abe? Against incredible odds and certain death, they didn’t cower and run — they stood their ground and fought ’til the last man.


      O Stranger, tell the Spartans that we lie here in obedience to their commands.

      The above words have immortalized those mean SOBs who saved Hellas. Yes, they were mean SOBs. These were not people you wanted to mess with, even on a good day — especially if you had the unfortunate luck to be a slave or Helot.. One wrong glance by a Helot on a Spartan and the Spartan would cut him down … for the sport of it. But at least the SOBs had principles, I’ll give them that 🙂

      Speaking of principles, have you heard of the other famous 300 Greeks? No, they’re not Spartans, and they’re not from Greece’s glorious past. They exist in the present. I dare say, you might even know one of them, Abe. I call them “The 300 Athenians.” Who are they exactly? Well, remember that embarrassing news story last year about swimming pools in Athens? They are the 300 (give or take a dozen) principled Athenians who, out of a total of 16,000 or so swimming pools (detected by satellite) in greater Athens, registered their swimming pools for … get this … tax purposes!

      Only 300!

  • the Only and the Real truth in Banking Sector is that this sector gives loans to people, companies, organizations, states, etc,that could not afford them. I used to work for one of the biggest banks in the world (not now) and I remember very clear the following words from the CEO. “Do you want a loan? if you have pulse you will take it……” and as a matter of fact after great losses he received again and again enormous bonuses.

    • the Only and the Real truth in Banking Sector is that this sector gives loans to people, companies, organizations, states, etc,that could not afford them.


      As Yani lucidly explains in his remarkable book The Global Minotaur, the banksters cleverly got around this hurdle — lending money to people who “could not afford them” — using a financial instrument called a “collateralized debt obligation” (CDO). CDOs allowed the banksters to remove the “liars loans” ( term that was coined by former bank regulator William Black) off their balance sheets by aggregating them all together, slicing them up according to some formula, and then selling them.

      PS: As I was writing this, my 7-year-old duaghter happened to be sitting next to me. Glancing at the monitor, she points to the front cover image of TGM and says, “Daddy, you have that book!”:-)

  • Yanis, in one of your postings you have expressed your apprehension, that the Euro could collapse now, or in some months or even years.
    Please explain this a bit. How would such a prolonged crisis emerge without leading to a crash? Could Europe become a kind of Japan and what would that mean?

    • The introductory chapter of Yani’s book The Global Minotaur — btw, the most comprehensive book that I have come across that explains the origins of the current crisis — begins with the Queen, at some event, asking the question to economists, “Why had you not seen it coming?” Well, as Yani points out, they had — “they” being the big boys in the American administration and Wall Street. They saw it all too well — “in painful slow motion.”

      Anyone here recall Cheney’s — you know the guy: 5 Vietnam draft deferements, chickenhawk par excellence, war criminal … yeah, that guy — infamous words to the then US Treasury Secretary of Paul O’Neil, “Reagan proved that deficits don’t matter”? In The Global Minotaur, Yani explains why the US was able to run deficits, both trade and budgetary, with impuity.

      In Iraq, the American war machine unleashed “shock and awe.” And after nearly 8 years of war, millions of casualities, and millions of people displaced, in terms of both death and destruction, this bloody war pales in comparison to Paul Volcker ‘s “Volcker Shock” in the 1980s. The African nations din’t know what hit them. If only they were so “lucky” as the Iraqis.

    • Only a lucky few, such as Germany, will become a “kind of Japan” and muddle through the severe downturn. As for the rest, not even close. Much, much worse.

    • On the other hand, if he ever was Papandreou’s advisor, he failed miserably at it!!!!

      For some reason PASOK’s economic strategy was exactly the opposite of what professor Varoufakis would advise…..

      ..which tells as a lot about what our gutless politicians (worldwide) would do to postpone the required reforms as well as avoid the conflicts these reforms would demand.

  • Sorry to be out of place dear Yannis. Excellent posts as usual. Congrats to Klaus as well. One question though. What do you think of the ECB move to provide basicaly “unlimited” liquidity through 3year (!) loans to european banks? Isn’t this move a basic first step towards a way out of this mess? With this liquidity banks could refinance the sovereign debt expiring in 2012 and (hopefully, although i doubt it) sort of kickstart the economy. The first auction of this measure came close to half a trilion euros. Doesn’t this move by the ECB combined with an additonal rate decrease renders all talk of the EFSF mess obsolete?

  • Personally , i would like to thank Klaus for his sincerity .
    Although , i don’t agree with the way he presents things .

    I would like to contribute the following as a response to the “free markets fake ideology” and their extreme power when compared to state power and politics .

    “Η μαλακία είναι δικαίωμα όλων , αλλά δεν είναι υποχρέωση κανενός”
    @ “Οι ιππείς της Πήλου”

    If someone is acting stupidly , that doesn’t make it a norm or even worse a reality with which we must comply .

    I oppose to any solution that does not take actions against the stupidity and greed of banks . Actions to regulate in favour of bank customers , citizens and countries .

  • Just in case some of you doubt that the German tactic is that of invasion and occupation (a technic they picked up from the Turks who also taught them how to commit genocide as well – Hitler was a great admirer of the Armenian genocide and perfected it against innocent Jewish people).

    As if sending third rate bureaucrats in Greece and calling them “German administration” will cure the problem. Don’t you people have any shame?,1518,804870,00.html

  • Yanis,

    What did you mean by your recent tweet:

    “Spanish yields fall in anticipation of more ECB liquidity for the insolvent cajas. Another nail in the euro’s coffin disguised as progress.”

    Are you concerned that eurozone collateral is flowing into the ECB and staying there? Or is it a different concern?

    • The concern stems from the observation that the cajas are being, effectively forced to do that which normal bank shareholders would reject: To take on (admittedly cheap) loans in order to expand their balance sheets by buying bonds which are bound to fall in value. Larger, private banks would not succumb. It is the smaller ones that allow political pressure to force them into potential insolvency so as to secure some cheaper govt borrowing now.

  • Now I am confused….

    1. Will the banks use the ECB funding to buy government loan or not ? (cause according to the statement by the Italian banks, they will not).

    2. Is it a good or bad thing if that happens?

    3. How do we know in advance that “bonds are bound to fall in value” when this ECB support package (along with everything else our political elite does today) targets to exactly the opposite outcome?

  • After reviewing the comments to my tale (thanks to Yanis for distribution), I would like to comment on comments.

    My tale was about BEHAVIOR of banks and bankers and not about technicalities of banking. Having spent some of my banking years as “overpaid wine-taster” and some others as “narrow-minded domestic banker”, I can assure everyone that my description reflects quite accurately the behavior of large banks with international activities.

    I did not want to attribute blame to anyone. While I took Greece as an example, the tale applies universally and I would guess that it is timeless.

    One reaction was that I didn’t talk about the betting among banks against, say, Greece. That is correct. I could have easily concocted a couple of very biting paragraphs about that but, then, there are other aspects which I didn’t cover either. The tale had become longer than intended already.

    Regarding the mean bankers/speculators who are allegedly out to “kill” countries and economies, I have never met any person fitting that description. However, there are many bankers/speculators out there who are chasing high financial returns, preferably short-term gains, and they can definitely destroy real values. Theoretically, if economies/markets were in complete balance (not possible in practice), these people would be out of a job. They thrive on imbalances and they have an amazing ability to detect imbalances. Oftentimes they can even create them. But they are out to (profitably) transact business and they are not out to (unprofitably) wage geopolitical campaigns.

    The word “parasites” was mentioned and I find that very interesting. In the Middle Ages, that term was used against people who were deemed to take advantage of real economies without contributing to them. What we have today are entire industries who take advantage of real economies without contributing to them (other than recycling the financial wealth which they generate for themselves).

    Even today, most banks (the medium-sized and smaller ones) understand that banks are not an end per se but a means towards an end. That their end is to support customers in the real economy so that there can be real wealth generation. Despite their quantitative majority, these banks really cannot influence large international capital markets. Instead, they are influenced by them. The much fewer large players have developed a mindset where the bank is an end per se and where it is the customers who become the means towards that end. They think less of “customers” and more of “counterparties”. Instead of visiting customers, their top executives visit institutional investors, attend analysts’ meetings, talk to consultants, etc. “Real” customers often, and rightfully, criticize them for speaking a language which no “real” customer understands. However, without a real economy somewhere out there, they could not transact any business. From that standpoint, to use the word “parasites” to describe them is mean but not false.

    For individual banks/bankers caught up in the midst of the herd behavior, it is next to impossible to break out. Horst would have been fired if he had fallen too far behind Jean-Pierre and Charlotte (and replaced by someone who could successfully compete with them). Even a CEO like Josef Ackermann would have gotten into serious personal trouble if Deutsche Bank had fallen far below the 25% ROE which he had promised his investors. And he promised that return to investors to safeguard his job in the first place. A notable exception would be Warren Buffett who has built such a myth around himself that he does not really need to report to anyone (and, so far, no one has dared to question him); they all trust him blindly. When Warren Buffett decided not to take part in the IT-bonanza/bubble because he didn’t understand it, he could do so. Most everyone else would have lost his job for “not understanding” such (perceived) enormous profit opportunities.

    Goldman Sachs was cited as the villain. Actually, G+S is the epitome of perfection in this game. Not only do they often profit the most from being in the herd. As “leading steers”, they push the herd onwards but they are smart enough to leave the herd before it goes over the cliff (and sometimes they even save themselves by driving others over the cliff). It is the nature of the game which needs to be criticized. If one justifies the nature of the game, one should not criticize its most successful (albeit it reckless) performer.

    G+S was criticized for advising Greece how to “cheat” with the level of her debt and for collecting high fees for that. The reality is that every major player in international finance employs entire divisions of supremely intelligent people who spend their time developing new products/ideas for making money. Regulations are a great opportunity for them because for every regulation there are possible ways around it. Maastricht is a case in point. The fee income earned so far by bankers, lawyers, accountants, etc. through advising governments how they can legally circumvent these regulations is probably beyond imagination. Some of the better known circumventions are: cross-border leasings; private-public partnerships; outplacing debt into SPVs; or – as in the case of Greece – cross-currency swaps. I cannot imagine that G+S got the mandate for Greece’s cross-currency swaps because they conspired with the Greek government how to cheat the EU. Instead, I would suspect that every major player had pitched for that mandate and G+S got it because they were the best. As far as I know, there was nothing illegal about the structure of the cross-currency swaps and Greece is definitely not the only country which is “optimizing” its sovereign debt for the purpose of reporting it (Austria’s reported sovereign debt would be about 20% higher without “optimization”).

    These are some of the behavioral aspects which I tried to bring across and I appreciate the feedback from those who understood this. I attach a video below which came out almost 4 years ago. Not all of you may know it yet. It is priceless for its humor, and — quite reflective of reality!