Streetwise Professor

January 6, 2012

People Unclear on the Concept of “Bargaining”

Filed under: Economics,Financial Crisis II,Politics,Regulation — The Professor @ 5:34 pm

Back in October, at one of the many Euro summits, the European government leaders uhm, persuaded the Institute of International Finance, representing large banks and insurers holding Greek debt, to accept a 50 percent “voluntary” haircut on their holdings.  ISDA’s credit event determination committee fell into line, and ruled that since it was “voluntary”, the writedown did not constitute a credit event that would trigger CDS payouts.

Germany was the main country pushing for these haircuts, euphemistically termed “Private Sector Involvement” (PSI).  There have been stories in the last week that Germany is pushing for even bigger haircuts–on the order of 75 percent.  Not to be outdone, a member of the council of the European Central Bank–which has always been twitchy about PSI–has mooted a counterproposal: 0 percent.

Glad to see that the bargaining range is narrowing!  Pretty soon Germany will be demanding that the bondholders pay the Greeks and the bondholders will be demanding that the Greeks pay the banks double what they owe.

Germany’s insistence on PSI is strange in many ways.  The conventional rationale is that it is necessary to punish–and hence deter–morally hazardous risk taking.  But given that the whole pretense of the Eurozone was that all government debts were created equal, and given that Basel treated Greek debt as riskless as Germany’s, any moral hazard is ultimately traceable to European governments and regulators.  How dare those banks do what they were told to?

Moreover, the Greek PSI had to walk a thin line.  The story was that only Greek debt would get a haircut: this was necessary to prevent disastrous runs on Portuguese, Italian, and Spanish debt.  But it is hard to give a coherent rationale for that: investing in Greek debt was morally hazardous, but investing in Portuguese debt wasn’t?  Really.

No political promise is credible–especially in Europe right now, and especially given that the logical basis of the promise is dubious at best.  Pushing for a bigger haircut on Greek debt is bad news for Portuguese, Italian, and Spanish debt because bigger haircuts on Greek debt raises the expected haircut on the debt of these other countries.  It raises both the size of the haircut, conditional on one occurring, and the probability that haircut will actually be applied to these other countries (i.e., that the promise will be broken): if Germany is so insistent on haircuts for Greece today, why won’t they be just as insistent for Portugal tomorrow, despite their fine words to the contrary.  (This is the essence of the ECB councilor’s argument.)

Finally, the big problem with a Greek default has always been that banks and insurers would suffer huge losses that would jeopardize their solvency.  That is, a Greek default that led to big writedowns would impose big losses on German, French, Dutch, etc., banks.  These losses could be big enough to require some taxpayer bailouts.  But a big “voluntary” haircut would do the same thing.  Thus, Germany’s insistence on a big PSI always seemed like financial S&M.

One last thing about this divergence of views.  It makes it clear that despite all of the stirring pronouncements, nothing is settled in Europe.  Nothing.  Everything is still up for negotiation.  And the parties are moving apart on key issues, not closer.  Today’s surge in Italian and Spanish yields and subsequent ECB intervention is in part a manifestation of the realization that that we are not even at the middle of the beginning.

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25 Comments »

  1. Interesting comments, Prof. This go-round of European dysfunction is reminiscent of what was observed in the lead-up to the Great Depression and WW2, which is kinda scary. I read your piece here, and your earlier remarks re America being in a pre-revolutionary state, and am struck by how close are the parallels with 1920s Europe, as chronicled by Guido de Russiero (a classic Euro liberal, in the way you use the term) and translated by Robin Collingwoodd, the great English philosopher of history. Forgive me for quoting at length here from “The History of European Liberalism,” the 1927 translation by Collingwood published by Oxford Press … that “other” university imprint next to your publisher (good book, btw): “These economic elements in the crisis of Liberalism have an indirect action; they work by modifying the social structure of the middle classes, on which Liberalism is essentially based. During the period when the middle classes were increasing in strength, their central position gave them an advantage, because it enabled them to attract elements both from above and from below, and, once consolidated, to confer stability on the whole fabric. But it became a disadvantage when industrial evolution polarized the interests of Society, and gave rise to a reverse attractive tendency towards the extremes of plutocracy and social democracy. Thus began a slow but constant erosion of the middle classes, whose fragments were thrown by this centrifugal action partly into the proletariate, and partly into the new bourgeois aristrocracy, leaving the central nucleus reduced both in bulk and in coherence. …The true greatness of this Liberalism appeared in the innumerable cases in which the bourgeoisie was able to postpone or even to sacrifice its own private interests to the public good, and accept the verdict of freedom even when given against itself.” (p. 425)

    Ruggiero opens his concluding chapter, “The conclusion of the foregoing analysis is that the crisis of Liberalism, grave and deep-seated as it is, is not so irreparable as it may appear to superficial observers and impatient heirs.” (p. 434)

    Alas, we know how that story ended in Italy; same-same in Germany, France, Greece, …, Europe (ex England). History may not repeat, but it certainly does reprise. We are living thru such a polarization between plutocracy and social democracy as practiced in Europe now in the US, as unlikely as that seems, given our own history. The Romney defense of free-market capitalism sounds so like an apology for the plutocracy, oblivious to the massive government intervention in financial markets that saved the bacon of the very plutocrats supporting ol’ Mitt; while the Obama rhetoric sounds like so much pandering to the “Occupy” folks who resemble nothing if not an incoherent mob awaiting a savior to rise up from these streets, as The Boss might say. The cohort in the middle who actually pay the taxes and fight the wars have no voice, no advocate and certainly no evidence that the truths they were raised upon are no more than shibboleths trotted out every four years to gull them into voting for one or the other.

    I have to agree: America is pre-revolutionary at this moment. As is Europe. It is an amazing this to consider that the more stable parts of the planet are those areas we once thought of as oppressive and undeveloped. The wheel turns.

    Comment by markets.aurelius — January 7, 2012 @ 11:16 am

  2. It’s Guido de Ruggiero above … I gotta start proofing and editing before hitting the send button.

    Comment by markets.aurelius — January 7, 2012 @ 11:30 am

  3. […] […]

    Pingback by EU Politics - Hamsterwheel - Page 29 - PPRuNe Forums — January 7, 2012 @ 5:05 pm

  4. @marcus–No need to apologize re extended quote. The parallels are in fact quite eerie.

    Re “de Russiero”–must be all that stuff about Russia on SWP that got your mind in that channel 🙂 At least you didn’t say Guido Sarducci.

    Thanks for the comment and the Ruggiero reference. I wasn’t familiar with him. I’ll track down the book.

    The ProfessorComment by The Professor — January 7, 2012 @ 5:14 pm

  5. SWP versus Andy Sullivan (who at least tells you which way the wind is blowing – he loved Dubya in 02′ and Obama in 07′).

    Have at it, American flag waving foreign cyber-drones.

    http://andrewsullivan.thedailybeast.com/2012/01/arguments-vs-associations.html

    And then this surprising piece of pure McCarthyism from David Frum:

    A politician isn’t answerable for the antics of every one of his supporters. But there’s surely a reason, isn’t there, that racists, anti-Semites, 9/11 Truthers, and Holocaust deniers are so strongly attracted to the Paul campaign. They hear something. They continue to hear it too, no matter how firmly Ron Paul’s more mainstream supporters clamp their hands over their own ears.

    Notice how pure the smear is, enabled and not diminished by the first sentence. Notice the key concept of Beltway ideological policemen: there is a mainstream and a non-mainstream. Dabble with the latter at your peril. Since David has perished by the cult of the “mainstream”, it’s odd he should deploy it against others. But to throw in “Holocaust denial” and 9/11 Truthers for good measure! Really.

    And notice how particularly cheap and easy it is to use such tactics against a libertarian. The traditional left is often based on collective associations, building a movement out of oppressed groups and their grievances, whether it be class or race or even sexual orientation. Libertarianism is the opposite. It’s about disassociating. When you listen to Paul saying he will not turn anyone away from supporting his platform regardless of their motives or beliefs, you are hearing a reflection of his libertarianism, not his bigotry. He will accept support from any quarter and compared with the corporate money flowing into the other candidates’ coffers, he is about as independent as a presidential candidate can be. Because he is a radical individualist, he doesn’t even understand why he should somehow explain the belief of others, or justify their support. You should ask them, not him.

    This kind of gotcha-association game is particularly easy because libertarians favor liberty above all, and that will necessarily mean liberty for bigots as well as others. A principled belief in states’ rights will doubtless lead to more racist and homophobic policies in many states – but also, of course, more enlightened and successful inclusive states like Oregon or New York or Massachusetts or California. A rejection of statism might lead to more discrimination in the private sector. But it doesn’t mandate it. And it need not encourage it. A non-interventionist foreign policy will allow evil to triumph elsewhere in the world, because it believes it’s none of our business or too riddled with unintended consequences to try extirpating. That may be right or wrong, but it is not an approval of the evil of Assad or Ahmedinejad or the North Korean junta. And again, it is actually much deeper an American tradition than permanent warfare. But if you can trot out David Duke or Ayatollah Khamenei as potential Paul supporters, you have a very easy, cheap and essentially McCarthyite target. It saddens me that this kind of tactic works.

    Comment by Mr. X — January 7, 2012 @ 10:07 pm

  6. Also funny because David Frum was the only neocon if I recall to gush with praise for Putin (in The Right Man) or at least Bush looking into Putin’s eyes, seeing his soul, getting slammed by all stupid and sensible Washington people for this, and getting that first phone call on 9/11 (which Andy still denies) authorizing locked and loaded B-1s to fly over Russian airspace en route to Afghanistan. Ah those were the good ole’ days, like exchanging Lucky Strikes for vodka at Torgau.

    Comment by Mr. X — January 7, 2012 @ 10:09 pm

  7. Mr. X, all of the strikes on Afghanistan flew from Diego Garcia.
    There were no overflights of Russian airspace.
    You are an idiot.

    Comment by Andrew — January 8, 2012 @ 11:15 am

  8. “…oblivious to the massive government intervention in financial markets that saved the bacon of the very plutocrats supporting ol’ Mitt”

    Hey! We resemble this remark!

    And we are grateful for the Chicago School, the intellectual center of Our plutocracy, for making it possible for Us to pursue Our First Principle:

    All for Ourselves and nothing for Other People!

    Comment by a — January 8, 2012 @ 4:29 pm

  9. X-man: “The traditional left is often based on collective associations, building a movement out of oppressed groups and their grievances, whether it be class or race or even sexual orientation. Libertarianism is the opposite. It’s about disassociating.” I agree with your first sentence. I agree, in a way with your 2d and 3d. But that’s what I find so weird about Paulbots–including you. They are so clannish, cultish, homogeneous. They flip out on people who agree on many issues, but do not buy into the entire catechism. There’s even a sort of stock insult–the Paulian Trifecta–hurled at someone who does not agree with them 100 percent: “Statist, neocon, warmonger.” I’ve lost count the times that’s been hurled at me or to people I know.

    The classical liberal dilemma is that individualism impedes political effectiveness, which requires collective action. Yes, true libertarians disassociate. But Paulians are tribal, and do everything but disassociate. Excommunicate, yes. But that’s a symptom of the weirdness. Indeed, the whole idea of a libertarian personality cult is beyond weird.

    The ProfessorComment by The Professor — January 8, 2012 @ 4:36 pm

  10. B-1B strikes from Diego Garcia. F-18 & F-14 strikes from carriers. B-2 strikes from CONUS–Whiteman AFB in MO. But definitely no bombers flying over Russian airspace.

    The ProfessorComment by The Professor — January 8, 2012 @ 4:50 pm

  11. @a–Long time no hear. You haven’t found a clue during your absence, obviously.

    The ProfessorComment by The Professor — January 8, 2012 @ 4:51 pm

  12. “B-1B strikes from Diego Garcia. F-18 & F-14 strikes from carriers. B-2 strikes from CONUS–Whiteman AFB in MO. But definitely no bombers flying over Russian airspace.”

    Take it up with David Frum then — he’s now reachable at The Daily Beast. Or take it up with the Polish military journal that I linked to when Andy was making this same tired total denial. The Poles wouldn’t have any obvious reason to give the Russians kudos.

    And even if the fully locked and loaded bombers weren’t flying over, just the tankers and transports, which world’s largest country (KZ doesn’t border Germany or Poland) do you think lies between Ramstein in Germany and Manas in Kyrgyzstan? Look at the tracks — Georgia is too far south on the way from Germany.

    http://en.wikipedia.org/wiki/Transit_Center_at_Manas

    “On December 18, 2001, the 86th Contingency Response Group out of Ramstein Air Base in Germany arrived at Manas to open the airfield for military use as part of Operation Enduring Freedom.[8]”

    And the overall point is that your recent comment that you’d rather keep bribing the eminently hostile Pakistanis in a vain attempt to keep the Kyhber Pass corridor open than rely on the Northern Supply Route was either a self-parodying example of Russophobia or a deliberate bit of ‘I’ll say whatever the hell I can to provoke certain commenters and then pretend I didn’t say it, like the whole Zerohedge didn’t cover Russian protests thing.’ The consistent thing to do would be to urge us to get the hell out of Afghanistan yesterday to avoid relying on either Russia or Pakistan. But I repeat myself.

    “But Paulians are tribal, and do everything but disassociate.” That would explain why Ralph Nader was talking on NPR tonight about reaching out and working with Paul and his movement on getting the U.S. out of its massive overseas empire, and working with libertarians on issues where they actually agree. You can laugh at Nader all you want, but he spared us President Al Gore. Sorry SWP but the Tea Party and Occupy folks won’t stay at each other’s throats forever. Both MSNBC and Fox News viewership is declining steeply or in the latter case aging rapidly and declining more slowly. Sneering at the only candidate who actually brought young people into the GOP is a losing strategy in the long run.

    http://www.parliament.uk/briefing-papers/RP01-81.pdf
    Briefing paper in 2001-2002 for the UK Parliament:

    “Russia has increased its backing for the opposition Northern Alliance in the form of logistical support, arms and equipment. Following a meeting on 22 October with Burhannudin Rabbani, the head of the internationally-recognised government of the Islamic State of Afghanistan, and his Tajik counterpart, President Vladimir Putin declared:

    We confirmed the intention of the Russian Federation to continue supporting the government of the Islamic State of Afghanistan in the military-technical sphere. We confirmed our intention and announced concrete plans to help the Afghan people with supplies of humanitarian goods. The goal of the Russian Federation and its policy in the region and towards Afghanistan is to create such a situation in the country that the Afghan people will be given the opportunity to identify their fate on their own, to begin a peaceful life and build a state friendly to its neighbours, including the Russian Federation.187

    Comment by Mr. X — January 8, 2012 @ 6:47 pm

  13. Here’s the OIF Wikipedia page:

    http://en.wikipedia.org/wiki/Participants_in_Operation_Enduring_Freedom

    Russia

    Russia provided a field hospital as well as a hospital in Kabul for allies and Afghan civilians.

    Russia has also agreed to provide logistic support for the United States forces in Afghanistan to aid in anti-terrorist operations.

    Russia is allowing US forces to pass through its territory to go to Afghanistan.

    Russian Special Forces has also assisted US and Afghan forces in operations in Afghanistan.[16]

    Comment by Mr. X — January 8, 2012 @ 6:51 pm

  14. http://www.youtube.com/watch?feature=player_embedded&v=4zyo10lusCY#!

    I’ll leave ya’ll with the Judge Napolitano. Bye now.

    Comment by Mr. X — January 8, 2012 @ 7:36 pm

  15. Yes Mr. X, we a fricking know that there has been Russian support and acquiescence for certain NATO operations in Afghanistan. Duh. You said–specifically–B1 strikes. Fail. Again.

    The ProfessorComment by The Professor — January 8, 2012 @ 8:26 pm

  16. SWP – since for copyright reasons THE FULL FREAKIN’ text of Frum’s book is not published online, I can’t link to the exact passage where he says fully loaded American bombers were flying over Russian air space. He was in the WH with a security clearance after 9/11, you were not. There may clearly be reasons why Putin didn’t want to antagonize some folks harder by admitting that it was armed and not just unarmed aircraft flying over. Go buy it on Kindle or check it our from the library with the word ‘Putin’ in the index in the back. Then get back to me.

    “As for anyone rubbishing links who then links to morons like Zerohedge……” ‘morons’ who are in the top 1,000 U.S. sites nationwide and probably the 50 for politics and the top 10 for finance. But hey, with some luck at this pace the Prof will catch up to the hated Bulgarian KGB operative in 10,000 years.

    Like I said Andy, lots of active duty and credible retired military (Stewart Rhodes et al) versus one schlubby tubby dude from Pittsburgh whose blog post you found. Fail. SWP’s little campaign against ZH: serious fail.

    And a Kiwi and a Norwegian droning/apologizing for the status quo in American foreign policy and demonstrating a strong concern for abortion ‘rights’? That’s rich. Why don’t we ask whether or not people in Liechtenstein or Luxembourg support Ron Paul too, since they’re so threatened by his foreign policy views. LOL.

    Comment by Mr. X — January 8, 2012 @ 10:00 pm

  17. Wrong again Mr.X, the refueling and transport aircraft followed the route UK,EU,Bulgaria,Black Sea,Georgia, Azerbaijan, Caspian sea, Turkmenistan,Uzbekistan,Kyrgyzstan.

    It was not until well after the opening of UN mandated hostilities in Afghanistan that Russia opened it’s airspace, and then only to non lethal transport. Not until 2009 did Russia agree to allow aerial transit of non lethal material, including personnel.

    And Mr.X, there is a little thing in the UDHR that allows people to comment on anything they like, just because I am not an American does not mean I have no right to comment, nice to see your fascist/KGB tendencies are alive and well.

    Once again, it makes no sense to have fully loaded bombers flying over Russia all the way from the US, when there is a perfectly good base in Diego Garcia which they can stage from. But logic never was your strong point was it Mr.X.

    Once again, you are a liar.

    Comment by Andrew — January 9, 2012 @ 12:31 am

  18. “Not until 2009 did Russia agree to allow aerial transit of non lethal material, including personnel.” Then those Antonovs I guess were flying to the Moon instead of Bagram.

    Comment by Mr. X — January 9, 2012 @ 1:03 am

  19. pre 2009.

    Comment by Mr. X — January 9, 2012 @ 1:03 am

  20. “Not until 2009 did Russia agree to allow aerial transit of non lethal material, including personnel.” I know from personal contacts who were rolling stuff through Russia via truck and airplane way before 2007 to the AfPak theater that this is false. Not everything that disproves these silly statements can be found on the Internet.

    Plus this is hairsplitting at any rate. Who provided air defense for Kazakhstan, Uzbekistan and the other former Soviet ‘stans, even if the Polish defense institute report was mistaken? Who agreed that U.S. air assets could transit any of those countries? VVP. The whole point is Andy’s sheer desperation to prove that Russia lent nothing to the initial success in Afghanistan and that the U.S. owed Russia nothing but massive support for anti-Russian governments in return for this critical support (along with SWP’s ludicrous comment that he’d rather keep bribing the Pakistanis) is exhibit #2,800 in the case against the Russophobic derangement that exists here. But hey it wasn’t Kiwi taxpayer money, it was American setting up Darth Cheney and Z. Big’s little post-Soviet client state empire, so who cares right?

    And I probably shouldn’t have mentioned Frum in the first place, since he in 2002 referred to Russia as a ‘has been country with an economy the size of the Netherlands’. Typical neocon ignorance and condescension, though Frum is probably the only neocon to express any second thoughts post-Baghdad. Pretty amazing how by 2008 that ‘economy the size of the Netherlands’ somehow miraculously became one of the top ten holders of U.S. Treasury debt, and one of the top four or five holders of Fannie and Freddie/U.S. mortgage agency paper. If Russia’s economy sucked so bad, why did Paulson’s deputy go begging to them to keep buying U.S. debt all the way up to summer 2008?

    Comment by Mr. X — January 9, 2012 @ 1:31 am

  21. And once again, why are a Norwegian and a New Zealander lecturing this American about how America’s supposed to stay the global cop and Ron Paul is a dastardly threat to this state of affairs? Can’t the Aussies defend Middle Earth just fine?

    Comment by Mr. X — January 9, 2012 @ 1:35 am

  22. Our good Professor, your modesty becomes you, but We give credit where credit is due.

    Of course, there will come a time when what you think of as your assets are Ours, as Our assiduous servant Barack continues Our assiduous servant George’s good work in extending and deepening the present depression.

    Comment by a — January 9, 2012 @ 4:43 am

  23. Mr X, surely it would be the governments of Georgia, Kazakhstan, Tajikistan, Bulgaria etc that would determine if US aircraft could transit those nations airspace, not “VVP”

    The negotiations on aerial transit of Russian airspace began in 2008.

    You are a liar, and a supporter of ethnic cleansing……

    Comment by Andrew — January 9, 2012 @ 4:59 am

  24. Oh and BTW, many civilian cargo carriers and former eastern bloc air forces use Antonovs and IL-76’s, including those that supply the UN, it by no means implied the Russians were providing assistance.

    Comment by Andrew — January 9, 2012 @ 5:42 am

  25. Mr X

    Your paranoid excuses fits very well into the Putin regimes terror programs .

    A Belarusian outfit called the “White Legion” was linked to the 2008 bombings and may have had a hand in two earlier explosions in 2005. But nobody knows much about it. Some even doubt it exists. In ex-communist countries, such bogeys are sometimes conjured up by clandestine sponsorship from ill-wishers, inside the country or abroad. On investigation, they prove to have ectoplasmic properties.

    http://www.economist.com/blogs/easternapproaches/2011/04/belarus_bomb

    Comment by Anders — January 9, 2012 @ 7:33 am

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