FourWinds10.com - Delivering Truth Around the World
Custom Search

Bankers at the Gates (Just like the Fourth Crusade against Constantinople)

Peter Frankopan

Smaller Font Larger Font RSS 2.0

FW 6/2/12
(Articles from May 24-29, 2012)
 
 
Peter Frankopan (the director of the Center for Byzantine Research at Oxford and the author of “The First Crusade: The Call From the East.”)
 
Oxford, England

FEW Greeks have a good word to say about the European banking system these days. They believe it’s the real reason for their current crisis, having pushed easy money on their politicians and now demanding a pound of financial flesh.

It was the same story 800 years ago. The men of the Fourth Crusade, who had originally set off to fight for Christianity in the Holy Land, found themselves instead ransacking Constantinople, the capital of the Greek-speaking Byzantine Empire, because of enormous debts that had been racked up in the West.

The way Europe has behaved over the current Greek crisis is scarcely less shameful than the way those crusaders behaved all those centuries ago.  If nothing else, that dark spot on the West’s historical record should be a warning to the bankers and politicians who would rather watch Greece fall apart than take responsibility for their own profligacy.

Greece may be on Europe’s periphery today, but in the 12th century Constantinople was the gateway to a lucrative trade in spices, silks and luxury goods coming from the east.  This trade had made fortunes for men across Europe — as the economies of Greece, Spain, Portugal and Italy have done over the last two decades.

Traders from places like Venice, Genoa and Pisa in the late 12th century managed to win for themselves the sort of advantages and loopholes in Constantinople that bright young fund managers would kill for today: they negotiated positions that allowed them to undercut local traders, alongside smart commercial treaties that let them minimize or even sidestep their taxes. As with modern Greece, this led to a flow of cheap foreign capital into the markets.

Around 1200, though, things went sour. A sharp contraction of trade in the Byzantine Empire was exacerbated by wild overspending by Venice, the medieval equivalent of a European central bank.

Almost overnight there was a switch from the easy money, where everyone was a winner, to the dark arts of debt collecting.  As with Athens since the financial crisis took hold, it became clear that no one would take responsibility for lending too much, for basing forecasts on only best-case scenarios.

Someone would have to cover the losses, and Venetian merchants were adamant that it would not be them. Constantinople and the Greek-speaking empire, riven by internal divisions, was the obvious mark.

Eventually, one of the rival factions in Constantinople offered a deal with Venice: in exchange for covering the Most Serene Republic’s losses, the faction would receive Venetian military muscle to secure its claim on the Byzantine throne. Venice jumped at the deal.

But Constantinople had vastly underestimated the size of its new debt obligations — and overestimated the stabilizing effect of Venetian arms. Financial obligations mounted abroad, while political paralysis deepened at home.

Everyone from the pope to the kings of Europe knew about the pressure building against Constantinople. One Western delegation after another told the Greeks to get their act together — or, to put it more bluntly, to pay up. The crusaders, under the sway of Venice, lay siege to the city.

Eventually, the Westerners had enough of the procrastination. Seizing their chance, the knights stormed Constantinople. What happened next was a disgrace: the prize assets of the empire were looted at will, seized as collateral by a mob that behaved with no concern for the city’s inhabitants, its culture or its history.

According to one account, prostitutes danced on the altar of St. Sophia, the most beautiful church in the whole of Christendom.  Palaces, gardens and holy places were ransacked, with treasures taken off by the cartload.  The great collections of relics held in the imperial capital were seized by the Westerners to adorn cathedrals and churches across Western Europe; to this day four bronze horses, stolen from the hippodrome of Constantinople, are in the museum inside the Basilica of Saint Mark in Venice.

Judging the Greeks fiscally and politically incompetent, the conquerors appointed a regent.  Baldwin of Flanders, crowned emperor of Constantinople in 1204, was a classic I.M.F.-style appointee: a safe pair of hands, someone with whom other Western leaders could do business.

Meanwhile, the noblemen leading the Crusade, many of whom had brought ruin in the first place with their reckless promises, took control of whole areas of the city and empire for themselves — a classic case of getting in at rock bottom. (So keep an eye on those bankers and their villas in the Aegean; you don’t need to be a historian to know it is a buyers’ market.) The new Latin Empire of Constantinople lasted just 50 years before the Greeks returned to power.

The story is the same as then: cheap money brings handsome rewards but guarantees crisis, while the pain falls solely on the Greeks.  Constantinople and Athens may have become addicted to easy money, but the West was their dealer.

Peter Frankopan is the director of the Center for Byzantine Research at Oxford and the author of “The First Crusade: The Call From the East.”
---------------------------------------
This article has been revised to reflect the following correction:   Correction: May 31, 2012
 
An earlier version of this Op-Ed misstated the location of four bronze horses that were looted from Constantinople in 1204 and moved to Venice. The horses are in the museum inside the Basilica of Saint Mark; replicas — not the originals — stand atop the dome of the basilica.

=============================================================================
NYTimes.com

Most Aid to Athens Circles Back to Europe

By LIZ ALDERMAN and JACK EWING

May 29, 2012

 

 


Klaus Masuch of the European Central Bank, Matthias Morse of the European Commission and  Poul M. Thomsen of the International Monetary Fund after meeting with Greek Prime Minister Lucas Papademos in January.

 

 

PARIS — As Greek membership in the euro currency union hangs in the balance, it continues to receive billions of euros in emergency assistance from the so-called troika of lenders overseeing its bailout.

 

But almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets.

And so, the €130 billion, or $162.2 billion, European bailout that was supposed to buy time forGreece is mainly only servicing the interest on the country’s debt — while the Greek economy continues to plummet.

If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Union’s member governments — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has beset Athens and clouded the future of the euro zone.

As they pay themselves, though, the troika is also withholding other funds earmarked for keeping the Greek government in operation.

Last week, the Athens office that tracks revenue said Greece could run out of money by July. If so, Greece could default on its debts — except those due to the E.C.B., the I.M.F. and the European Union.

“Greece will not default on the troika because the troika is paying themselves,” said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt.

In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

“Why are we doing it like this?” Mr. Mayer said. “Because we’re Europe.”

About three-quarters of Greece’s debt, or €182 billion, is now effectively owned either by the Union, the E.C.B. or the I.M.F., according to estimates by the investment bank UBS.

The E.C.B., in particular, is eager to get paid back, he said. To help calm volatile financial markets, it bought billions of euros in Greek bonds that come due monthly.

“It’s why they want to get paid back every month now,” said Mr. Mayer, who has followed the cash. “The E.C.B. bought at a high price and now insists on being paid in full.”

Some people close to the situation say the troika is also trying to put financial pressure on Greece to continue doing what it can to collect tax revenue from an increasingly devastated economy.

The I.M.F. chief, Christine Lagarde, ignited nationwide furor in Greece over the weekend by comments made in an interview with The Guardian, a British newspaper, chastising Greeks for not paying taxes.

A Greek government advisor who spoke anonymously, for fear of alienating the European lenders, said of the troika: “They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues.”

On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them.

“You send the money, you call it a ‘loan’ — you get it back and call it an ‘interest rate,”’ said Stephane Deo, global head of asset allocation in London for UBS.

Mr. Deo said such arrangements were common in situations where governments are in danger of defaulting on their debts.

That is because governments do not go bankrupt in the same way that companies do; creditors cannot break them up and sell the assets to recover some of their money. So creditors have an incentive to ensure that distressed governments continue to repay their debts — even if it means lending them the money to do so.

Since May 2010, Greece has been sent €141.7 billion in European taxpayer money to keep the country afloat and ward off a bigger meltdown that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika.

Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy.

The circular lending is all about risk management. After all, Greece this year negotiated a debt deal in which banks that held its bonds got only about half of their money back.

The troika wants to make sure the same does not happen to them and taxpayers. E.U. officials have also pointed to Greece’s track record on finances, including manipulating its budget numbers to qualify to join the euro union in 2001, and government corruption since then.

Another recent development has rung alarm bells. Last month the troika sent Greece €25 billion to help shore up its banks.

On Tuesday, the caretaker Greek government dispensed €18 billion of it to the banks. But some Greek officials have suggested tapping the remainder to keep the government running past June, should the troika continue to wield a tight fist.

The E.C.B. became one of Greece’s biggest creditors after it started buying debt from troubled euro zone countries in 2010 to help stabilize prices. The central bank does not disclose how much Greek debt it bought, but estimates range from €35 billion to €55 billion.

Greek bonds are a profitable investment for the E.C.B. as long as Greece continues to make interest payments. The E.C.B. exempted itself from the debt restructuring deal. And Greek bonds were already trading at a big discount when the E.C.B. started buying them. As a result, the central bank is earning an effective interest rate of 10 percent or so, Mr. Deo estimated.

But he added that it was also a risky trade. If Greece defaulted, European taxpayers might ultimately have to pour new money into the E.C.B.’s capital reserves.

The E.U.’s bailout fund, the European Financial Stability Facility, also became a major Greek creditor as a result of the debt-reduction deal that Greece negotiated with bondholders earlier this year. All told the E.F.S.F. contribution amounted to about €70 billion.

However harsh the payback terms might seem right now, the European authorities have a strong interest in avoiding the even higher costs that would result if Greece left the euro zone or defaulted completely on its debt.

As early as next year, according to optimistic estimates, Greece could reach the point where tax receipts exceeded government operating expenses.

At that point, a populist government might be tempted to stop making debt payments altogether. If so, it might then take its chances on its own, outside the euro zone without the burden of interest payments.

To help leaders Greece resist that future temptation, the troika’s reasoning goes, it is better to help them service the debt in the here and now.

 
 

 


NY TIMES

Bankers at the Gates (Just like the Fourth Crusade against Constantinople)

May 24, 2012

Peter Frankopan (the director of the Center for Byzantine Research at Oxford and the author of “The First Crusade: The Call From the East.”)

Oxford, England

FEW Greeks have a good word to say about the European banking system these days. They believe it’s the real reason for their current crisis, having pushed easy money on their politicians and now demanding a pound of financial flesh.

It was the same story 800 years ago. The men of the Fourth Crusade, who had originally set off to fight for Christianity in the Holy Land, found themselves instead ransacking Constantinople, the capital of the Greek-speaking Byzantine Empire, because of enormous debts that had been racked up in the West.

The way Europe has behaved over the current Greek crisis is scarcely less shameful than the way those crusaders behaved all those centuries ago.  If nothing else, that dark spot on the West’s historical record should be a warning to the bankers and politicians who would rather watch Greece fall apart than take responsibility for their own profligacy.

Greece may be on Europe’s periphery today, but in the 12th century Constantinople was the gateway to a lucrative trade in spices, silks and luxury goods coming from the east.  This trade had made fortunes for men across Europe — as the economies of Greece, Spain, Portugal and Italy have done over the last two decades.

Traders from places like Venice, Genoa and Pisa in the late 12th century managed to win for themselves the sort of advantages and loopholes in Constantinople that bright young fund managers would kill for today: they negotiated positions that allowed them to undercut local traders, alongside smart commercial treaties that let them minimize or even sidestep their taxes. As with modern Greece, this led to a flow of cheap foreign capital into the markets.

Around 1200, though, things went sour. A sharp contraction of trade in the Byzantine Empire was exacerbated by wild overspending by Venice, the medieval equivalent of a European central bank.

Almost overnight there was a switch from the easy money, where everyone was a winner, to the dark arts of debt collecting.  As with Athens since the financial crisis took hold, it became clear that no one would take responsibility for lending too much, for basing forecasts on only best-case scenarios.

Someone would have to cover the losses, and Venetian merchants were adamant that it would not be them. Constantinople and the Greek-speaking empire, riven by internal divisions, was the obvious mark.

Eventually, one of the rival factions in Constantinople offered a deal with Venice: in exchange for covering the Most Serene Republic’s losses, the faction would receive Venetian military muscle to secure its claim on the Byzantine throne. Venice jumped at the deal.

But Constantinople had vastly underestimated the size of its new debt obligations — and overestimated the stabilizing effect of Venetian arms. Financial obligations mounted abroad, while political paralysis deepened at home.

Everyone from the pope to the kings of Europe knew about the pressure building against Constantinople. One Western delegation after another told the Greeks to get their act together — or, to put it more bluntly, to pay up. The crusaders, under the sway of Venice, lay siege to the city.

Eventually, the Westerners had enough of the procrastination. Seizing their chance, the knights stormed Constantinople. What happened next was a disgrace: the prize assets of the empire were looted at will, seized as collateral by a mob that behaved with no concern for the city’s inhabitants, its culture or its history.

According to one account, prostitutes danced on the altar of St. Sophia, the most beautiful church in the whole of Christendom.  Palaces, gardens and holy places were ransacked, with treasures taken off by the cartload.  The great collections of relics held in the imperial capital were seized by the Westerners to adorn cathedrals and churches across Western Europe; to this day four bronze horses, stolen from the hippodrome of Constantinople, are in the museum inside the Basilica of Saint Mark in Venice.

Judging the Greeks fiscally and politically incompetent, the conquerors appointed a regent.  Baldwin of Flanders, crowned emperor of Constantinople in 1204, was a classic I.M.F.-style appointee: a safe pair of hands, someone with whom other Western leaders could do business.

Meanwhile, the noblemen leading the Crusade, many of whom had brought ruin in the first place with their reckless promises, took control of whole areas of the city and empire for themselves — a classic case of getting in at rock bottom. (So keep an eye on those bankers and their villas in the Aegean; you don’t need to be a historian to know it is a buyers’ market.) The new Latin Empire of Constantinople lasted just 50 years before the Greeks returned to power.

The story is the same as then: cheap money brings handsome rewards but guarantees crisis, while the pain falls solely on the Greeks.  Constantinople and Athens may have become addicted to easy money, but the West was their dealer.

Peter Frankopan is the director of the Center for Byzantine Research at Oxford and the author of “The First Crusade: The Call From the East.”

---------------------------------------

This article has been revised to reflect the following correction:   Correction: May 31, 2012

An earlier version of this Op-Ed misstated the location of four bronze horses that were looted from Constantinople in 1204 and moved to Venice. The horses are in the museum inside the Basilica of Saint Mark; replicas — not the originals — stand atop the dome of the basilica.

=============================================================================

NYTimes.com

Most Aid to Athens Circles Back to Europe

By LIZ ALDERMAN and JACK EWING

May 29, 2012

Klaus Masuch of the European Central Bank, Matthias Morse of the European Commission and  Poul M. Thomsen of the International Monetary Fund after meeting with Greek Prime Minister Lucas Papademos in January.

PARIS — As Greek membership in the euro currency union hangs in the balance, it continues to receive billions of euros in emergency assistance from the so-called troika of lenders overseeing its bailout.

But almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets.

And so, the €130 billion, or $162.2 billion, European bailout that was supposed to buy time for Greece is mainly only servicing the interest on the country’s debt — while the Greek economy continues to plummet.

If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Union’s member governments — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has beset Athens and clouded the future of the euro zone.

As they pay themselves, though, the troika is also withholding other funds earmarked for keeping the Greek government in operation.

Last week, the Athens office that tracks revenue said Greece could run out of money by July. If so, Greece could default on its debts — except those due to the E.C.B., the I.M.F. and the European Union.

“Greece will not default on the troika because the troika is paying themselves,” said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt.

In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

“Why are we doing it like this?” Mr. Mayer said. “Because we’re Europe.”

About three-quarters of Greece’s debt, or €182 billion, is now effectively owned either by the Union, the E.C.B. or the I.M.F., according to estimates by the investment bank UBS.

The E.C.B., in particular, is eager to get paid back, he said. To help calm volatile financial markets, it bought billions of euros in Greek bonds that come due monthly.

“It’s why they want to get paid back every month now,” said Mr. Mayer, who has followed the cash. “The E.C.B. bought at a high price and now insists on being paid in full.”

Some people close to the situation say the troika is also trying to put financial pressure on Greece to continue doing what it can to collect tax revenue from an increasingly devastated economy.

The I.M.F. chief, Christine Lagarde, ignited nationwide furor in Greece over the weekend by comments made in an interview with The Guardian, a British newspaper, chastising Greeks for not paying taxes.

A Greek government advisor who spoke anonymously, for fear of alienating the European lenders, said of the troika: “They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues.”

On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them.

“You send the money, you call it a ‘loan’ — you get it back and call it an ‘interest rate,”’ said Stephane Deo, global head of asset allocation in London for UBS.

Mr. Deo said such arrangements were common in situations where governments are in danger of defaulting on their debts.

That is because governments do not go bankrupt in the same way that companies do; creditors cannot break them up and sell the assets to recover some of their money. So creditors have an incentive to ensure that distressed governments continue to repay their debts — even if it means lending them the money to do so.

Since May 2010, Greece has been sent €141.7 billion in European taxpayer money to keep the country afloat and ward off a bigger meltdown that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika.

Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy.

The circular lending is all about risk management. After all, Greece this year negotiated a debt deal in which banks that held its bonds got only about half of their money back.

The troika wants to make sure the same does not happen to them and taxpayers. E.U. officials have also pointed to Greece’s track record on finances, including manipulating its budget numbers to qualify to join the euro union in 2001, and government corruption since then.

Another recent development has rung alarm bells. Last month the troika sent Greece €25 billion to help shore up its banks.

On Tuesday, the caretaker Greek government dispensed €18 billion of it to the banks. But some Greek officials have suggested tapping the remainder to keep the government running past June, should the troika continue to wield a tight fist.

The E.C.B. became one of Greece’s biggest creditors after it started buying debt from troubled euro zone countries in 2010 to help stabilize prices. The central bank does not disclose how much Greek debt it bought, but estimates range from €35 billion to €55 billion.

Greek bonds are a profitable investment for the E.C.B. as long as Greece continues to make interest payments. The E.C.B. exempted itself from the debt restructuring deal. And Greek bonds were already trading at a big discount when the E.C.B. started buying them. As a result, the central bank is earning an effective interest rate of 10 percent or so, Mr. Deo estimated.

But he added that it was also a risky trade. If Greece defaulted, European taxpayers might ultimately have to pour new money into the E.C.B.’s capital reserves.

The E.U.’s bailout fund, the European Financial Stability Facility, also became a major Greek creditor as a result of the debt-reduction deal that Greece negotiated with bondholders earlier this year. All told the E.F.S.F. contribution amounted to about €70 billion.

However harsh the payback terms might seem right now, the European authorities have a strong interest in avoiding the even higher costs that would result if Greece left the euro zone or defaulted completely on its debt.

As early as next year, according to optimistic estimates, Greece could reach the point where tax receipts exceeded government operating expenses.

At that point, a populist government might be tempted to stop making debt payments altogether. If so, it might then take its chances on its own, outside the euro zone without the burden of interest payments.

To help leaders Greece resist that future temptation, the troika’s reasoning goes, it is better to help them service the debt in the here and now.