The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (2 page)

I describe some complicated things, hopefully in rather human terms. I use the ‘ladder of abstraction’ – a secret of broadcasting. I explain high-level stuff, such as negotiations between finance ministers and bankers, and ground-level stuff, the impact on their victims. I’ve skipped a portion of the detail in the middle. There’s the occasional spot of simplification, a sliver of poetic licence. But I have tried to avoid dumbing things down. Indeed, the writing on the formula that is breaking the world economy (Chapter 7), and the global money-printing experiment (Chapter 9) may seem complicated, but such developments are vital cogs in the way that modern Europe’s finances have developed, from Northern Rock’s mortgage factory to the equations that underpin global banking solvency.

The journey starts with aeroplanes of euros in Greece. Athens then became the alibi for a capitulation to bond vigilantes by Britain in the epic battle that goes on in wild global credit markets. I jump back to Iceland, the first harbinger of the crisis jumping to nations, and the most remarkable and transparent attempts to discover precisely what went wrong. In Chapter 4, in China, you will learn to thank hard-working migrant workers for your high living standards before the crash, and discover why Gangnanomics could save the world. Chapters 5 to 7 are the stories of British financial and credit excess. It starts with the all-encompassing dysfunction of our relationship with property, stretching from celebrity culture, sports-style commentary of house prices, to tacit and occasionally overt political corruption that is shafting young people. Chapter 6 takes you around a Downing Street dinner table with frankly absurd tales of UK banking excess. It sketches out a story of failed former building societies desperate to outcompete one another, as well as the lesser-known story of the darkest penumbra of the unstable shadow banking system that basically collapsed in 2008 – also in London. Chapter 7 takes you to the Yoda of credit, the very origins of derivatives and the shift in risk off loan books and onto trading books.

Chapter 8 is the incredible story of Spain’s Gates of Hell, featuring extraordinary house-building, construction corruption and the collapse of the centuries-old caja savings bank system. The ninth chapter reflects on the Bank of England’s record and its experiment in quantitative easing. In Chapter 10 I pick at how Germany got to where it is today, and how that colours its response to the Eurozone crisis. Berlin is the new reluctant and mysterious centre of European power. After that, in Chapter 11, it is natural to turn to Frankfurt, and the home of the powerful European Central Bank, in whose hands the world economy seems disproportionately to rest. Chapter 12 takes us on a global hunt for carbon and the impact on our environment and living standards, from Iraq to Siberia to India and the City. And in Chapter 13 we return to Cyprus, not so far from where Chapter 1 began, with another planeload of euro notes, and a disturbing insight into a future world of ‘bail-in’.

My epilogue, ‘New Default Lines’, is a section that I felt compelled to write because of an overwhelming sense of exasperation at the bad choices made by our political class. The epilogue is largely free of statistics and is a shoot-from-the-hip account of new default lines that I think will define the next decades. I float some vaguely crazy policy ideas from right and left to spark some debate. They are all rooted in something I have learnt or described somewhere in this book. I reserve the right to change my mind utterly about the opinions in this epilogue, as events change. The thirteen chapters that precede it are far sturdier folios of crisis history.

I have begun each chapter with a dramatis personae. This is a human drama as well as an economic crisis. I have personally interviewed or questioned about 80 per cent of the people listed. In certain cases, because some informants are still in their jobs, or have been so illuminating in private, I have felt the need to keep them anonymous. I have changed two names, for obvious reasons. There is much of this tale that is in the public record. There are astonishing stories that can be told from published statistics alone. This subject matter is a moving target, but the cut-off date for news was July 2013. I will keep editions updated, and encourage feedback on Twitter
@TheDefaultLine
.

Dramatis personae

Anonymous Troika official

George Provopoulos, governor of the Bank of Greece

George Papandreou, prime minister of Greece (2009
–11)

Mrs Antonopoulos, pregnant wife of Athenian tax inspector

Plato, ancient Greek philosopher

Kostas Antonopoulos, Greek tax inspector

Dr Giorgos Vihas, a cardiologist at a Greek health clinic

Mr Karagiannis, an internally devalued businessman having to live off his mother’s pension

Alexis Athanasios and Haris Manolis, striking steel workers

Antonis Stelliatos, Greek yacht-owner

Lee Buchheit, the Red Adair of sovereign debt crises,

and adviser to the Greek government

Jean-Claude Trichet, European Central Bank president (2003
–11)

Anonymous Greek solar power magnate

Anonymous senior adviser to Eurozone leader

Nicolas Sarkozy, French president (2007
–12)

Kostas Kartalis, PASOK MP

Jan Kees de Jager, Dutch finance minister (2010
–12)

Steven Vanackere, Belgian finance minister (2011
–13)

Alexis Tsipras, leader of the Syriza Party (2009
–)

Manolis Glezos, Greek hero of the Nazi occupation and Syriza MP

Vasili, economics graduate selling fish at Athens fish market

At the time, the Athens Airlifts of 2011 and 2012 were a closely guarded secret. It wasn’t a matter of feeding a starving population. No lives were saved, at least not directly. But for the fate of Europe, the Athens Airlifts were no less important than the Berlin Airlift of 1948–9, when for many months the Western allies flew vital supplies into West Berlin in the face of a Soviet blockade. The mission of the Athens Airlifts in the early twenty-first century was not to preserve democratic freedom, but to protect and prolong the economic experiment of a currency without a single home.

It was well known that Greece was running out of cash, in metaphorical terms at least. In June 2011, after months of stalling on its economic reform programme, the foreign Troika that effectively ran the country had run out of patience with the Greek leadership. The Troika – consisting of the European Union, the European Central Bank and the International Monetary Fund – was going to pull the crucial final tranche of funding from Greece’s original €110 billion bailout, agreed in May 2010. The final €12 billion slice of foreign funds was required to pay pensions, public servants and interest on Greece’s huge debts. It was funding Greece could raise neither in taxes from its own people, nor from the financial markets.

But what most people did
not
know was that Greece was
literally
running out of cash. There were shortages of all denominations apart from the €10 note. Greeks had responded to the uncertainty regarding the Troika’s next move by withdrawing euros from their bank accounts at a record rate. Soon there would be not enough euro notes in the country to cope with the number of Greeks trying to get their hands on their money from cash machines and bank branches. A secret plan was activated.

A senior official overseeing Greece’s bailout told me that when it became known that the IMF were considering not paying out the final tranche, there was the beginning of a bank run. ‘We’re talking about June 2011,’ he told me, ‘when Greeks were taking about one to two billion euros a day from the banking system. And the Greeks had to send military planes to Italy to get banknotes. It got to that point.’

A decade after it gave up the drachma, the world’s oldest existing currency, Greece faced the crushing reality that it did not have the sovereign authority to meet the demand for paper currency from its own citizens. It did possess its own state-of-the-art printing facility, at the Bank of Greece’s National Mint at Holargos, in northern Athens. All the euro coins could be minted there, and not just for Greece. But coins were not going to sate the desire of the Greek people for cash. At the time, the note-printing presses at Holargos only had the plates for the €10 note. The European Central Bank had dispersed the printing of euro banknotes around member states. Only the German Bundesbank, the National Bank of Austria and the Luxembourgers have ever had the plates for the highly prized €500 note, the highest value paper currency in the world. (This form of manufacturing would appear to have been confined to German-speaking countries.) Intentionally or not, the ability of Greece to meet a huge surge in demand for banknotes had been tightly proscribed. As it happened, in June 2011 demand for paper currency had nearly trebled. To deal with this crisis, the Greek military cargo planes returned from abroad laden with freshly printed euros. The secret mission was intended not only to preserve Greece’s fracturing social stability, but also to preserve the single currency itself.

At that time, nervousness had begun to spread to Italy. If the Greek banks had run out of cash and been forced to limit bank withdrawals, the fear would have spread across the Mediterranean. The metaphor used to describe this process relates to the spread of diseases: contagion. The governor of the Bank of Greece, George Provopoulos, subsequently explained that if the demand for notes had not been met, an impression would have been created that the banks were unable to repay depositors. ‘It would have caused a collapse of confidence,’ he said, ‘with dire consequences for financial stability and the general outlook of the country.’ A Troika figure later told me, ‘There would have been complete and immediate panic. They had no time. A billion, two billion per day in banknotes is a lot of money. This then becomes an industrial problem.’

The airlift was only the first stage of the operation. Dozens, if not hundreds, of journeys by truck and boat spread the new notes across the mainland and the islands, from Rhodes to Corfu, from Crete to Komotini near the Turkish border. Staff worked through the night to ensure that bank branches across Greece had sufficient notes to meet depositor demand, and so contain any incipient physical bank run. Incredibly, this operation proceeded without anyone noticing. The Bank of Greece tracked a demand for paper currency through bank branch orders for currency. Large withdrawals were normally granted with notice of a day or two. The Bank also noticed a spike in purchases of gold sovereigns. It did not have to deploy teams of ‘bank-run spotters’ as the Bank of England had done in the crisis of 2008. As far as ordinary Greeks were concerned, the cash machines continued to function. However, underneath their very noses a monetary revolution was taking place…

The simple balance sheet of the Bank of Greece showed no disturbance from these tumultuous events on the stock of notes and coins in circulation in the country. The official figures are adjusted accounting numbers, but unpublished numbers can be calculated. The value of notes in circulation in Greece doubled from €19 billion in 2009 to €40 billion in September 2011. By the summer of 2012 the total had reached €48 billion. Typically, developed economies have cash in circulation worth between 4 and 7 per cent of the country’s GDP. In 2009 in Greece, the figure was 8.2 per cent. By 2012 it had nearly trebled to 24.8 per cent. On these numbers, in mid-2012, Greece had put a larger value of euro notes in circulation than the Netherlands. The Dutch economy is four times that of Greece.

Actually, there already was a bank run on, but thankfully for Athens and Europe’s central bankers in Frankfurt, not one that could be filmed with television cameras. Officially, some news dribbled out about a slow-motion ‘bank jog’. But in 2011 and then again in early summer 2012, the quantities of Greek euro deposits fleeing Greek banks were massive. In the twelve weeks from April 2011, Greek banks were drained of four years of growth in deposits. In May 2011 alone, €12.4 billion of deposits, or 6 per cent of Greece’s GDP, was removed from its banking system. These deposits made their way to various ‘safe havens’, including the London property market, the undersides of Greek bedroom mattresses and the lauded banking system of Cyprus (see
here
). A third of the withdrawn cash was spent, a third was taken abroad, and a third was stored in Greek homes, authorities estimate.

The drama of June 2011 was to abate slightly, and the deposit flows to reverse temporarily, after Prime Minister George Papandreou won a confidence vote in parliament. Amid violent protests and tear gas outside the parliament building, Papandreou’s government passed new austerity, reform and privatisation measures by a majority of five. George Provopoulos, the central bank governor, had warned MPs that ‘To vote against this package would be a crime – the country would be voting for its suicide.’ It was the threat of a return to the drachma that enabled the government to force through politically unpopular decisions – a type of blackmail that I dubbed ‘drachmail’. And this blackmail was to continue in some form or another right across Europe, as the continent struggled with the consequences of its experiment in shared economic sovereignty.

September 2011. A thousand tax inspectors are packed into a theatre in Athens. There are passionate debates about the latest set of cuts to their pay and pensions. Arguments between the government-affiliated union leader and his members spill out on to the street. The rank-and-file feel betrayed that they have been persuaded to accept a first wave of pay cuts earlier in 2011, only to find that now they are being asked to accept even more cuts. This does not feel like a country being bailed out by its neighbours. As Mrs Antonopoulos, the wife of a tax inspector, puts it, Greece is being ‘treated like Hector, being dragged around and around by Achilles’ chariot’. Greece’s humiliation, she suggests, is being paraded as an example to other nations.