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No Laughing Matter: A Look at the European Debt Crisis Through Cartoons

November 22, 2012 at 12:00 AM EDT
Lee Buchheit, a lawyer who helped mastermind Greece's debt restructuring earlier this year, and investor Hans Humes explain the wrangling behind-the-scenes of Europe's debt crises to economics correspondent Paul Solman, all with a little help from some cartoonists.

HARI SREENIVASAN: Next: reducing Greece’s big debt.

The troubled country appears to be on track to get some much-needed aid next week. But European Union leaders meeting at a summit this week are still unable to agree on how to cut Greece’s debt to a more sustainable level.

NewsHour economics correspondent Paul Solman has a behind-the-scenes look at the efforts to do so. It’s part of his ongoing reporting on Making Sense of financial news.

PAUL SOLMAN: Is the euro crisis resolved?

The message from Europe’s financial markets over the past few months has been mostly positive. And this month, Greece passed a tough austerity bill, despite widespread street protests. The credit for Europe moving ahead has gone to European Central Bank head Mario Draghi, who pledged in July that his ECB would buy the debt of distressed borrowing countries to keep their interest rates down, keep them solvent.

Investors worldwide now call him Super Mario, after the Nintendo video game superhero.

PAUL SOLMAN: But, in fact, as both knowledgeable outsiders and insiders attest, the tug-of-war between Europe’s borrowers and lenders continues and probably will for years.

Just look at the images of outsiders like foreign cartoonists, for example. Their picture of Super Mario’s newfound powers is a lot more down-to-earth.

That’s because Draghi faces steep opposition to his vow to impose super-tough terms for his bond buying plan, more austerity in the form of tax hikes, government pay and pension cuts and the like, to be overseen by his bank and the International Monetary Fund.

For all the public reassurances, these new austerity conditions have sparked bitter protests in Spain, in Greece, twice bailed out already and yet again pleading for more slack. This protest was prompted by an October visit from German Prime Minister Angela Merkel, who many Greeks blame for the painful cuts they have already endured.

But, back at home, Merkel must contend with an anti-bailout public in Germany, a Germany which must ultimately approve any Europe-wide debt relief program, since it funds about a quarter of the European Central Bank. But Germany has no choice. It will have to keep playing the game.

Or at least that’s the conviction of a key insider, New York lawyer Lee Buchheit.

LEE BUCHHEIT, Cleary Gottlieb Steen & Hamilton: As the French say, for want of better, and for fear of worse.

PAUL SOLMAN: Buchheit is Mr. Insider, Greece’s chief debt negotiator. He’s managed the country’s bargaining strategy these past pinched years and is the go-to guy for many a nation being muscled by its lenders.

LEE BUCHHEIT: No one likes to lose money. Any creditor approached by a sovereign with a request for debt relief would accede to it only if they thought that by not giving the debt relief, they stand to lose more.

PAUL SOLMAN: And your job is to convince the creditors that the borrowers can’t afford to pay more.


PAUL SOLMAN: So, when you’re advising a country, what are you telling the officials who are negotiating with their creditors?

LEE BUCHHEIT: To convince its creditors first that it needs a restructuring, and second that the terms of the restructuring are what they need, not necessarily what they want.

PAUL SOLMAN: Let’s pause for a moment to explain, with a little help from our friends the cartoonists.

Restructuring is just a way of saying reduce the amount a squeezed country owes, forcing lenders, generally bondholders, to take what’s euphemistically known as a haircut, a reduction in the amount that’s due them. For professional investors, though, the visit to the barber can be rather more drastic. But how else can a debt-drowning country stay afloat, Buchheit asks.

LEE BUCHHEIT: You try to return the debt stock to the point that a neutral observer in the market would say, Ruritania is now creditworthy again.

PAUL SOLMAN: Ruritania being your…

LEE BUCHHEIT: Mythical country.

PAUL SOLMAN: Mythical country. Right?


PAUL SOLMAN: Attorney Buchheit is nothing if not careful. But for all his elusive talk of Ruritania, his real client is Greece. In the past year, Greece has not just been weighed down by fat-cat lenders, but by pan-national parties like the European Union and its Central Bank.

They have given money to Greece to maintain the interest payments on its private debt, becoming not just the lender of last resort, but of life support.

LEE BUCHHEIT: Any time in a corporate or sovereign context that you have a new party coming in saying, I’m financing the debtor, or I’m prepared to put in the new money, they have the whip hand. And so we nor the creditors can ignore their views.

PAUL SOLMAN: Those views were that Greece should never restructure its loans.

LEE BUCHHEIT: As they saw it, sovereign debt restructuring was a unique affliction of emerging markets. You could not have the restructuring of a European sovereign without declaring yourself to be an emerging market.

PAUL SOLMAN: And that would be a real stigma.

LEE BUCHHEIT: That would be, as they saw it, an indelible stain. And, therefore, their insistence was avoid a debt restructuring at all costs, even if it means that, in effect, European taxpayers must lend the debtor country the money to repay all of its debt in full.

PAUL SOLMAN: The problem with this approach, the longer Greece put off paying the debts incurred by its supposedly Olympian lifestyle, the greater the pressure on all its creditors.

LEE BUCHHEIT: What happened in Greece was, in May of 2010, they started with a bailout program that gave Greece all of the money it needed to repay all of its existing creditors. I understood the psychology of it, but at some point the psychology must give way to arithmetic.

The liability didn’t go away. It simply migrated out of the hands of commercial creditors and into the hands of the official creditors. When the axe falls, it will fall on the taxpayers’ neck.

PAUL SOLMAN: Something the cartoonists, this one from fiscally conservative Holland, will never let the lenders forget.

LEE BUCHHEIT: Eighteen months later, they realized what they were doing, and at that point they careened from saying, you must repay all of your creditors in full and on time, to saying, you must impose at least a 50 percent nominal haircut on your creditors.

PAUL SOLMAN: And so, in March, Buchheit helped negotiate a deal that lopped off about a third of Greece’s total debt to keep Greece in the game. Private lenders were forced to take a 75 percent loss on the face value of their bonds.

HANS HUMES, Greylock Capital Management: In general, it’s, the country wants to pay the least it can, and you want them to pay the most they can.

PAUL SOLMAN: One of Greece’s private creditors is investor Hans Humes of Greylock Capital. He’s sat across the table from Lee Buchheit in many negotiations over the years.

HANS HUMES: I guess a very nice way to put it, he’s a formidable opponent. Lee had a speech where he made reference to creditors’ blood running in the street. And you get a sense with him at some level he’s getting a visceral thrill out of it.

LEE BUCHHEIT: It is a bitter process. My role is simply to take the debtor’s side in that dynamic. I don’t expect everyone will like it.

PAUL SOLMAN: The major gripe against Buchheit is that he got Greece to actually change its laws so private creditors could no longer sue to collect if enough other creditors, like the ECB, also owned Greek debt.

Could that serve as model for other countries? Well, once you start changing laws, says Hans Humes, the sky’s the limit.

HANS HUMES: Right now, we’re teetering on something that’s far worse than what we saw in Latin America.

PAUL SOLMAN: In the 1980s or ’90s, you mean?

HANS HUMES: Yes. I mean, I lived in Latin America. I saw it and I was part of the work-out. This is worse.

PAUL SOLMAN: Does Lee Buchheit then…

HANS HUMES: Have a lot of work?



PAUL SOLMAN: Yes, I’m sure he has a lot of work, but does he bear a lot of the blame?

HANS HUMES: No, no. I mean, he’s just reacting to the situation that’s evolving. But I think there’s a lot of concern that, if you have this legal coaching on how to really gut creditor rights, that you may actually end up in a situation where nobody wants to lend to countries.

PAUL SOLMAN: But if that’s already a clear and present danger, we wondered, why not just stiff the creditors?

After all, the history of sovereign debt is default, default, default, default over centuries, and then those same countries come back into the market, sometimes in just a few years, and can start borrowing again.

LEE BUCHHEIT: Excessively brutal behavior by the sovereign debtor will be remembered, and subsequent administrations will pay a penalty. They will pay a higher interest rate.

The other aspect, though, is the pain you inflict on creditors will be a matter of concern to your geopolitical partners, to the IMF and to others who have a stake in seeing the financing of sovereigns worldwide continue to go on. And so outrageous behavior, as they would see it, is something that will incur their displeasure. And you, the sovereign debtor, are likely to hear about it.

PAUL SOLMAN: And, so, the dance goes on. The cartoonist’s vision is a disastrous ending. But the euro powers that be are in the business of buying time, in the belief that most debt crises end not in a bang, but a whimper.

HARI SREENIVASAN: And you can find much more of Paul’s reporting on Greece and the Eurozone crisis on our website.