Tom, Tom Hagen.Posted: February 22, 2012 | |
Last night I watched Jeremy Paxman interviewing Charles Dallara, the managing director of the Institute of International Finance. He was quite impressive (Dallara), exuding a calm and intelligent demeanour, knowledgeable, honest, and frank.
Discussing the Greek debt crisis, and the terms of the 2nd bailout that had just been agreed, Paxman had been trying to push him on the reasons why his members, essentially banks and private investors, would accept the deal he had negotiated on their behalf, which would involve them in accepting a loss of 53.5% on the face value of their Greek bond exposure, and a lower interest rate on what remained. That’s a write off of about 100bn euros of private money.
Paxman was asking a fair question, because there is nothing that compels the private money to take these losses. They are being asked to participate, and they would be well within their rights to decline, something that Mr Dallara confirmed unapologetically.
This current round of bailout negotiations is required very specifically because of an upcoming obligation of 14.4bn euros, which falls on the 20th of March. The alternative to a successful bailout is chaotic default, which in turn could trigger credit default swaps.
So, when Paxman was asking why they would accept this deal, it was actually the difference between accepting the 53.5% loss, or allowing Greece to default, and retaining 100% of their exposure through triggering the insurance of their credit default swaps.
The answer it seems, was that it would be better for everyone, in the long run, including the individual specific investors, and he was confident that they would understand that when they saw the detail of the deal.
Jeremy Paxman: If the insurance system worked they could recover perhaps 100% of the money they’ve lent the Greeks instead of something like 30%
Charles Dallara: Its not inconceivable. If too many go in that direction though, the system breaks down, we will not have the successful conclusion of this deal and then where will they be?
Watching the interview it certainly seemed to me that Dallara was sure that this deal, implemented on the terms he had negotiated was essential for everyone. At the same time he seemed remarkably comfortable with the prospect of default, he simply laid out the facts as he saw them, no hyperbole or hysteria.
But then here was the man who had negotiated on behalf of private investors, a 100 billion euro loss. And he was telling them, his members, to take it. That it was a good deal.
Let’s put some context on what a 100bn euros feels like. Apple has a market value in the region of $330bn, Google, $177bn, Coca Cola $146bn. Bill Gates is worth $56bn, Warren Buffet $50bn, Christy Walton and family (walmart, and the world’s 10th richest private fortune) $26.5bn
In short, it’s the sort of money that only the most powerful individuals and corporations can afford to lose. And Mr Dallara is their appointed negotiator. Balls of steel? It’s in the job description.
As of this writing Mr Dallara has no Wikipedia page, which in itself is novel. That said it is still easy, front page of google, to discover that he has managed the IFF since 1993 after a stint at the top of J P Morgan and a career of impressive academic achievement (1 bachelors, 2 masters, 1 doctorate) and government appointments.
The IFF, seemingly, are the pressure group, for want of a better name, that represent the world’s biggest finance companies on the global stage.
The reason I hesitate to use the name, pressure group, or even lobby group, for the IFF is that we would need to understand who they would be lobbying or pressuring for it to be an accurate description, and unlike at nation state level, where government and institution provide the framework and the rule of law to enable and to adjudicate these interactions, on the global stage no such institution exists.
Let’s make no mistake about this. The IFF are the representative agency of private finance in a new uncharted space of power at the global level, where they are a participant not an invitee. They sit at the table on their own bidding in a way that does not occur at the nation state level.
Paddy Ashdown recently spoke at TED about global power shifts. He was talking of the big moments in history when power moves geographically, such as the transfer from Europe to America that took place through the middle of the last century, punctuated by the 1st and 2nd world wars.
His suggestion is that not only are we at a moment in time where power is shifting on such a scale, but also, and for the first time, power is shifting vertically as the responsibilities and decisions previously taken at the nation state level are now being taken on a global stage, a global stage that has no obligation to any rule of law, for no such thing exists. He shows that power has moved to an international stage (the power of the internet, multinational corporations, global finance) but regulation has not yet followed.
…and where on the nation state level that power is held to accountability, subject to the rule of law, on the international stage it is not….
It is a fascinating talk in its entirety, both in his description of the landscape of today’s world and how it may change in the foreseeable future. He charts a very reasonable path, pointing out that the lack of constraint (the real deliverable of a non-regulated environment) on the international stage suits the powerful, but only up to a point, for shortly they will be followed into this regulatory vacuum by the criminal and the terrorist. So, Paddy is sure that governance will follow, this is not a heady conspiracy theorists view of the world, though I’m sure the conspiracy theorists, those opposed to the ‘new world order’ et al, would find the whole concept of global governance appalling. Nonetheless Paddy makes an appealing case for its necessity.
So, having watched Paddy’s talk just last week, it was very interesting to watch Paxman talking with Charles Dallara, to see the power structures as described by Ashdown in play, addressing the big current global issue of the day, the European financial crisis. In the past I’ve often watched these unelected people, talking of the big issues both economic and otherwise, engaged with the governments of the world. But only now have I got an accurate framework to understand exactly how powerful they actually are.
Charles Dallara is doing something you wouldn’t catch a single government in the world doing. He is telling the richest people in the world that they should accept a 100bn loss, with a straight face. That’s power.