Saturday, May 15, 2010
Three Expert Views on the Debt Crisis
Last week, Charlie Rose interviewed three famed investors: Byron Wien, vice chairman of Blackstone advisory group; former deputy treasury secretary Roger Altman, who is also the founder and chairman of Evercore partners; and Barton Biggs, who runs Traxis Partners and has worked on Wall Street for more than four decades.
These three distinguished and informed finance veterans gave their perspective on what the Greek debt crisis means to the world, and what it portends for the US.
The following is a partial transcript of the interview, highlighting the most fascinating and elucidating portions. The emphasis is mine:
BYRON WIEN: The big issue is what happened in Greece looked like it wasn’t going to be resolved – or it could be resolved temporarily but not permanently – because in order for Greece to be solvent on a continuing basis, they have to make certain budget adjustments. And the pictures on the front page of people rioting over austerity programs, it looks like Greece is going to have a tough time accomplishing that.
ROGER ALTMAN: Markets are under pressure, as Barton said, all around the world, and they’re under pressure because, a.) the global financial crises obviously is not over, b.) the fundamental structure of Europe as an economic and financial entity is being exposed as extremely weak, and, c.) the factor that caused all this – too much leverage – is still out extant, is still there, and is still causing that pressure.
CHARLIE ROSE: OK, let me just make sure I as a layman understand the connection here. Clearly it was excess leverage and risk taking after the subprime crises that led to the global economic meltdown.
Are you saying that there’s some connection between the subprime crisis per say or are you simply saying the same kind of factor that led to that crises have led to the debt crises which puts Greece in the place that it is?
ROGER ALTMAN: It’s the second. The world has seen greater and greater frequency of financial crises over the past 20 or 30 years. They are occurring with more and more rapidity. And all of them have one thing in common -- leverage.
So what we’re seeing, among other things here, is that the sovereigns – these nations in Greece, Spain, Portugal, and so forth – are too leveraged. Their debt in relation to their economy is too high, and there are concerns about their ability to service that debt, will they default, and so forth. And I think the jury is out on that.
CHARLIE ROSE: As to whether Greece will default?
ROGER ALTMAN: As to whether any of these smaller nations in Europe will default – and I think the markets are reacting to that prospect – it’s entirely possible there will be defaults. There have been many defaults throughout history, from Argentina to Russia and so many others. The idea of default is not an alien idea, and we may see that.
CHARLIE ROSE: And if in fact... do you think that’s likely to happen – Greece will default on this debt – and that whatever rescue that the European Union and everybody else says they’re prepared to do, in the end Greece will not be able to deliver on the austerity because of the political pressure?
BARTON BIGGS: It’s inevitable. There’s no way that when we run the numbers, there’s no way they can earn their way or cut their way out of this issue. So they’re going to have to restructure their debt.
And you’re the expert on this kind of thing -- and so is Portugal and maybe so is Spain. And the haircut could be maybe 40 percent. Isn’t that right?
BYRON WIEN: There’s a parallel here with the subprime crisis. At the beginning when it just appeared as if the subprime loans were going to get into trouble, people said that’s only 10 or 15 percent of the overall mortgage market. It can be contained.
And Greece is an economy the size of the state of Michigan. So when that went wrong, everybody said well if the European Union, Germany band together and solve that problem maybe it won’t infect other things.
I think the change in consciousness that’s taken place over the last few days is the recognition that what’s going on in Greece could affect the other southern tier countries, Portugal, Spain, Italy, and Ireland.
CHARLIE ROSE: And suppose that happens, the southern tier have countries reflect a similar kind of financial crises. Will it come to the United States?
ROGER ALTMAN: Well, the United States, as you and I discussed before, is going to correct itself either the easy way or the hard way. The easy way is that our leaders get together and proactively put together a package to reduce the deficits and this disastrous path of debt that we’re on.
The hard way is that financial markets – as we’re seeing now in Europe, but in our case the United States – financial markets reject that path. I don’t think that’s imminent, I don’t think we’ll see that over the very short term. But I think over the next couple years, if we don’t proactively address it, that will happen to us.
And we’ll experience the same type of ugly and punitive solution because it’s forced on us by markets that we saw, for example, in 1979 when the dollar crashed and the U.S. government experienced that.
CHARLIE ROSE: Explain to me the link what’s happening there, and what’s happening here, other than you have these nations with huge debt problems, albeit each one is different – Spain and Portugal are different.
BARTON BIGGS: The sovereign debt crises. And this is the first time in a number of years that we’ve had a true sovereign debt crises. And what Roger’s pointing out is the connation from Greece and Portugal can spread to Spain and the United States.
CHARLIE ROSE: But is it contagious because somebody who is concerned about what’s happening in Greece also becomes concerned about Spain and Portugal, and therefore the markets react to that, saying if it’s Greece today it’s Spain tomorrow?
BYRON WIEN: Some numbers are important here. All those countries represent 35 percent of the euro zone. The strong countries – the Netherlands, France and Germany – represent 65 percent. The strong countries are doing well and the weak countries aren’t.
So the sudden realization is that the 35 percent can drag down the 65 percent. Until the last few days that wasn’t recognized or wasn’t in the markets, but now it is.
The other thing that’s relevant to your question, Charlie, is this: The United States has a 12 percent budget deficit, as a percentage of gross domestic product. The United Kingdom has about 13 percent and Greece has 13 percent. And all three of us have significant national debt in relation to the GDP.
The difference is that the United States and United Kingdom can borrow money even with these problems. Greece cannot. Greece doesn’t have the borrowing power that we do. And the worry is that we’ll run into -- over time we’ll begin to run into the same problems Greece is. I don’t think that’s a possibility or not a near term possibility, but the numbers are very similar.
CHARLIE ROSE: And so what should the president be doing, Roger, of the United States?
ROGER ALTMAN: Well of course he’s put together the deficit commission and it’s going to report by December 1st. We’ll see what it comes up with.
I’m actually not optimistic that the commission will reach consensus, but I am optimistic that it will put forward a blue print for a package of spending restraint and revenue increases that would address this.
And then in 2011 the president may take... and I think he will make an effort to put together at least the first step in that regard. I happen to think that will be a Social Security agreement rather than addressing the whole thing in one step.
But I think the president’s going to in 2011 try to demonstrate his seriousness about this in order to stave off what otherwise, as I said, could be the type of ugly and punitive impact on the United States which could below up his whole presidency.
BYRON WIEN: Roger, we’re running $1.6 trillion in budget deficit this year and it’s going to be over $1 trillion next year and the year after – maybe for a few years. Are we willing to cut the social programs, Medicare, Social Security, defense? That’s what you have to do. You really have to attack the major portions of the budget deficit.
You can cut out foreign aid, the National Endowment for the Arts, earmarks -- you won’t get anywhere if you do that. You’ve got to really go at some of the critical programs.
BARTON BIGGS: We don’t want to be too pessimistic. There are other ways we can get out of debt and the world can get out of this dilemma. And the United States financial statistics looked very similar to this in 1947. And how did we get out of it? We grew our way out. We had substantial growth in both real GDP and nominal GDP.
And so one way we get out of it is by controlling the deficits but by also growing the economy and getting some inflation. And we’re going to have some inflation.
CHARLIE ROSE: Increase on the revenue side?
ROGER ALTMAN: But Barton, there’s one big difference.
BARTON BIGGS: Yes.
ROGER ALTMAN: We had this much debt in relation to the size of our economy in 1947 because we had financed an enormous war, the arsenal of democracy. It was by definition temporary, thank god.
We’ve gotten into this problem for an entirely different reason. And if you put aside World War II, we’ve never been on a path to have debt in relation to the size of our economy of this amount since record keeping started in 1792 – ever.
Now we’re on the path there, and the question is how long will the markets allow us to stay on that path? I think some intermediate period of time, but not indefinitely. And this is the biggest risk to President Obama’s entire presidency.
BYRON WIEN: The United States is also at a very competitive position today than it was in 1947. World War II had devastated Europe and Asia. The United States had an intact manufacturing capability. It maintained industrial leadership from 1945 until 1980.
At that point, Europe was back on its feet. Japan was producing automobiles and consumer electronics products we wanted to buy. And we began to lose our competitive position.
Today, China and India and other countries are a much more formidable competitive force than any country in the world was at that point in time.
BARTON BIGGS: Byron, that’s our gloom and doom speech.
ROGER ALTMAN: You’re way too pessimistic.
BYRON WIEN: I’m optimistic, Barton. I have the highest growth forecast for 2010 of almost anybody out there. I think the U.S. economy is going to do very well this year.
CHARLIE ROSE: What does that mean, "very well"?
BYRON WIEN: Five percent, four to five percent, because historically it has sprung back from severe recessions. The recession was down – peak to trough – 3.9 percent. Usually you grow six to eight percent after that. I don’t think we’ll do that well, but I think we’ll do four to five, and most people are two to three, and the first quarter was 3.2.
CHARLIE ROSE: What do you think, Barton?
BARTON BIGGS: I agree with that. And I agree with the idea that our long term growth is going to be more like two to three percent because consumer spending is just not going to increase the way it did in the past when consumers were reducing the savings rates very substantially.
And so we’re going to have a longer period of slow growth, and so Europe, and Japan already have it. But there are other powerful dynamic economic posters in the world called India and China and Indonesia and Turkey and places like that. Byron is looking at me skeptically.
CHARLIE ROSE: How long have you two guys known each other?
BYRON WIEN: We’ve worked together for almost 20 years.
CHARLIE ROSE: At Morgan Stanley.
ROGER ALTMAN: He’s a pessimist.
BYRON WIEN: I’m not a pessimist.
CHARLIE ROSE: So this is the kind of meeting you would be in the conference room of Morgan Stanley when you talked about the future.
BYRON WIEN: It drove Morgan Stanley crazy because we were two strategists and often we had different opinions.
BARTON BIGGS: He never understood the glory of tax cuts. He was never a supply-sider.
ROGER ALTMAN: I think the question for today is, you know, are we seeing the early stages of global sovereign debt crises? And I think the answer is we are. And it’s --
CHARLIE ROSE: It’s self-evident, isn’t it?
ROGER ALTMAN: Some would argue it’s going to be contained.
CHARLIE ROSE: In Greece and that’s it?
ROGER ALTMAN: Greece, Spain and Portugal. And others think it may spread. I’m in the latter camp. I think it’s not going to be limited to just Greece, Spain, and Portugal.
CHARLIE ROSE: And what could make your wrong? In other words, it could be contained. What would have to happen for it to be contained? What set of initiatives and actions?
ROGER ALTMAN: Well, first I think the European authorities have been way too slow responding to Greece and have allowed this market disquiet to fester and forced upon themselves a much bigger rescue package for Greece than they would have had to put up had they acted decisively a month ago.
I think part of the problem is the European Central Bank is being exposed as much weaker and has far fewer powers than our central bank and that’s a big problem for Europe.
But you’re dealing with market psychology, Charlie, and once market psychology shifts – and it has shifted – these things are hard to contain. So if tomorrow we woke up and we found that the European Union and the European Central Bank had developed a much stronger package for all of these southern tier countries, that might be the end of it. But I don’t think that’s going to happen.
But I think market sentiment has changed, and we are in the beginning of a period of great anxiety over sovereign debt and I don’t think it’s going to end quickly.
CHARLIE ROSE: Mr. Trichet said today of the European Union, a Greek default is out of the question, and although he said they haven’t discussed it, he wouldn’t rule out that the ECB would buy government bonds.
BARTON BIGGS: That’s amazing. And that’s the thing. If they did that tomorrow and if they really did quantitative easing and bought government bonds and basically propped up both Portugal and Greece, I think they could avert this.
BYRON WIEN: That would be a strong action you could wake up and find.
BARTON BIGGS: They would cut the discount rate, and so on, in Europe.
BYRON WIEN: The problem probably is not immediate. I think the European Union and the International Monetary Fund will take action to alleviate this problem.
The problem is further on down the road. The problem is whether Greece can do the kinds of things that gets its financial house in order, and whether Spain and Italy can follow. That’s next year’s problem.
The European Union isn’t ready now for a financial calamity and they can do something about it. If over the next year, the countries take remedial action, then we can defer it indefinitely.
But if they don’t, then by next year you’ll have the country spun out of the union, they’ll have their currencies, they’ll be able to devalue their currencies and restructure their debt. And Europe will be a very different place.
ROGER ALTMAN: In other words the European Union would break up from a monetary point of view.
CHARLIE ROSE: So the euro is dead?
BYRON WIEN: No. I think there still would be a euro. My own view is there still would be a euro for the Netherlands, France, and Germany. They would still have common currency.
BARTON BIGGS: But the financial chaos that would create, by everybody else dropping out --
BYRON WIEN: But, you see, Germany is the biggest loser here. And Germany isn’t ready for that.
CHARLIE ROSE: It has the strongest economy too.
BYRON WIEN: Yes, it has the strongest economy and has the most subset in outstanding degrees.
BARTON BIGGS: Germany is going to be a huge winner out of it because the euro is – if we go the way we’re going – because the euro is being devalued against everything else. And Germany has the strongest economy, and the strongest exporting industries, and this is like a huge price cut for all Germany’s exports.
BYRON WIEN: Yes, but the fact is if the euro breaks up and these countries impose significant austerity, their markets will be smaller. That’s the other side of it.
I agree with you, devaluing the currency helps trade. But you have to have somebody to sell to, and the people you sell to have to have buying power.