Taped transcripts of the former US Treasury Secretary expose a catalogue of errors that will haunt Europe for years, made worse by misplaced righteousness
Tim Geithner discovered what he was up against as early as February 2010 at a G7 gathering Photo: Reuters
By Ambrose Evans-Pritchard, International Business Editor
6:29PM GMT 12 Nov 2014
So now we know: Europe’s leaders did indeed attempt to smash Greece back into the Stone Age out of vindictive rage; conspired to withhold debt support for Italy unless the elected leader was forced out; and mismanaged the EMU crisis for three years with a level of stupidity that makes you want to weep.
Timothy Geithner has revealed the details, unpleasant and alarming in equal measure. The former US Treasury Secretary hinted at some of these “short-comings” in his memoir, Stress Test: Reflections on Financial Crises.
Peter Spiegel, from the Financial Times, has now obtained the raw transcripts, laced with expletives.
The verdict is brutal. “I completely underweighted the possibility they would flail around for three years. I thought it was just inconceivable to me they would let it get as bad as they ultimately did,” Mr Geithner said.
He discovered what he was up against as early as February 2010 at a G7 gathering in the Canadian town of Iqaluit, in Frobisher Bay (of all places). By then it had already come out that Greece’s budget deficit was 12pc of GDP – not 6pc as previously claimed – and the wheels were coming off the Greek bond market.
Geithner: I remember coming to the dinner and I’m looking at my BlackBerry. It was a f***ing disaster in Europe. French bank stocks were down 7pc or 8pc. That was a big deal. For me it was like, you were having a classic complete carnage because of people saying: crisis in Greece, who’s exposed to Greece?
I said at that dinner, that meeting, because the Europeans came into that meeting basically saying: ‘We’re going to teach the Greeks a lesson. They are really terrible. They lied to us. They suck and they were profligate and took advantage of the whole basic thing and we’re going to crush them.’ [That] was their basic attitude, all of them.
But the main thing is I remember saying to these guys: ‘You can put your foot on the neck of those guys if that’s what you want to do. But you’ve got to make sure that you send a countervailing signal of reassurance to Europe and the world that you’re going to hold the thing together and not let it go. [You’re] going to protect the rest of the place.’
I just made very clear to them right then. You hear this blood-curdling moral hazard-y stuff from them, and I said: ‘Well, that’s fine. If you want to be tough on them, that’s fine, but you have to make sure you counteract that with a bit more credible reassurance that you’re going to not allow the crisis to spread beyond Greece. You’ve got to make sure you’re putting enough care and effort into building that capacity to make that commitment credible as you are to teaching the Greeks a lesson.
Interviewer: Did you have this kind of foreboding, like: oh my God, these guys are just going to…
Geithner: Yeah. I had like a definite… Of course I, as I think I’ve said separately, I completely underweighted the possibility they would flail around for three years. I thought it was just inconceivable to me they would let it get as bad as they ultimately did. But the early premonitions of that were in that initial debate. They were lied to by the Greeks. It was embarrassing to them because the Greeks had ended up borrowing all this money and they were mad and angry and they were like: ‘Definitely get out the bats.’
They just wanted to take a bat to them. But in taking a bat to them, they were feeding a fare that was in its early stages. There were a lot of dry tinders.
Mr Geithner was aghast at the Deauville deal in October 2010 – between Chancellor Angela Merkel and French President Nicolas Sarkozy – to impose haircuts on sovereign bondholders before there was any back-stop machinery in place to stop contagion.
Geithner: That was [an] incredible miscalculation for damage. They had a summit in Deauville, France, where Sarkozy, in order to get Merkel to back off her ‘fiscal union’ stuff, which was very hard for him politically because, you know, France agreeing to come under the thumb of Germany on fiscal policy – at least that’s what the French politics was. He, Sarkozy, agrees to back Merkel on this haircut stuff.
I was on the Cape [Cod] for Thanksgiving and I remember doing a G7 call from the Cape and being in my little hotel room. And I basically, and Trichet did the same thing, I was rude and I said: basically, if you guys do that, all you will do is accelerate the run from Europe. No one will lend a dollar, a euro to a European government if they’re weak in that context because the fear will be, if they need money, you’ve got to force some restructuring, haircut. It completely inverts the incentives you want to create.
I was f***ing apoplectic about it and I said it may be that you’re going to have to – I can’t remember how I said it – you may be, if you’re going to restructure Greece, but until you have the ability to in effect protect or guarantee the rest of Europe from the ensuing contagion, this is just [a] metaphor for our fall of ’08. You can’t do that.
At that point, Trichet was completely apoplectic about these guys, [and] said that you cannot afford to have all this loose haircut talk until you are in a better position to be able to guarantee and protect the rest of Europe from the contagion and the run of what happened.
On Italy, we already know from Mr Geithner’s book that EMU leaders tried to talk President Barack Obama into joining the Putsch against premier Silvio Berlusconi in 2011. The request was turned down. “We can’t have blood on our hands,” were the exact words. The transcripts give the full flavour.
Geithner: To be sympathetic to them, the Germans’ experience has been every time they buy a little bit of calm and the Italian spreads start to come down, Berlusconi reneges on anything he committed to do. So they were just paranoid that every act of generosity was met by sort of a ‘f**k you’ from the establishment of the weaker countries in Europe, political establishment of those weaker countries in Europe, and so the Germans were just apoplectic. Sarkozy, who is trying to navigate between the Germans’ view of the crisis and the fact that France was suffering a fair amount of collateral damage, too, because Europe’s getting somewhat weak, he’s in election. He’s trying to figure out how to bridge this difference.
There’s a G20 meeting in France that Sarkozy hosts which was really incredibly interesting, fascinating thing for us and for the President and I’ll tell you just a few quick things in passing so we can come back to those things. The Europeans actually approach us softly, indirectly before the thing saying: ‘We basically want you to join us in forcing Berlusconi out.’ They wanted us to basically say that we wouldn’t support IMF money or any further escalation for Italy if they needed it if Berlusconi was prime minister. It was cool, interesting. I said no.
But I thought what Sarkozy and Merkel were doing was basically right, which is: this wasn’t going to work. Germany, the German public, were not going to support a bigger financial firewall, more money for Europe, if Berlusconi was presiding over that country.
Finally, Mr Geither says flat out that Mario Draghi made up his “whatever it takes” line in July 2012 on the spur of the moment, without the backing of the European Central Bank’s executive council. This may be true, but it is misleading since the German finance ministry was indeed in the loop over the OMT debt rescue plan for Italy and Spain. (I attended a dinner with the director-general of the ministry roughly three weeks earlier and he signalled something was coming. He even used the expression “nothing flies in the eurozone right now without our permission”, which is why I can only smile when people tell me that Germany does not run EMU).
But here we are:
Geithner: Things deteriorated again dramatically in the summer, which ultimately led to him [Draghi] saying in August, these things I would never write, but off-the-cuff – he was in London at a meeting with a bunch of hedge funds and bankers. He was troubled by how direct they were in Europe, because at that point all the hedge fund community thought that Europe was coming to an end. I remember him telling me [about] this afterwards, he was just, he was alarmed by that and decided to add to his remarks, and off-the-cuff basically made a bunch of statements like ‘we’ll do whatever it takes’. Ridiculous.
Interviewer: This was just impromptu?
Geithner: Totally impromptu…. I went to see Draghi, and Draghi at that point, he had no plan. He had made this sort of naked statement of this stuff. But they stumbled into it.
What a way to run a railroad.
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