Strategy & Operations » Leadership & Management » Rhodes to recovery

WHEN BILL Rhodes, the former Citigroup banker and veteran of every major debt crisis since the early 1980s, warned a senior eurozone official in June that Europe was on the brink of crisis, he was told the situation was “under control”.

“I was told I was an exaggerator,” he recalls. “The problem is that you point out some of the deficiencies with what is being done and you get attacked for exaggerating things and that might affect the markets.”

In an interview with Financial Director, Rhodes says he has been consistent in calling for private sector lenders to be forced to share a burden of sorting out the debt crisis in Greece and other peripheral eurozone countries.

In looking at the euro, he draws on his time in the 1970s working with then US treasury secretary Nicholas Brady, Federal Reserve chief Paul Volcker and the IMF to create “Brady bonds”.

These allowed commercial banks to change their loans to 13 defaulting countries, mainly in Latin America, into tradable instruments and get the debts off their balance sheets.

“You’ve got to have the private sector involved from the beginning and one of the mistakes that the European leaders made was not to get the private sector involved at the onset of the crisis,” he says.

“The private sector holds a good proportion of the debt. If you’re going to get a country back to the markets, it’s the private sector that’s got to do it.”

He was finally vindicated in October when the major private sector lenders agreed to take a “haircut” of 50% on their loans to Greece under a deal to cut its debt.

“The private sector was finally brought into this thing, but look how much time they’d lost – 18 months before they were finally brought in,” he says. “I kept on saying they should have been brought into the equation early on.”

The eurozone leaders also used their summit to unveil plans to increase the size of their bailout fund, the European Financial Stability Facility (EFSF), to €1tn.

One option is to encourage cash-rich countries such as China and India to provide funding through special purpose vehicles overseen by the IMF. EFSF chief Klaus Regling has already held talks in Beijing.

Rhodes, who has recently returned from China where he met the premier Wen Jiabao, says that fast-growing emerging markets could play a key role in resolving the crisis, but they cannot be taken for granted.

“I don’t think we can expect China to bail us out,” he says. “They are obviously concerned about what’s going on in Europe and the US, but China has got its own problems with inflation.”

Any solution is more likely to come through the IMF. “This is an opportunity for the IMF to take a stronger leadership role as they have in the past and be an anchor in these situations,” says Rhodes.

“There is now a possibility of creating a fund as was done at the time of the Latin American debt crisis and the time is now.”

Rhodes backed moves by 17 eurozone countries to embark on full fiscal union – a harmonised budget policy – to match the currency union established a decade ago.

“The problem in euroland is that they don’t have the structure. You can’t have monetary discipline without fiscal discipline,” he says. “This is an opportunity for the Europeans really in this sense to get their act together.”

Rhodes, whose book Banker to the World covers his time as a debt negotiator, says the clear lesson from history is that the “average Joe citizen” in countries such as Greece had to buy into the terms of the rescue. The scenes of sit-down protests in Spain and full-scale riots in Athens show that leaders have so far failed to achieve that.

While negotiating the South Korean rescue, he saw “thousands of women [queuing] around the corner for block after block in front of the central bank of Korea. They were melting their gold jewellery to support their country to keep them out of default. So there was a real will there and a real leadership”.

Overall, Rhodes says he is hopeful of a positive outcome in Europe. “I’m an optimist at heart, but we will see,” he says. “As they say, only time will tell.” ?

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