Interview by James Pressley
Oct. 18 (Bloomberg) -- If Satyajit Das is right, China will end up writing off its $3.2 trillion in foreign reserves. Europe is shambling toward Japanese-style growth. And a day of reckoning is at hand for creditors and debtors alike.
“Europeans are going to have to recapitalize their banks,” Das said as we discussed the sovereign-debt crisis and his new book, “Extreme Money,” over coffee in a Brussels hotel. “You have made bad loans; you’re going to have to write them off. That is the one axiomatic law of making a bad loan.”
Das, 54, is the puckish derivatives specialist who lampooned banking excesses in “Traders, Guns & Money.” He was in town to brief members of the European Parliament on the crisis. Looking relaxed in a black V-necked sweater and black shirt, he talked about Germany’s fling with Greece, China’s unpaid loans and what Angela Merkel can learn from Winston Churchill. We began with Dexia SA’s second bailout.
Das: The European Banking Authority gave Dexia a clean bill of health in the last three months. What does that tell us? The unwillingness to address the leverage in Dexia is astonishing, especially given how the French at the start of the crisis went on about “les affaires capitalistes sont finies.”
Whether you bail out Greece or you bail out your banks, all these countries will incur savage costs. Moody’s has now put Belgium on negative credit watch. I don’t think France will be far behind.
Pressley: Is the Greek rescue really an attempt to save French banks and German exports?
Das: It has always been about that. The hypocrisy of the Germans is staggering. They run the same relationship as China runs with the United States: They funded the peripheral economies to fuel their exports. Everybody knows why Germany wants to save the euro. The debtors have sinned, but the creditors are hardly without sin. No country can run permanently large trade surpluses, and no country can run permanently large trade deficits.
Pressley: How can a land as large as China run such a surplus? It works for a Korea, but China?
Das: It’s unsustainable. That’s the lesson we should have learned from 2007. We instead shoveled everything under the carpet, and it’s going to come back to haunt us. China’s going to have to write off its $3 trillion.
Chinese history is full of discontinuities. Why wouldn’t they suddenly turn around and say, well, we lent you $3 trillion and you’re not going to pay us back. So we’ve written it off and we won’t buy any more U.S. Treasuries until the U.S. reforms its fiscal position. Any country whose symbol is the Great Wall is hardly incapable of isolationism.
Pressley: Chinese state-controlled banks are meantime on the hook for bad loans to state-owned companies. Is that a Ponzi scheme?
Das: It is. I do a simple piece of mathematics. The Chinese say they’re growing at about 10 percent. But they’re pumping the system full of bank debt equal to 30 percent to 40 percent of gross domestic product. Of that, a third to a quarter isn’t coming back.
If one-third doesn’t come back, they’re losing 10 percent. The state-owned companies’ production shows up as GDP. Are they growing at 10 percent, or do the losses mean they’re growing at zero? Are they converting capital into income? Isn’t that what the U.S. did when it borrowed against home equity to fund growth?
Risk for U.S.
Pressley: What does Europe’s crisis means for the U.S.?
Das: In New York a few weeks ago, somebody said to me, “This European debt problem: What’s it got to do with us?” I said, ‘Well, based on 2010 data you export about $400 billion a year to Europe, which is about 20 percent of your exports. Plus you export a significant volume of intermediate goods to Southeast Asia and China, which they repackage and sell as finished goods to Europe. So if you don’t mind wiping out, say, 20-plus percent of your exports, you’ve got no problem.’
Pressley: Are European politicians trying to patch this up with Band-Aids?
Das: That’s the danger. It’s like having cancer. If people admit they have cancer, then you can look at all the options for treatment. If you stay in a state of denial and let the disease metastasize, it doesn’t give you a good long-term prognosis.
In a democracy, you have to have an honest discourse. Go back to Churchill, whom I’m not a great admirer of. What was his most important characteristic in the early part of the war? He was honest. He said, we have to fight this because there is no choice. We either fight this or we die.
Pressley: What happens if Greece defaults?
Das: Its banking system will be bankrupt. The government won’t be able to borrow from overseas. Even with all the austerity, Greece is going to shrink by about 20 percent over three years.
The rest of Europe is then trapped. Savings will be absorbed in bank bailouts, and the ratings of these countries will come under pressure. They will have trapped themselves in a cycle of low growth. That’s the best case.
Pressley: That sounds like Japan’s lost decade.
Das: In hindsight, Japan may be judged better than people think.
“Extreme Money: Masters of the Universe and the Cult of Risk” is published by FT Press (459 pages, $29.99, 20 pounds). To buy this book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own. This interview was condensed from a longer conversation.)
--Editors: Mark Beech, Laurie Muchnick.
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