Greece – InterdependenceFebruary 12, 2015
Years ago, Catherine Mann (chief economist of the OECD and GIC board member) set out an articulate thesis about interdependencies, both negative and positive. She used the metaphor of the alcoholic and the liquor store.
The alcoholic buys whiskey from the liquor store and promises to pay in the future. The liquor store books the sale and the profit and raises its accounts receivable. It pledges those receivables to a bank and borrows cash so it can buy more booze to sell to the drunk. This unsustainable arrangement may continue for years. When it stops, the cumulative force of a prolonged negative interdependency fiercely asserts itself.
Positive interdependence commences only after negative interdependence ceases. The child and the cookie jar is another metaphor. Only when a punishment is administered and the cookie jar is put out of reach does the child’s behavior change. Interim warnings mean nothing.
For financial professionals the transition from negative interdependence to positive interdependence is always difficult. We want to ride the wave until the day before the transition begins. The wave is defined as the excess return obtained while the alcoholic is consuming, the liquor store is operating, and the bank is providing cash while showing profits from lending.
Notice the hidden role of government in this model. It is supposed to monitor the drunk, license the liquor store, regulate the bank and protect the society. Like professionals in finance, government officials also seek to ride the wave until the last day and to postpone that day as long as possible.
We now see Greece again trying to stick its hand into the cookie jar. We see the euro system debating whether to put the cookie jar out of Greece’s reach. And we see other governments, including the US, engaged in their own idiosyncratic forms of interdependency, both positive and negative.
The ECB made it clear recently (http://www.bloomberg.com/news/articles/2015-02-04/what-the-ecb-s-move-on-greek-government-debt-is-really-all-about) that the suspension of Greek sovereign debt as eligible collateral came because a successful conclusion of the current Greek troika program review had become impossible. See also http://www.bloomberg.com/news/articles/2015-02-05/greece-here-s-what-happens-next.
2015 promises to be a fascinating year as events unfold. For financial professionals it will be extraordinary in challenging our ability to gauge the transition and act on it.