William R Rhodes - Senior Vice-Chairman Citibank (1991-2010) HARDtalk

Now on BBC News it is time for The new Greek government wants its

EU and IMF creditors to soften the terms of its bail-out deal, which

has heaped austerity on the Greek people. Meanwhile, the Spanish

government wants its banking debt crisis to be seen as separate from

the state of its public finances, and the EU is struggling to find

solutions as the markets wonder what next. My guest today is Bill

Rhodes, who, for 53 years, worked at Citibank. What is his advice to

Bill Rhodes, welcome to HARDtalk. Thank you. It is a pleasure to be

here. We have gone back and forth for a long time. You have been

around for quite a while, talking to all sorts of people. If you were

advising the new Greek government about trying to renegotiate its

bail-out deal, what is the key bit of advice you would give? If you

look at their debt to GDP, it is higher than any country I ever

restructured. They are going to have a reopening of terms with the

ECB, IMF and EU to buy more time to implement these measures and

probably get a better deal on interest rates. Otherwise they are

in their fifth year of recession. I call it a depression. The only way

out for a country like Greece is growth. It is the same for Portugal,

Ireland and Spain. When you speak about its debt to GDP ratio being

high, about 163 %, it is very difficult for them to try and

finance that. The EU, and Jean- Claude Juncker, has said as far as

the austerity package goes, it is fine at present. They will discuss

the time frame, but nothing else. think that is just the beginning.

At the end of the day, the European Union and the eurozone want Greece

to stay within the eurozone. The only way they can do that is if

they get better terms instead. At the same time, they have to make

themselves more competitive. They have to overhaul the tax system,

start privatising. It is all a big order for the new government.

that's all in the austerity package. Exactly. Looking at the

negotiations and how the new leader of Greece goes about trying to get

what he wants, you have to balance the interests of the Greek people

and then the rest of the EU. The rest of the EU has to say the

taxpayer in the EU is overburdened and cannot afford to give much more.

At the same time the Irish and Portuguese are implementing their

plans very well and will say if the EU gives more money to Greece, they

will ask for more. If the EU wants Greece to stay in the eurozone,

they have to buy time for the Government to implement the

programme. How do you try to persuade the Germans? Everybody

talks about the Germans as being key to all of this because they are

the main paymaster to the EU. The Germans have already paid something

like $500 billion for the bail-out packages for various European

countries. How can you persuade the Germans to put the interests of the

EU before their own? You have to have a balancing act here because,

as you know, Chancellor Merkel has to run for re-election next year.

If you had a floating Deutschmark, it would be way up and would

curtail their exports. They have the best of both worlds. They have

low interest rates and they have been able to take advantage of the

exports. Angela Merkel recently said Germany's strength is not

infinite. There is no doubt that Chancellor Merkel has to run again.

She lost those two state elections. It is a balancing act. They want to

keep the eurozone together for the reasons I gave. Aren't there risks

to asking Germany to do more, or is Angela Merkel bluffing? What she's

saying is what she believes. There are other players here. There is

France with a new President, who just got the National Assembly. I

think you will develop a partnership here. Then you have the

situation with Spain and Italy. All four of these leaders are going to

meet in Rome on Friday. What is important is what they come out

with. There is a lot of rumours about what they are going to do to

support both Spain and Italy. This is what Mario Monti is advocating.

We will talk about the solutions in a moment. But looking at the

questions of the debt, the deputy finance minister of Germany has

said the debt is a national responsibility. Greek debt should

be Greek debt and Italian debt should be Italian debt. Who owns

the debt? I think that is why the Germans do not support Euro bonds.

What they are saying is they want a fiscal pact first. That was the

intention and announcement of the heads of state of the eurozone in

March. As you know, Maastricht, which was supposed to be the fiscal

part of the Union - the treaty spoke about limits on expenditure

and was violated first by France and Germany. So Germany deserves

what has happened then? What Germany is looking for is to say,

all of us made a mistake, so let's get back on track again and let's

get this fiscal pact to match the monetary union that we have.

Germany's position has always been having a closer fiscal and

political union. Asking about this question of debt. You were heavily

involved in restructuring of debt of other countries. What kind of

skills does the financial diplomat need? That is what you have been

described as and what you talk about in your new book, 'Banker to

the World'. One of the things you learn early on is that every

country is different. Greece got into the problem because of their

over borrowing. In the case of Ireland, it was the banks that

dragged the sovereign down. In the case of Portugal, it was no growth

for ten years. In the case of Spain, it was the banks over lending. In

Italy, it was a high GDP to debt ratio. There was one thing that was

similar. In all the situations it was contagion. When I first tried

to mention that to European leaders in January, 2010, they said, that

is for emerging market countries like Latin America and Asia. They

have learned the hard way that contagion is real and is one of the

things they are facing now. They must come up with the solutions

this year or I think the euro is going to be in danger. Just take us

behind the scenes about how you negotiate, whether you are trying

to restructure sovereign debt or dealing with financial institutions.

What are the actual skills that somebody would need? Timing is of

the essence in crises. You do not have unlimited timing. In the

eurozone we have had 2.5 years. Timing is of the essence. The

quicker you can put together an arrangement on debt, the more

successful it will be. Then you get the country back to the markets. It

doesn't need external aid because the private market will support it.

I think this is one of the mistakes that was made. But the mechanics,

what happens? You describe in your book how you take the parties

involved in negotiations into a room, switch off the air-

conditioning to make sure they are perspiring in order to get a deal.

I think what you have to do is to get a consensus and tell people

they cannot leave until they get an arrangement. That goes into the

timing question. You have to have a consensus and let everyone have a

say. You cannot force something down someone's throat. When you say

you have to wear people down or make sure they all have a chance to

state their case, can this go into the early morning hours or should

there be a break? Sometimes it goes for two or three days. But you have

to set a timeline. One of the lessons for Europe is when they

have all of these summits you didn't get a timeline on when it is

going to be achieved. That is one of the lessons are in my book. You

have to have a timeline. We are going to get this done by X time.

The European leaders are not working quickly enough? Exactly. I

think they underestimated contagion and I think we need to see the

leadership now. I think the only reason the ECB has not dropped

interest rates over the last month or so is because they are putting

pressure on the political leaders to come up with some sort of

package on regulation across the eurozone. Also, people are looking

at an insurance scheme. You say that the EU could have learned from

the problems of debt crises in some of the emerging markets.

eurozone. When you are dealing with a regional grouping like the

eurozone, surely that is quite different than when you're dealing

with an individual nation like Argentina? What you have is

individual countries. Every country is different. Every country has its

own characteristics. Each one of these countries got into a problem

in its own way. But you have to have a common solution, don't you?

That is where they are now. Doesn't that make the decisions much harder

if you are being employed in this role? That was all the more reason

to start earlier on and not let get so much time go by. We have talked

about Greece, which is trying to get its national debt softened, but

looking at Spain, which has been a major preoccupation for the

eurozone at the moment - in fact if you look at the borrowing costs,

they are much higher than Greece at the moment - why, do you think,

that there isn't as much talk about Spain leaving the euro as there is

about Greece? Spain is a real key because they are the fourth largest

economy in the eurozone. Getting the banking system is key because

one of the things that I think everyone has seen is that banks and

sovereigns are inextricably linked. And so, if you do not have the

banking system in shape to the end, you're not going to have growth. If

you don't have growth, there is no way out. It cannot have continual

recession, austerity and depression. You have to convince the people of

the country that there is growth at To pick up what you said there, you

said when the Spanish government at the beginning of its debt crisis

said it is a banking problem, you were suggesting that is a force to

distinction because they are linked. You have the banks buying

government debt to support the state and governments guarantee the

liabilities of banks. It is a false distinction. The problem was they

kept putting out estimates of what it would cost. First it was 20

billion euros then it was 50 billion euros. Now the figure has

come out to be 100 billion. There is a report coming out in the next

few days by an independent group that is auditing the situation for

the Spanish government and the central bank as to what the

reserves and write-offs have to be. And this is very important because

if you do not get that settled, the markets are going to keep pushing

up the spreads and the cost of Spanish bonds. When the Prime

Minister told business leaders at the start of June that they were

not on the edge of a precipice, did he get it wrong? Should he have

asked for a bail-out sooner? Surely he was right to try to assuage the

concerns. A month earlier, when I was asked about what it would cost,

I said it was going to cost at least 100 billion. P Way

underestimated and waited too long. I think a lot of time was wasted.

For political reasons? Exactly. The markets today move in nanoseconds.

When I was working in Latin America and Asia the technology did not

move as fast. Today, the markets see promises being made are not

kept. They move against you, which is why the Costa Spanish bonds

zoomed up over 7%. -- cost of. talk about Spanish bonds because EU

leaders are trying to work in concrete initiatives to try to

defuse the debt crisis. When keeping may have to do is to bring

down the costs of borrowing. Let's have a look at the idea of Euro

bonds. Basically and one -- a bond is an IOU issued by a country or

company. The thought is if you have any you one then strong countries

will pull up the weaker ones so that the cost of borrowing is not

high. Let me tell you what I think is going to happen. There is a

meeting of European leaders this Friday in Rome. I think they are

going to talk about using the stability facility as a backstop,

both for Spain and Greece. They have already done this with Greece

and Italy. I think that this was an idea that came up from the G20

summit. I think it is probably not going to wait until the full summit

at the end of the market. I think the Germans will not agree to a

Euro bonds until they see the fiscal package approved. It has not

yet been implemented. 1 euros bonds, you say that the Germans are going

to absolutely resist this and it will not come in at all. They have

been very reluctant to accept it. think eventually it will. When they

see progress on the fiscal side. I think something is to be done more

immediately and that is why the big topic of conversation is going to

be some sort of package in Rome. You have the top four countries in

the eurozone. One of the things they will talk about his Mario

Monti's suggestion to use the stability fund to backstop but

Spain and Italy. How they backstop them, by going back into the market

and buying the bonds. When you mention the Brady bonds that you

dealt within the lectern American debt crisis, do you see parallels

there between the Brady bonds and the eurobond? I think it is

different, but I think what is important is the Brady plan was one

of growth so that the countries involved saw the way to growth.

Until you can get to growth, you can only push austerity so far. So

I think Mario Monti's idea of using the stability fund to go into the

markets is a distinct possibility. That is what the ECB they were

waiting for the -- that is what the ECB did last year. They were

waiting for the politicians to support the countries in the market.

Then there was this idea of a banking union, which the Germans

are kicking into touch. George Osborne has said he thinks there

are signs that the eurozone is moving towards richer countries

standing behind their banks and also standing behind the weaker

countries. Not everybody thinks it is a great idea. Britain would not

be part of that because it is not in the eurozone. It is Peter Hardy

respected commentators, they say it would be like giving southern

Europe a credit card -- if you speak. This is why that -- many

people feel Angela Merkel would be pushing on this fiscal pack. There

is a word in the Portuguese and Spanish that means you have to do

it as a package. They need to do it very quickly because if not you

will see a continuing erosion of the cost of these bonds in both

Spain and Italy. You cannot have that happen. This whole idea of a

closer fiscal and political union, I mean if you look at recent

opinion polls, their majorities right across Europe of people

saying they do not want to yield sovereignty on budgetary matters to

a central authority. It is not very popular. I think it will be very

difficult. I listen to your Prime Minister and President Obama and

they both talked about progress being made towards this and we'll

see what kind of progress is made when this meeting takes place in

Rome. Also in the four EU meeting at the end of the month. I think

something has to give because you cannot have a continuing cost of

that you have in Spain, both in the banking system and in the cost of

bonds. Also in Italy, we are talking about the third and fourth

largest economies. You mentioned growth, but looking at growth first

as austerity, which is how the debate is often pitched, there is

muddled thinking on debt over indebted governments can spend

their way out of the crisis. Is that what you're suggesting? There

is an American expression, walking and chewing gum. I think you need

fiscal reform, but he wasn't it a path to growth. Here in England

people were talking about that last week. There is a recognition that

you have to move ahead on this. interest rates, credit easing, new

infrastructure projects, that kind of thing? Reduce the cost of

funding by extending long-term its liquidity? There are a couple of

things I would do. One would increase the involvement of the

public sector. I think the ECB has to get more active in issuing more

bonds of their own poor infrastructure and I think that the

ECB should invest in their own structure. Citibank is one of the

world's oldest financial institutions. I am an adviser one

day a week. I retired 2.5 years ago. When you see now how reviled a lot

of pain bizarre and people asking for more controlled regulations, if

you knew now - would you go into begging now? -- banks are. One of

the things people have to understand is that if you do not

have based you didn't have intermediaries to lend. If you do

not have lending, you do not have growth. I think banks have to

reassess their resistance and regulators have to do their job. I

think also you have to make sure that the pay system in the

financial industry in general is something that the boards, the

senior management and shareholders can agree it is a reasonable figure.

Because the CEO of Citibank currently had a $15 million salary

turned down by the shareholders, didn't he? He would for a couple of

years for $1 a year. Would you go into begging now if you are

starting again? I guess looking back, the answer is yes. If you