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

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:00:09. > :00:12.Now on BBC News it is time for The new Greek government wants its

:00:12. > :00:16.EU and IMF creditors to soften the terms of its bail-out deal, which

:00:16. > :00:19.has heaped austerity on the Greek people. Meanwhile, the Spanish

:00:19. > :00:22.government wants its banking debt crisis to be seen as separate from

:00:22. > :00:30.the state of its public finances, and the EU is struggling to find

:00:30. > :00:40.solutions as the markets wonder what next. My guest today is Bill

:00:40. > :00:44.

:00:44. > :00:54.Rhodes, who, for 53 years, worked at Citibank. What is his advice to

:00:54. > :01:14.

:01:14. > :01:22.Bill Rhodes, welcome to HARDtalk. Thank you. It is a pleasure to be

:01:22. > :01:27.here. We have gone back and forth for a long time. You have been

:01:27. > :01:30.around for quite a while, talking to all sorts of people. If you were

:01:30. > :01:40.advising the new Greek government about trying to renegotiate its

:01:40. > :01:42.

:01:42. > :01:46.bail-out deal, what is the key bit of advice you would give? If you

:01:46. > :01:49.look at their debt to GDP, it is higher than any country I ever

:01:49. > :01:52.restructured. They are going to have a reopening of terms with the

:01:52. > :01:55.ECB, IMF and EU to buy more time to implement these measures and

:01:55. > :02:02.probably get a better deal on interest rates. Otherwise they are

:02:02. > :02:06.in their fifth year of recession. I call it a depression. The only way

:02:06. > :02:13.out for a country like Greece is growth. It is the same for Portugal,

:02:13. > :02:16.Ireland and Spain. When you speak about its debt to GDP ratio being

:02:16. > :02:26.high, about 163 %, it is very difficult for them to try and

:02:26. > :02:28.

:02:28. > :02:38.finance that. The EU, and Jean- Claude Juncker, has said as far as

:02:38. > :02:46.

:02:46. > :02:51.the austerity package goes, it is fine at present. They will discuss

:02:51. > :02:55.the time frame, but nothing else. think that is just the beginning.

:02:55. > :03:00.At the end of the day, the European Union and the eurozone want Greece

:03:00. > :03:03.to stay within the eurozone. The only way they can do that is if

:03:03. > :03:05.they get better terms instead. At the same time, they have to make

:03:05. > :03:14.themselves more competitive. They have to overhaul the tax system,

:03:14. > :03:22.start privatising. It is all a big order for the new government.

:03:22. > :03:25.that's all in the austerity package. Exactly. Looking at the

:03:25. > :03:29.negotiations and how the new leader of Greece goes about trying to get

:03:29. > :03:39.what he wants, you have to balance the interests of the Greek people

:03:39. > :03:40.

:03:40. > :03:43.and then the rest of the EU. The rest of the EU has to say the

:03:43. > :03:46.taxpayer in the EU is overburdened and cannot afford to give much more.

:03:46. > :03:50.At the same time the Irish and Portuguese are implementing their

:03:50. > :03:56.plans very well and will say if the EU gives more money to Greece, they

:03:56. > :03:59.will ask for more. If the EU wants Greece to stay in the eurozone,

:03:59. > :04:09.they have to buy time for the Government to implement the

:04:09. > :04:15.

:04:15. > :04:18.programme. How do you try to persuade the Germans? Everybody

:04:18. > :04:21.talks about the Germans as being key to all of this because they are

:04:21. > :04:24.the main paymaster to the EU. The Germans have already paid something

:04:24. > :04:33.like $500 billion for the bail-out packages for various European

:04:33. > :04:38.countries. How can you persuade the Germans to put the interests of the

:04:38. > :04:48.EU before their own? You have to have a balancing act here because,

:04:48. > :04:50.

:04:50. > :04:53.as you know, Chancellor Merkel has to run for re-election next year.

:04:53. > :04:56.If you had a floating Deutschmark, it would be way up and would

:04:56. > :04:59.curtail their exports. They have the best of both worlds. They have

:04:59. > :05:07.low interest rates and they have been able to take advantage of the

:05:07. > :05:17.exports. Angela Merkel recently said Germany's strength is not

:05:17. > :05:22.

:05:22. > :05:28.infinite. There is no doubt that Chancellor Merkel has to run again.

:05:28. > :05:37.She lost those two state elections. It is a balancing act. They want to

:05:37. > :05:40.keep the eurozone together for the reasons I gave. Aren't there risks

:05:41. > :05:45.to asking Germany to do more, or is Angela Merkel bluffing? What she's

:05:45. > :05:50.saying is what she believes. There are other players here. There is

:05:50. > :05:54.France with a new President, who just got the National Assembly. I

:05:54. > :05:58.think you will develop a partnership here. Then you have the

:05:58. > :06:04.situation with Spain and Italy. All four of these leaders are going to

:06:04. > :06:13.meet in Rome on Friday. What is important is what they come out

:06:13. > :06:17.with. There is a lot of rumours about what they are going to do to

:06:17. > :06:23.support both Spain and Italy. This is what Mario Monti is advocating.

:06:23. > :06:26.We will talk about the solutions in a moment. But looking at the

:06:26. > :06:30.questions of the debt, the deputy finance minister of Germany has

:06:30. > :06:33.said the debt is a national responsibility. Greek debt should

:06:33. > :06:40.be Greek debt and Italian debt should be Italian debt. Who owns

:06:40. > :06:45.the debt? I think that is why the Germans do not support Euro bonds.

:06:45. > :06:48.What they are saying is they want a fiscal pact first. That was the

:06:48. > :06:58.intention and announcement of the heads of state of the eurozone in

:06:58. > :07:02.

:07:02. > :07:05.March. As you know, Maastricht, which was supposed to be the fiscal

:07:05. > :07:11.part of the Union - the treaty spoke about limits on expenditure

:07:11. > :07:19.and was violated first by France and Germany. So Germany deserves

:07:19. > :07:22.what has happened then? What Germany is looking for is to say,

:07:22. > :07:32.all of us made a mistake, so let's get back on track again and let's

:07:32. > :07:32.

:07:33. > :07:35.get this fiscal pact to match the monetary union that we have.

:07:35. > :07:45.Germany's position has always been having a closer fiscal and

:07:45. > :07:47.

:07:47. > :07:54.political union. Asking about this question of debt. You were heavily

:07:54. > :08:00.involved in restructuring of debt of other countries. What kind of

:08:00. > :08:03.skills does the financial diplomat need? That is what you have been

:08:03. > :08:06.described as and what you talk about in your new book, 'Banker to

:08:06. > :08:12.the World'. One of the things you learn early on is that every

:08:12. > :08:16.country is different. Greece got into the problem because of their

:08:16. > :08:19.over borrowing. In the case of Ireland, it was the banks that

:08:19. > :08:29.dragged the sovereign down. In the case of Portugal, it was no growth

:08:29. > :08:30.

:08:30. > :08:34.for ten years. In the case of Spain, it was the banks over lending. In

:08:34. > :08:40.Italy, it was a high GDP to debt ratio. There was one thing that was

:08:40. > :08:43.similar. In all the situations it was contagion. When I first tried

:08:43. > :08:52.to mention that to European leaders in January, 2010, they said, that

:08:52. > :08:55.is for emerging market countries like Latin America and Asia. They

:08:55. > :08:59.have learned the hard way that contagion is real and is one of the

:08:59. > :09:09.things they are facing now. They must come up with the solutions

:09:09. > :09:26.

:09:26. > :09:28.this year or I think the euro is going to be in danger. Just take us

:09:28. > :09:31.behind the scenes about how you negotiate, whether you are trying

:09:31. > :09:34.to restructure sovereign debt or dealing with financial institutions.

:09:34. > :09:37.What are the actual skills that somebody would need? Timing is of

:09:37. > :09:41.the essence in crises. You do not have unlimited timing. In the

:09:42. > :09:44.eurozone we have had 2.5 years. Timing is of the essence. The

:09:44. > :09:51.quicker you can put together an arrangement on debt, the more

:09:51. > :09:55.successful it will be. Then you get the country back to the markets. It

:09:55. > :10:01.doesn't need external aid because the private market will support it.

:10:01. > :10:11.I think this is one of the mistakes that was made. But the mechanics,

:10:11. > :10:13.

:10:13. > :10:16.what happens? You describe in your book how you take the parties

:10:16. > :10:21.involved in negotiations into a room, switch off the air-

:10:21. > :10:25.conditioning to make sure they are perspiring in order to get a deal.

:10:25. > :10:28.I think what you have to do is to get a consensus and tell people

:10:28. > :10:31.they cannot leave until they get an arrangement. That goes into the

:10:31. > :10:41.timing question. You have to have a consensus and let everyone have a

:10:41. > :10:48.

:10:48. > :10:51.say. You cannot force something down someone's throat. When you say

:10:52. > :10:55.you have to wear people down or make sure they all have a chance to

:10:55. > :11:01.state their case, can this go into the early morning hours or should

:11:01. > :11:11.there be a break? Sometimes it goes for two or three days. But you have

:11:11. > :11:16.

:11:16. > :11:19.to set a timeline. One of the lessons for Europe is when they

:11:19. > :11:23.have all of these summits you didn't get a timeline on when it is

:11:23. > :11:27.going to be achieved. That is one of the lessons are in my book. You

:11:27. > :11:30.have to have a timeline. We are going to get this done by X time.

:11:30. > :11:33.The European leaders are not working quickly enough? Exactly. I

:11:33. > :11:39.think they underestimated contagion and I think we need to see the

:11:39. > :11:43.leadership now. I think the only reason the ECB has not dropped

:11:43. > :11:46.interest rates over the last month or so is because they are putting

:11:46. > :11:48.pressure on the political leaders to come up with some sort of

:11:48. > :11:58.package on regulation across the eurozone. Also, people are looking

:11:58. > :12:01.at an insurance scheme. You say that the EU could have learned from

:12:01. > :12:11.the problems of debt crises in some of the emerging markets.

:12:11. > :12:14.

:12:14. > :12:16.eurozone. When you are dealing with a regional grouping like the

:12:16. > :12:19.eurozone, surely that is quite different than when you're dealing

:12:19. > :12:22.with an individual nation like Argentina? What you have is

:12:22. > :12:27.individual countries. Every country is different. Every country has its

:12:27. > :12:32.own characteristics. Each one of these countries got into a problem

:12:32. > :12:41.in its own way. But you have to have a common solution, don't you?

:12:41. > :12:44.That is where they are now. Doesn't that make the decisions much harder

:12:44. > :12:49.if you are being employed in this role? That was all the more reason

:12:49. > :12:52.to start earlier on and not let get so much time go by. We have talked

:12:52. > :12:55.about Greece, which is trying to get its national debt softened, but

:12:55. > :12:58.looking at Spain, which has been a major preoccupation for the

:12:58. > :13:02.eurozone at the moment - in fact if you look at the borrowing costs,

:13:02. > :13:05.they are much higher than Greece at the moment - why, do you think,

:13:05. > :13:15.that there isn't as much talk about Spain leaving the euro as there is

:13:15. > :13:17.

:13:17. > :13:25.about Greece? Spain is a real key because they are the fourth largest

:13:25. > :13:28.economy in the eurozone. Getting the banking system is key because

:13:28. > :13:33.one of the things that I think everyone has seen is that banks and

:13:33. > :13:36.sovereigns are inextricably linked. And so, if you do not have the

:13:36. > :13:41.banking system in shape to the end, you're not going to have growth. If

:13:41. > :13:44.you don't have growth, there is no way out. It cannot have continual

:13:44. > :13:53.recession, austerity and depression. You have to convince the people of

:13:53. > :13:58.the country that there is growth at To pick up what you said there, you

:13:58. > :14:03.said when the Spanish government at the beginning of its debt crisis

:14:03. > :14:07.said it is a banking problem, you were suggesting that is a force to

:14:07. > :14:11.distinction because they are linked. You have the banks buying

:14:11. > :14:18.government debt to support the state and governments guarantee the

:14:18. > :14:22.liabilities of banks. It is a false distinction. The problem was they

:14:22. > :14:25.kept putting out estimates of what it would cost. First it was 20

:14:26. > :14:30.billion euros then it was 50 billion euros. Now the figure has

:14:30. > :14:35.come out to be 100 billion. There is a report coming out in the next

:14:36. > :14:39.few days by an independent group that is auditing the situation for

:14:39. > :14:43.the Spanish government and the central bank as to what the

:14:43. > :14:46.reserves and write-offs have to be. And this is very important because

:14:46. > :14:53.if you do not get that settled, the markets are going to keep pushing

:14:53. > :14:56.up the spreads and the cost of Spanish bonds. When the Prime

:14:56. > :15:05.Minister told business leaders at the start of June that they were

:15:05. > :15:09.not on the edge of a precipice, did he get it wrong? Should he have

:15:09. > :15:16.asked for a bail-out sooner? Surely he was right to try to assuage the

:15:16. > :15:22.concerns. A month earlier, when I was asked about what it would cost,

:15:22. > :15:32.I said it was going to cost at least 100 billion. P Way

:15:32. > :15:33.

:15:33. > :15:41.underestimated and waited too long. I think a lot of time was wasted.

:15:41. > :15:45.For political reasons? Exactly. The markets today move in nanoseconds.

:15:45. > :15:51.When I was working in Latin America and Asia the technology did not

:15:51. > :15:55.move as fast. Today, the markets see promises being made are not

:15:55. > :16:03.kept. They move against you, which is why the Costa Spanish bonds

:16:03. > :16:06.zoomed up over 7%. -- cost of. talk about Spanish bonds because EU

:16:06. > :16:11.leaders are trying to work in concrete initiatives to try to

:16:11. > :16:15.defuse the debt crisis. When keeping may have to do is to bring

:16:15. > :16:20.down the costs of borrowing. Let's have a look at the idea of Euro

:16:20. > :16:27.bonds. Basically and one -- a bond is an IOU issued by a country or

:16:27. > :16:30.company. The thought is if you have any you one then strong countries

:16:30. > :16:38.will pull up the weaker ones so that the cost of borrowing is not

:16:38. > :16:42.high. Let me tell you what I think is going to happen. There is a

:16:42. > :16:47.meeting of European leaders this Friday in Rome. I think they are

:16:47. > :16:52.going to talk about using the stability facility as a backstop,

:16:52. > :16:58.both for Spain and Greece. They have already done this with Greece

:16:58. > :17:02.and Italy. I think that this was an idea that came up from the G20

:17:02. > :17:08.summit. I think it is probably not going to wait until the full summit

:17:08. > :17:13.at the end of the market. I think the Germans will not agree to a

:17:13. > :17:18.Euro bonds until they see the fiscal package approved. It has not

:17:18. > :17:24.yet been implemented. 1 euros bonds, you say that the Germans are going

:17:24. > :17:30.to absolutely resist this and it will not come in at all. They have

:17:30. > :17:34.been very reluctant to accept it. think eventually it will. When they

:17:34. > :17:37.see progress on the fiscal side. I think something is to be done more

:17:37. > :17:42.immediately and that is why the big topic of conversation is going to

:17:42. > :17:45.be some sort of package in Rome. You have the top four countries in

:17:45. > :17:52.the eurozone. One of the things they will talk about his Mario

:17:52. > :17:57.Monti's suggestion to use the stability fund to backstop but

:17:57. > :18:04.Spain and Italy. How they backstop them, by going back into the market

:18:04. > :18:12.and buying the bonds. When you mention the Brady bonds that you

:18:12. > :18:17.dealt within the lectern American debt crisis, do you see parallels

:18:17. > :18:24.there between the Brady bonds and the eurobond? I think it is

:18:24. > :18:28.different, but I think what is important is the Brady plan was one

:18:28. > :18:38.of growth so that the countries involved saw the way to growth.

:18:38. > :18:39.

:18:39. > :18:47.Until you can get to growth, you can only push austerity so far. So

:18:47. > :18:54.I think Mario Monti's idea of using the stability fund to go into the

:18:54. > :19:00.markets is a distinct possibility. That is what the ECB they were

:19:00. > :19:04.waiting for the -- that is what the ECB did last year. They were

:19:04. > :19:09.waiting for the politicians to support the countries in the market.

:19:09. > :19:13.Then there was this idea of a banking union, which the Germans

:19:13. > :19:16.are kicking into touch. George Osborne has said he thinks there

:19:16. > :19:21.are signs that the eurozone is moving towards richer countries

:19:21. > :19:26.standing behind their banks and also standing behind the weaker

:19:26. > :19:32.countries. Not everybody thinks it is a great idea. Britain would not

:19:32. > :19:34.be part of that because it is not in the eurozone. It is Peter Hardy

:19:34. > :19:43.respected commentators, they say it would be like giving southern

:19:43. > :19:51.Europe a credit card -- if you speak. This is why that -- many

:19:51. > :19:54.people feel Angela Merkel would be pushing on this fiscal pack. There

:19:54. > :19:59.is a word in the Portuguese and Spanish that means you have to do

:19:59. > :20:02.it as a package. They need to do it very quickly because if not you

:20:02. > :20:09.will see a continuing erosion of the cost of these bonds in both

:20:09. > :20:12.Spain and Italy. You cannot have that happen. This whole idea of a

:20:12. > :20:15.closer fiscal and political union, I mean if you look at recent

:20:15. > :20:20.opinion polls, their majorities right across Europe of people

:20:20. > :20:25.saying they do not want to yield sovereignty on budgetary matters to

:20:25. > :20:31.a central authority. It is not very popular. I think it will be very

:20:31. > :20:33.difficult. I listen to your Prime Minister and President Obama and

:20:33. > :20:36.they both talked about progress being made towards this and we'll

:20:36. > :20:42.see what kind of progress is made when this meeting takes place in

:20:42. > :20:47.Rome. Also in the four EU meeting at the end of the month. I think

:20:47. > :20:50.something has to give because you cannot have a continuing cost of

:20:50. > :20:57.that you have in Spain, both in the banking system and in the cost of

:20:57. > :21:04.bonds. Also in Italy, we are talking about the third and fourth

:21:04. > :21:11.largest economies. You mentioned growth, but looking at growth first

:21:11. > :21:15.as austerity, which is how the debate is often pitched, there is

:21:15. > :21:21.muddled thinking on debt over indebted governments can spend

:21:21. > :21:30.their way out of the crisis. Is that what you're suggesting? There

:21:30. > :21:37.is an American expression, walking and chewing gum. I think you need

:21:37. > :21:43.fiscal reform, but he wasn't it a path to growth. Here in England

:21:43. > :21:48.people were talking about that last week. There is a recognition that

:21:48. > :21:51.you have to move ahead on this. interest rates, credit easing, new

:21:52. > :21:57.infrastructure projects, that kind of thing? Reduce the cost of

:21:57. > :22:01.funding by extending long-term its liquidity? There are a couple of

:22:01. > :22:06.things I would do. One would increase the involvement of the

:22:06. > :22:14.public sector. I think the ECB has to get more active in issuing more

:22:14. > :22:21.bonds of their own poor infrastructure and I think that the

:22:21. > :22:27.ECB should invest in their own structure. Citibank is one of the

:22:27. > :22:33.world's oldest financial institutions. I am an adviser one

:22:33. > :22:43.day a week. I retired 2.5 years ago. When you see now how reviled a lot

:22:43. > :22:53.of pain bizarre and people asking for more controlled regulations, if

:22:53. > :22:55.

:22:55. > :22:58.you knew now - would you go into begging now? -- banks are. One of

:22:58. > :23:00.the things people have to understand is that if you do not

:23:00. > :23:06.have based you didn't have intermediaries to lend. If you do

:23:06. > :23:12.not have lending, you do not have growth. I think banks have to

:23:12. > :23:18.reassess their resistance and regulators have to do their job. I

:23:18. > :23:23.think also you have to make sure that the pay system in the

:23:23. > :23:28.financial industry in general is something that the boards, the

:23:29. > :23:33.senior management and shareholders can agree it is a reasonable figure.

:23:33. > :23:38.Because the CEO of Citibank currently had a $15 million salary

:23:38. > :23:44.turned down by the shareholders, didn't he? He would for a couple of

:23:44. > :23:48.years for $1 a year. Would you go into begging now if you are

:23:48. > :23:53.starting again? I guess looking back, the answer is yes. If you