Econ mom sees complex Greek derivatives in a kabaddi match

It had stopped raining. With the fresh air beckoning to me, I put on my shoes and decided to go for a long walk. As I walked down the staircase, I noticed that the kids seemed to be answering to the same kind of beckoning. The whole bunch was downstairs, squabbling loudly as to what game should be played to make the most of the good weather. “Hide n Seek!,” suggested a little girl shyly. “No! Some of our hiding places are still damp!” After some time, the majority agreed that Kabaddi was in order.

I was amused to see that the children already had identified who the captains of the two sides would be. These were the bigger, more burly and mature kids of the block. It was now for the captains to choose their teams. This was the most serious thing in the game, I could make out.

“Yash!”said one captain. “Viraj!” said the other. “Meera” was followed by “Aditya” and then by “Tanvi” and “Rhea”…As the children got grouped into two sides, the team members started advising their captains about which other kids would strengthen their team. “Don’t, don’t choose Nilesh, choose Soham instead ,” said one of the kids to his captain. Little Nilesh looked rather hurt, I thought, but my walk pulled me away from the scene.

Later that evening, I asked Lil One, “Why doesn’t any team want Nilesh on its side? I thought he was going to cry…it’s very unfair of you all.” Lil One looked up indignantly. “Mom, this is not about emotions, ok?” Wow, I thought, what mature thoughts kids have at times. “It’s not that we don’t want Nilesh, but the team becomes weak if you take all smaller players just because they’ll feel bad.” Hmm, the chain can only be as strong as the weakest link. “Elders never understand these things. Last time, Aryan (who doesn’t stay in our society) had come to play with us and Sheela aunty told us that he had qualified for his school team and so we took him in our team. And then, we realized that he actually was a pretty bad player. God, we lost so badly that day, Ma. And Sheela aunty says how does it matter and its only a game. But it’s important for us! You elders would never understand.. ” The childish bickering continued…

The basic rule of any team game. The team can only be as strong as its weakest player. If kids can understand this, why couldn’t the Eurozone economists? The leader of the game, or the “core” as it is called, is obviously the most  burly, the strongest kid on the block. Germany. Germany may have excellent fundamentals by itself, but it would be impossible to pull off wonderful growth trajectory for the entire region if you insist on creating a United States of Europe as a matter of misplaced pride. Because it isn’t about emotions, you see.

And then, the Sheela aunty factor. The pushy aunt, who conceals the truth and makes sure that her favourite kid is pushed into the team. An aunt called as Goldman Sachs. The main problem that Greece had in 2001 was that it was heavily indebted and that too in dollar and yen terms. It was needed to not only trim down the level of existing debt, but also show a declining trend in terms of the public debt ratio as an entry level criterion of the Maastricht treaty.

Now, one way to trim down the existing level of debt is to ahmmm….hide it! Well, now, how can you just mask millions of dollars worth of public debt? So, Greece was given a rather helpful hand by the investment bank Goldman Sachs. While the actual cross currency swap operation is a little complex, let me just explain it here simply by giving a smallish example. For starters, let me say that what is hidden, is not necessarily illegal. So, Goldman Sachs practiced the oldest art in the derivatives market in order to legally help Greece mask their public debt. Here’s a quick peek into the devious tactics used by Sheela Sachs aunty.

Let us assume that the spot market exchange rate is 1.11 dollars per Euro. Let us further assume that Greece raises debt of $1.11 billion, on which it pays 5% interest bi-annually. Now, since Greece would want to use the money domestically, it needs to change the dollars into Euros. At what rate, really, is the question. If you change $1.11 billion into Euro at the going spot rate, then you are entitled to receive 1 billion Euros against the $1 billion that you have.

Enter Goldman Sachs. What GS does is that it offers to exchange $1.11 billion into Euro at a rate that is decidedly different from the spot rate. Thus, if GS were to use a reference rate of 1.08 dollar to the Euro, you can see that it’ll give Greece 1.02 billion Euro against the same $1.11 billion. That it’ll further hedge its risk exposure is again a given. In the meanwhile, Greece looks fundamentally much, much brighter due to the additional 0.02 billion Euros it has received in the transaction. If GS hedges itself right, it too makes money in the market and it’s a win-win for both aunty and Nilesh. The problem is that the team suffers.

Till when can this delicate cycle continue? To the point where GS has the financial muscle to pull this off. Come 2008 and the entire public debt issues and the murky derivatives around it came crashing down Eurozone’s ears in one of the most resounding crashes in recent financial history. Greece was given two huge bailouts by the Troika (EC, ECB and the IMF) to stabilize and was also offered a “haircut” i.e. trimming of the debt given by the Troika by about 50%. Of course, the Greeks want a trimming to the tune of 60%, one of the many reasons for the very stale “stalemate” between Greece and the EU.

“All my homework is completed,” said Lil One later that night as he got his notebook for me to sign. “And Teacher says that all boys who don’t get a haircut by Monday will be kept outside the classroom.” A haircut, so that the boys can be part of the team. Sigh.

 

 

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14 thoughts on “Econ mom sees complex Greek derivatives in a kabaddi match

  1. Econ mom, love your power of connection. Two stories running parallel, yet having an impact so powerful, nailed it! I love your approach to emotions. An ardent writer.

    Though i still feel a lil bad for Nilesh… Sigh 😉

    P.S: For once, something to do with Economics made sense to me. Thank you! 🙂

    Liked by 1 person

    • Hi there Abbas! Thank you for visiting the blog and thank you for your comment 🙂 Well, Econ Mom is very close to me too and I enjoy writing a new role for her in my EconSoap 😛 Keep reading, keep smiling! BTW, I liked the Letting Go theme immensely! You should write more 🙂

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    • Hi Amol! I am getting used to your visit on my blog 🙂 Thank you so very much for all your kind comments! And incidentally, no. I don’t think econ all the time but I guess it always stays in the sub-conscious level. And yes, once I get serious about publishing, I will definitely want to talk to you! Thank you again!

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  2. More than my visiting, I am really happy (amused actually) to keep coming to your blog and getting a superb perspective. I guess you could start thinking about the book as it takes time. I will be happy to edit..:-)

    Liked by 1 person

  3. Although this post is well-informative on positive aspect of events, its normative aspect seems heavily skewed towards one side. The simple analogy of kids playing kabaddi though helpful to grasp the periphery of the matter, fails to address the only thing it should be addressing.
    Every team has a weak link and every team has player who would cheat; sometimes, unfortunately, a single player will stand out and share both these traits simultaneously. The team ought to help the player overcome its weakness of play and character, not threaten by ordering a thousand pushups in an hour or by holding all of the player’s family members of present and the future for the player’s actions.

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    • But that is exactly where the role of regulation comes in. It is for regulation to make sure that the cases in which things go to a level where there are punitive austerity measures levied stand at a minimum. I have argued that what GS did was NOT illegal, but where were the regulators when such tricks were being tried out? The problem with Maastricht have been many; the big one has been that it has lax regulatory structures once you qualify.

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  4. good one ,manasi. you are weaving day to day situations so beautifully that we the laymans could gulp difficult matter easily thank you,

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  5. Hello Mam,
    Another wonderful piece of writing. I really love the way you make analogies between economics and real world..also liked the ending with parallelism in a ‘haircut’ and the ‘austerity measures’ offered to Greece…
    And ‘Aunty Sheela Sachs !!’ .. thats a really cool name ! 😀

    PS: joined here only to follow your blogs.Looking forward for more..

    Ankita,
    MBA 1, SIBM

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    • Ankita, thank you for all those comments! I really really hope that the blogs will offer you a fun way of looking at economics as we go along 🙂 Thank you once more and stay connected 🙂

      Like

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