Why The Lessons Of New York City's Debt Crisis Won't Help Greece

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Should Greece look to the example of New York City to solve it’s debt problems?

Barry Ritholtz has a thoughtful essay comparing the 1970s debt problem of New York City to those of Greece. Both stemmed from out of control public spending and public borrowing, fuelled in part by financial shenanigans that included selling future revenue streams that masked debt. Like Greece, New York’s indebtedness and its deficit was revealed to be far higher than commonly understood–and much of it was in short term debt that needed to be quickly refinanced. When it comes to the origins of the Greek debt crisis, New York City should have served as a warning sign reading: disaster lurks here.

Unfortunately, the problem faced by Greece is far worse than the problem faced by New York. And New York’s debt problem was far worse than people think nowadays–and the resolution of the crisis hardly the panacea many now think.

As Ritholtz points out, New York State responded with the creation of the Municipal Assistance Corp, which was known as “Big Mac.” Big Mac extended the short term debt to longer term bonds, in part by converting some city taxes to state revenues that were used to guarantee Big Mac bonds. Both the state and federal governments also came thought with financial relief, despite what you might have heard about President Ford telling New York to “drop dead.” City payrolls were massively cut and the City’s pension funds were required to buy Big Mac bonds.

Much of that is impossible for Greece. In the first place, many of New York’s bondholders were wealthy New York City residents and locally based financial institutions. These bondholders exerted their political influence to demand the necessary budgetary reforms. The people of Greece and Greek financial institutions own a much smaller percentage of Greek government debt, which means that they lack the incentive to demand reform. Instead, much of the demand for budget deficit reduction is coming from outsiders, the leaders of Germany and the European Union. They lack political clout within Germany, however, which makes the odds of reform much longer.

The New York City bondholders also had an incentive to compromise. They recognised that a bankrupt New York City would be both humiliating and perhaps unlivable. The values of their Park Avenue apartments would plummet. So they made concessions to keep the city afloat. The Greek bondholders don’t much care about what happens to life in Greece, and so they have little incentive to concede. What’s more, they expect that the Germans will come through with a bailout because of the desire to keep the Euro intact as a viable currency.

New York City also had financial resources that Greece lacks. Eventually, some 40% of the city’s pension funds were invested in the Big Mac Bonds. The Greek pension system is so broken that it cannot afford to buy new bonds to bail out the Greek government.

It’s also worth noting that New York City paid a heavy price for its budgetary reforms. The punitive cuts in city payrolls triggered a flight of the “white ethnics” from the city. The old municipal jobs weren’t available anymore so the incentive to stick around was gone. Neighborhoods were abandoned and parts of the city became ‘no go’ zones for many of the residents who remained. Crime lurched upward and would continue to climb for a decade and half. The murder rate wouldn’t peak until 1990. The city’s education system was all but destroyed, with drop-out rates skyrocketing. New York City had escaped a debt crisis but found itself in a crime, population, and educational crisis that would last for decades.

It’s far from clear that Greece could survive a similar crisis on a national scale.

What’s more, the New York City rescue was not without financial scandal. As Ritholtz points out, Big Mac was run by Felix Rohatyn, whose family of wealthy Viennese bankers had fled from the Nazis to New York during World War Two. After his parents divorced, his mother remarried Henry Plessner, a partner of Lazard Frères in its Paris branch. The bank gave Felix a summer job at the New York branch of the bank while he was still in college. When he graduated in college, Felix went to work in Paris for the senior partner of the bank, Andre Meyer.

After New York City’s financed had been somewhat stabilised, Rohatyn returned to Lazard Frères. In March of the following year, Big MAC announced that it had selected Lazard Frères as its financial adviser. Mayor Ed Koch denounced the arrangement as a “moral conflict of interest.” Lazard was forced to step aside as financial adviser.

In short, Greece probably cannot go the way of New York City in addressing its debt problems. And, even if it could, it probably shouldn’t and doesn’t want to.

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