Angela Merkel finds her inner Teddy Roosevelt: Lessons from Santo Domingo

 It appears that the German government has just announced that it wants Greece to renounce its sovereignty in return for more credit. (Well, at least in return for the release of existing credit lines.) The idea isnt new: in 2002, two prominent economists seriously proposed that Argentina give up its sovereignty for five years. Of course, Argentina has done quite well for nine years by breaking all the rules, but it is far from clear that Greece could copy that, or that Argentina will continue to do well.

There is a historic parallel: the U.S. and the Dominican Republic in 1905. (Actually the U.S. and lots of Latin American countries, ranging as far afield as Peru and Bolivia, plus Liberia ... but let’s wait on that.) Short takeaway: Washington was way more generous back in those benighted days, with very little at stake, than Berlin is being today, despite massive repercussions for Germany if things go wrong.

The backstory was about what you might expect. The D.R. had defaulted; its government was facing multiple armed revolts; and the Germans were nosing around. This latter made Washington nervous that a rebel force (or one of the rapidly-changing governments of the day) might transfer a naval base to Germany in return for aid. In fact, after U.S. intelligence captured a letter from General Demetrio Rodríguez openly requesting aid for President Carlos Morales, Captain James Miller “invited” Rodríguez on board his ship, where he explained: “Neither he [Morales] nor anyone must think for a moment that Germany or any other foreign power could be situated in any portion of the Dominican territory.”

President Morales saw an opportunity. If he could convince the United States to take over his country’s customhouses, using the German threat as motivation, then he could kill three birds with one stone. First, having U.S. troops in the ports would remove them as strategic targets for rebel forces. Second, U.S. officials could manage the customhouses far better than corrupt Dominicans, thereby increasing revenue. Third, if the Americans could be convinced to skim a bit off the top and use that to guarantee debt repayments, then the D.R.’s borrowing costs would go down, and Morales could borrow more on top of the increased revenue. Win win win! Who needs sovereignty? (Two out of the three points, one might think, would apply to Greece today.)

Uncharacteristically, President Theodore Roosevelt (in his own words) chose to  “put off the action until the necessity became so clear that even the blindest can see it.” He was a bit worried that American public opinion might not be thrilled with the idea of involvement in somebody else’s civil war, not while the Philippine War had only just ended two year previously, and not with U.S. troops still fighting in Mindanao. So Roosevelt waited, and the Dominican situation got worse, and the Europeans kept nosing around, and American investors kept screaming, and finally in May 1904 the President proclaimed his famous corollary to the Monroe Doctrine. It read:

Any country whose people conduct themselves well can count upon our hearty friendship. If a nation shows that it knows how to act with reasonable efficiency and decency in social and political matters, if it keeps order and pays its obligations, it need fear no interference from the United States. Chronic wrongdoing, or an impotence which results in a general loosening of the ties of civilized society, may in America, as elsewhere, ultimately require intervention by some civilized nation, and in the Western Hemisphere the adherence of the United States to the Monroe Doctrine may force the United States, however reluctantly, in flagrant cases of such wrongdoing or impotence, to the exercise of an international police power.

Thing is, it still took a while to build support, and there was, you know, an election to win. President Roosevelt didn’t agree to Morales’s request until December 1904, a month after the U.S. presidential vote. The Senate, it turns out, had other ideas. Roosevelt decided that with the election past, that wasn’t a problem, and so the U.S. took over the customhours without a treaty on March 31, 1905.

Under the agreement, the U.S. directed 55% of customs revenue towards debt payments, but it did not do so mindlessly or automatically. Rather, it banked the money until February 1907, when it finally forced the D.R.’s creditors to accept a 50% haircut on their outstanding principal. (The average coupon was reduced to 5%.) In fact, if expropriation claims are excluded, creditors accepted a 57% haircut on their debt.

Moreover, the agreement worked: there was no austerity. Even after the U.S. took 55% off the top, government spending did not fall. Moreover, the D.R. managed to go to the capital markets as early as May 1907, when it refinanced its outstanding post-haircut debt of $15.8 million and borrowed an additional $3.9 million. ($3.9 million is, as a share of U.S. GDP, the equivalent of $1.7 billion in 2010.)

And therein lies the rub. Or rubs. First, the D.R. was not a democracy in 1904; Greece is one in 2012. Second, the D.R. asked for the receivership; the Greek government is not. Third, the U.S. used its good offices to obtain a very favorable debt restructuring; the E.U. (meaning the Germans, really) is letting Greece hash things out with its creditors on its own. Finally, in the case of the D.R. the U.S. really was able to improve custom collection; I’m not sure that anyone believes that a foreign administrator will be able to easily improve the Greek internal revenue service inside a culture of widespread evasion.

In other words, the U.S. was much more generous to its dirt-poor neighboring nondemocracy than the Germans are being towards their not-as-poor fellow democracy. Good luck with that. Unless, of course, failure is the plan.

Comments

[CG]

Two out of the three points, one might think, would apply to Greece today.

The third point is waiting to happen, and might make the Germans reconsider their plans.

Slow motion, though. Greeks are not likely to take up arms first; rather, many will move to other EU states to look for work. Your friendly Chistian Democratic government does not mind Greek immigration too much (no Muslims, after all) but German popular opposition to any sort of bailout is real, heavily working-class, and especially strong among folks who also oppose immigration. And if there's one thing in this crisis Merkel does personally care about, it's getting reelected. (Which is very likely barring serious economic trouble - e.g. such as would follow after an EU breakup. So I guess we won't see that either.)

[CG]

Btw, Greece has not really pushed this option yet.

[Will Baird]

I've been waiting for the folks over at A Fistful of Euros to post as a comment on this. I've heard snarks that this is makes Greece the first direct province of the EU. I don't quite buy it, but its an amusing comment.

May I ask what's taking so long for the creditors and Greeks to reach a deal? The Creditors are going to lose a lot more if Greece defaults and Greece will take it in the shorts (possibly Euro zone exit even) if they don't sort something out.

Then...Germany! Oh, Germany!

[CG]

Creditors are betting on Eurozone survival. (It's All or None, really.) Which will require (another) bailout.

[Bernard Guerrero]

Minor objection: in one sense, Greece is getting a similar service to that provided to the DR. That is, further aid has clearly been conditioned on the private creditor haircut taking place and being deep. So it's a bit of carrot & stick for the creditors. Take a haircut and have a real chance of making some money (for the recent buyers) or play hardball and watch Greece (and any hope of repayment) die.

[Bernard Guerrero]

Second minor objection: Isn't the relative lack of democracy in the DR one of the reasons the U.S. could be more generous than Germany is being with Greece? Morales could credibly commit to ceding some sovereignty. Further, the U.S. could thereafter do whatever it needed to in order to improve efficiency and reduce corruption. Finally, new creditors could expect the whole arrangement to stick. As the "failure is the plan" link notes, nobody expects to be able to change modern Greek political culture and make it stick.

[J.H.]

So Noel, have you read the news about the Dominican constitutional court ruling concerning the citizenship (or lack thereof) for the children of illegal migrants? Apparently it affects anyone after 1929 and could affect thousands of people. The reasoning is that Haitian migrants who came to work in the canefields after 1929 were in transit and their children were not automatically entitled to citizenship just because they were born in the DR. The reasoning (at least the reasoning reported) behind the ruling seems a little on the weak side to me.