Charles Dallara: The ultimate insider opens up

Sid Verma
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For 20 years, Charles Dallara worked the corridors of power in the financial community as managing director of the IIF. Then Lehman Brothers and the Greek crisis brought his role into the glare of publicity. As Dallara prepares to step aside, he considers the changes that have taken place in the banking industry, and the role the IIF has to play in its future.

It’s 1am on Thursday, October 27 2011. In the offices of Herman Van Rompuy, the president of the European Council, the then French president, Nicolas Sarkozy, and German chancellor Angela Merkel continue to strong-arm Charles Dallara, the lead negotiator for private creditors, in a make-or-break deal for the eurozone. The aim: compelling banks to swallow further losses on Greek sovereign debt holdings.

Global markets are poised on a knife-edge. A game of bluff – over what would be the largest sovereign debt restructuring in history – drags on. Merkel is civil. But in public comments in previous weeks, the chancellor had played hardball, suggesting Germany could stomach a Greek credit event amid bailout fatigue.

Meanwhile, Dallara, who is in charge of co-ordinating private-sector creditors in his capacity as head of the Institute of International Finance, touts the risk of a Lehman-like collapse in global markets if investors are forced to swallow an involuntary restructuring.

At the negotiating table, Sarkozy, as befits his bellicose demeanour, plays bad cop. He attempts to hector Dallara into offering deeper haircuts, citing how an unpopular deal would further bloody the reputation of the banking industry. Merkel, Sarkozy and Christine Lagarde, IMF managing director, are united as they draw a line in the sand: private-sector losses should help to stabilize Greece’s debt burden to 120% of GDP.

In the negotiations, Dallara, flanked by Jean Lemierre, co-chair of the private-creditor committee for Greece and former European Bank for Reconstruction and Development president, moots the prospect of deeper notional discounts than the 21% haircut offered earlier in the year. Dallara’s argument is seemingly gaining traction: the elusive 120% debt-to-GDP target shouldn’t serve as a dogmatic benchmark to calculate the necessary private-sector held debt losses but, rather, should influence Greek reforms and a rescue package over a medium-term economic cycle.

What’s more, face-value discounts need to be softened by big sweeteners from eurozone members to boost the value of remaining bonds, Dallara argues. After lambasting Dallara hours previously – with the double-edged taunt that his historically low poll numbers still make the French president eminently more popular than the bankers – Sarkozy relents: "You make your point well," he says in French.

With a deal of sorts taking shape, Dallara phones Josef Ackermann, the then chief executive of Deutsche Bank and chairman of the IIF board; and Douglas Flint, HSBC chairman; among others. He duly receives the green light from these crucial, battle-weary creditors and IIF confidants. Dallara is subsequently handed over a copy of the draft eurogroup communiqué by Merkel and entrusted to amend the language as he deems fit.

By around 5am, both parties, Dallara and Europe’s leaders, claim victory: a formal credit event is averted. Banks swallow a 50% haircut (later amended to a 53.5% face-value loss), with a low coupon. The taboo of the IMF and European Central Bank taking write-downs on their debt is avoided. A €100 billion debt reduction for Greece is facilitated. And global markets rally in tandem with a eurozone crisis package.

In the subsequent months, the IIF chief visits Athens multiple times – flanked by security whenever he ventures outside his hotel and government offices – to flesh out the terms of the historic voluntary private sector involvement (PSI) agreement. The deal is under siege amid the Greek referendum and objections from Luxembourg, among other factors. In one difficult meeting with the then Greek prime minister, Lucas Papademos, to discuss the coupon and maturity in the debt swap that would determine the losses for investors, Dallara takes Papademos out of the room, asking for the unwieldy circus of special advisers, junior ministers and aides along with high-ranking officials, to be downsized. An hour later, Papademos obliges and returns with half of his entourage.

These episodes highlight the IIF’s often-misunderstood role in international financial diplomacy and Dallara’s intimate involvement in the torturous Greek debt restructuring – the climax to a near two-decade career as head of the Washington-based institute.

Dallara, 63, the outgoing IIF managing director, has overseen the growth of the institute from its roots as an informal group of predominantly US and Japanese commercial banks that negotiated Latin American debt restructurings. Its expansion – and now direct involvement in sovereign debt restructuring in western Europe – is a microcosm for the shift in global financial power and the structural shifts in the financial industry. It operates today as a trade association for financial institutions with cross-border exposures of all stripes, including investment banks, asset managers and insurance companies. It now boasts a membership of 461 financial firms, around half headquartered in emerging markets, and last year picked up insurance companies with exposure to Greece. In short, the institute’s modest workforce, over 90 full-time employees, belies its strategic importance in bank lobbying on regulatory and sovereign debt affairs, research and industry coordination.