Alcoholics, bar tabs, and bonds

I consider myself reasonably intelligent with a modicum of nous.  I make an effort to keep abreast of what’s going on in the world, particularly in my little corner here in Budapest. I read what I can, when I can. I ask questions. I initiate discussions. I’m not afraid to show my ignorance if I am sure of learning something by doing so. I will even own up to being irritating on occasion – following each pronouncement with a ‘but why?’ would drive any one patient enough to explain things to me to drink.

Above all, I know my limits. I will never, for instance, understand the crazy laws that threatens the closure of the Caledonia, a pub on Mozsár utca. Co-owner and friend, Zsuzsanna Bozo tried to explain it to me (bless her patience) but I just don’t get it. Why is having two bottles of the same booze open in a pub such a no-no? Why is having open bottles of booze in a kitchen when the menu clearly calls for alcohol as an ingredient a non-starter. So rather than waste any more of my limited brain cells in trying to make sense of it all, I turned my attention to less complicated matters: Economics 2012.

I was fortunate enough to meet an antipodean recently who had a handle on the whole thing and he explained it to me like this:

Imagine, Mary, that you own a bar in Budapest or in Dublin. It doesn’t much matter. You realise that virtually all of your customers are unemployed alcoholics and, as such, they can no longer afford to drink in your bar. To solve this problem, you come up with new marketing plan that allows your customers to drink now, but pay later. You keep track of the drinks consumed in a ledger (thereby granting the customers loans).

[‘mmm… what about the Government till’, I ask. He sighs: so your bar is in Dublin then.]

Word gets around about your ‘drink now, pay later’ marketing strategy and, as a result, more and more customers flood into your bar. Soon you have the largest sales volume for any bar in Budapest, sorry, I mean Dublin. You’re packed to the gills seven days/nights a week. Because your customers don’t have to pay immediately, they don’t complain when, at regular intervals, you substantiallyincreases your prices for wine and beer, the most consumed beverages.

[Got it… ]

Consequently, your gross sales volume increases massively. Now a young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets. So he increases your borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral. At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into Drinkbonds andAlkibonds.

[Idiot…]

These securities are then bundled and traded on international security markets. Naïve investors don’t really understand that the securities being sold to them as ‘AAA’ secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items forsome of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at your local bank decides that the time has come to demand payment on the debts incurred by the drinkers at your bar and he lets you know. You’ve no option but to demand payment from your alcoholic patrons. But they’re unemployed alcoholics and have no money so can’t pay their bar tabs. Since you can’t fulfil your loan obligations, you’re forced into bankruptcy. Your bar closes and eleven employees lose their jobs.

[Always the way – the employees suffer – same as the Caledonia!]

Overnight, Drinkbonds and Alkibonds drop in price by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the city. Your suppliers had granted you generous payment extensions and had invested their firms’ pension funds in the various Bond securities. They find they are now faced with having to write-off your bad debt and lose over 90% of the presumed value of the bonds. Your wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations. Your beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion euro no-strings-attached cash infusion from their cronies in government.The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in your bar.

‘Do you get it’, he asked, looking at me expectantly. I sighed… nodded… and said ‘I need a drink’.

First published in the Budapest Times 11 October 2012

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