<table><tr><th>From:</th><th>Ed &lt;</th></tr><tr><td>Sent:</td><td>Tuesday, June 12, 2012 1:48 PM</td></tr><tr><td>To:</td><td>Epstein, Jeff</td></tr><tr><td>Subject:</td><td>DSK and the Euro Crisis (My Counter history)</td></tr></table>

The Greek election this Sunday could lead to Greece's exit from the =uro, and, if that happens set off the Doomsday clock for the global =inancial system. Could this disaster have been averted if Dominique =trauss-Kahn had kept his appointment in Berlin instead of going to =ail?

DSK: The Counter-History

By Edward Jay Epstein

The 1998 movie Sliding Doors illustrates the contingent nature of =eality. At the outset of the film, the character Helen, played by Gwyneth Paltrow, rushes to the =ubway after she's fired from her job, but when she reaches it, the =rain's doors slide closed. If she'd gotten there one second =arlier, she would have caught the train. The movie then splits into =wo separate stories. In the first, Helen slips onto the train before =he doors shut. She then gets home to find her lover with another =oman, which causes her to leave him, move out, and find a new lover. =n the second story, Helen misses the train, which causes her to have a =inor accident, and, as she gets home too late to discover her =over's infidelity, she stays with him.

The Sliding Doors principle could similarly have changed the story =or those in the presidential suite at the Sofitel at 12:06 P.M. on May 14, 2011. At =hat moment, DSK had been taking a shower. The maid, Nafissatou Diallo, was making her second =ntry into the suite without her cleaning equipment. If DSK had stayed in the shower for just a few =ore seconds, Diallo might have heard the shower or seen other signs that the suite was =ccupied. Since maids at the Sofitel are not supposed to clean rooms while guests are in them, she =resumably would have exited the suite before he emerged from the bathroom. She would then =ave returned to room 2820, where she had left her cleaning cart, and, as the guest in that =uite had checked out, she would have finished cleaning it. She would not have encountered DSK, =or would she have had a

degrading sexual experience between 12:06 and 12:13 P.M. She would not =ave had to wait more than an hour near the employee entrance. She =ould not have been taken to Roosevelt-St. Luke's Hospital to be =xamined. She would not have testified before a grand jury, told =alsehoods under oath, or had her creditability impugned by prosecutors =nd the judge, who dismissed the charges against DSK. Nor would she =ave seen her photograph on the cover of Newsweek, multi-million-dollar been interviewed payment on =ood to her. Morning =nstead, America, if the or sliding filed shower a civil suit door against had opened DSK, which, differently, if =uccessful, she would could =ikely result still in be a cleaning rooms on the 28th floor of the Sofitel.

DSK's story would also be very different. But how? On April 13, =012, I met with him at the elegant Pavillon de la Reine in the Place des Vosges to discuss =hat might have happened if that sliding door had opened. He a had a very clear memory of what he =ad planned to do on that fateful day. He said he'd been rushing to get dressed when he opened =he bathroom door and

encountered the maid. But what if he had stayed in the bathroom a few =ore seconds and not encountered the maid? I asked.

He would have gotten dressed, finished packing his single suitcase, =nd left, which would have taken about five minutes. Since it then would have only been 12:11=.M., he would not have been running behind schedule, so he would not =ave had to call his daughter Camille on the IMF BlackBerry that he =sually kept in his jacket pocket. If he had not called her, he might =ot have left the phone in a place from which it would go missing. He =ould have checked out, caught a taxi on 44th Street, and gone to the =esignated restaurant to meet his daughter and her new boyfriend. After =unch, he would have caught a cab to JFK in time to catch Air France =light 23, which left at 4:50 P.M. He would then have tried to sleep on =he transatlantic flight, since he had a busy agenda on Sunday.

The plane would have arrived at Charles de Gaulle airport at 6:01=.M. on Sunday, May 15. That morning, he would have given his BlackBerry, assuming he still =ad possession of it, to security experts arranged by his advisor Stephane Fouks. Two months =arlier, his security team had installed encryption software on the phone, but then, for an =nknown reason, the phone began to fail, so the software had recently =een removed. But he now feared his phone had been compromised, and, if the experts found concrete evidence of =ophisticated tampering, he would know that he was under surveillance and take appropriate counter =easures.

Because DSK had a 3:00 P.M. appointment with German Chancellor =ngela Merkel, he would then have boarded a fight to Berlin that morning. Merkel does not =ften hold meetings on Sunday, but DSK had insisted on it when he was in Washington, DC. He =rgently needed to discuss "Comprehensive," the code name for a secret plan he had =een working on at the IMF to avert the Greek financial crisis. The plan essentially provided an IMF =ask for the members of the euro zone to absorb the entire Greek =overnment debt

DSK knew that Germany was the key to solving the Greek problem: =nce Germany agreed to his plan, Sarkozy, who 0SK knew enjoyed dramatic =escues, would join Merkel. The other countries in the euro zone would =ollow suit. Over the past year, DSK had developed a close working =elationship with Merkel. They could discuss their complex issues in =erman, a language he was fluent in. He also understood the German =bhorrence to incurring debt that could not be repaid. As he explored =he political scenario with Merkel that January, it had become clear to =im that Merkel would need time to overcome this barrier.

But time was running out that Spring. Yes, he agreed with her, =reece was only two percent of the economy of the euro zone, but even =o this unpayable debt was a "cancer" that, if allowed to metastasize, would destroy credibility in the financial =arkets of other member countries, including Spain, Italy, and Portugal, and could unravel the =ntire euro zone. Greece could not solve the problem itself: No matter how much it cut =xpenditures, it could not repay the debt, which would only grow as interest rates rose. Providing Greece =ith loans was also not the answer. So pragmatism had to replace ideology.

This was not just a dilemma in which there were two =hoices—increased debt or increased austerity. DSK termed it a "trilemma," because the seventeen-nation =uro zone, which shared a common currency, the euro, and a common central bank, the European =entral Bank (ECB), lacked the political means to enforce any decisions it made. The ECB =ould loan money on various conditions, but, as Greece was sovereign, it could not =uarantee that they would be carried out. Yet, if the euro zone made it =vident to the marketplace that it could not solve such problems, the =financial players in the market would realize that the other heavily =ndebted countries, such as Italy, Spain, and Portugal, could also =efault. The contagion would spread, interest rates would soar, banks =ould be unable to retain their deposits, governments would topple, and =he fragile financial edifice of the euro zone would collapse.

Merkel understood this "trilemma," but that did not make it any =ess politically repugnant to ask German taxpayers to pay for Greek over-spending. Her finance =inister, Wolfgang Schauble, had taken the position that if there was to be a bailout, =his should be accomplished by the private holders of Greek debt, most of which were German and French =anks, writing off part of what was owed them, rather than by governments using money paid by =heir taxpayers. But that would lead to an effective default, and negotiating with banks =ould itself add to the growing unease in the marketplace.

DSK had the pragmatic solution. Since the amount of money involved =as then relatively small—about 60 to 70 billion euros—most of it could be =aid by Germany, France, and

other euro zone members, with a small portion paid by the banks. The =lternative was that the contagion would spread to Spain and Italy and become an unsolvable =ulti-trillion-euro problem.

Then, that May, the Greek finance minister George Papaconstantinou =roposed a quixotic program under which Greece would raise 50 billion euros by privatizing =overnment assets such as airports and monuments. This was so unrealistic that the market =eared an imminent default.

The credit rating services, led by Moody's, moved toward cutting =reece's credit into junk territory. This in itself would make it too expensive for Greece to =orrow to refinance its debt, which was coming due. Nor could Greece print money, since it had ceded =hat power, as had all the other members in the euro zone, to the ECB. And the ECB made it =tear that it was not allowed to subsidize a member. So Europe was now at a dangerous =mpasse.

DSK had meanwhile fine-tuned his "Comprehensive" plan to conform to =he political restraints that were holding Germany back. Euro zone members, led by =ermany, would replace most of the unpayable part of the Greek debt with Eurobonds. The =alance would come from the banks, which would agree to a voluntary haircut, and a token amount =ould come from Greece.

This would end the default threat, and, as the financial markets =ealized that the euro zone could solve default problems, there would be no spread of the malignancy to =arkets in Italy, Germany, and Portugal.

DSK hoped that Merkel, after four months of conversations with him =bout the crisis, was finally ready to support his plan. He knew that this would take great =olitical courage on her part, but he tried to convince her that there was no other option if the euro =as to be saved. So he hoped when he saw her at 3:00 P.M. on May 15, she would sign onto this =Ian. If she did, the Greek crisis would likely be solved, or at least put on hold.

But DSK never got to this critical meeting with Merkel. Instead, he =as in prison in New York City on charges that would later be thrown out. The crisis was not =ontained. That Spring, the contagion spread to Italy—where Prime Minister Silvio Berlusconi =as forced to resign—and to Spain. By 2012, most of Europe had been plunged into a recession, =pain had requested a euro bailout— and Greece was holding an =lection that could precipitate its exit from the euro.

There was also a sliding door for Sarkozy in May. If 05K had not =ncountered the maid, he would have returned to France after his meeting with Merkel on May =5. He was by then leading Sarkozy in the polls by almost 20 percentage points. On June =5, he would announce his candidacy for the presidency of France, and the Socialist Party would =ominate him as their candidate. He would run on his ability to solve economic problems, an =rea in which Sarkozy was weak. But would he win?

Just two weeks before his arrival at the Sofitel in May, DSK told =ditors of Liberation that one way his opponents might try to stop him was by inventing a rape =candal. This was clearly meant as a joke, as he affirmed to me. He did not believe that, even if =t were the only way to win the election, his opponents would go to such lengths. He may have =nderestimated them.

As it turned out, Sarkozy, a former Minister of the Interior, and his =peratives were not without resources. French intelligence had a dossier on DSK that went =ack many years. The past March, Sarkozy's staff had reportedly established a liaison with the =CRI, France's domestic intelligence service, for the purpose of keeping track of DSK. If that =s true, the surveillance had the means to transform the local investigation of a prostitution ring =un out of the Carlton Hotel in Lille into a scandal that could ensnare =SK in the prostitution ring. According to a recent book on the French =ntelligence services, this scandal would have been leaked in October =011 the midst of the Socialist primary. And so, even if DSK had =voided the sliding door at the Sofitel and had not been arrested in =ew York, and even if he had succeeded in his talks with Merkel in =verting the euro crisis, he might still have been brought down, and =arkozy, instead of losing the election, might still be president of =rance.

As ever,

Ed Epstein
www.edwardjayepstein.com
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