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Thursday, July 30, 2015

Yanis Varoufakis: A Case Of High Treason?

It simply does not seem to be part of Greek mentality to approach controversial issues in a balanced way. Within the space of a few weeks, Yanis Varoufakis muted from a glorified, self-assertive Finance Minister to a man being accused of high treason. As much as I criticize many of Varoufakis actions, to accuse him of high treason, based on what we know now, is truly overshooting the target by far.

I think with Varoufakis one has to differentiate between the 'what' and the 'how' (both, as regards the presentation of his economic theories as well as his actions as Finance Minister). If the 'what' is a case of high treason, then the Thessaloniki Program is a case of high treason as well. After all, whatever Varoufakis (and SYRIZA) did was spelled out clearly in that program.

It is the 'how' which got Varoufakis into trouble. One simply doesn't publicly brag about denying one's statements or about hacking into computer systems. Or, as Finance Minister, one simply doesn't accuse one's colleagues of economic ignorance.

To put the contingency plan, the Plan B, into perspective: if Greece had stumbled into Grexit without any contingency plan on hand, the Finance Minister could have been legally accused. Not of high treason but certainly of dereliction of duties. I, for one, have always believed that Greece as well as the EU should have prepared (top secret) contingency plans for such an event beginning in early 2010.

The issue is whether, in the preparation of Plan B, laws of the country were violated. To hack into computer systems and/or to induce third parties to do that certainly sounds to me like a violation of laws, but I am no expert on Greek laws. One would first have to determine objectively what had really been done (so far, all we know about the hacking is Varoufakis' casual statement in the teleconference call) and once a violation of law is determined by a court, the respective judgment should be passed. In the worst case scenario, Varoufakis could be convicted of having committed a crime. But committing a crime and high treason are definitely very far apart.


ADDENDUM
In a statement published in Varoufakis' blog, Prof. James K. Galbraith said: "Our work ended for practical purposes in early May, with a long memorandum outlining major issues and scenaria that we  studied." It would seem beneficial to all if this memorandum were published.

Greece: The Age Of Folly from 1981-2009

At the press conference after his first meeting with Angela Merkel in March, Alexis Tsipras made a statement which went hardly noticed. He said: "Germans are not to blame for the problems in Greece." I never thought that this reflected Tsipras' personal conviction. Rather, I felt it was meant to create positive vibes. Be that as it may, it certainly was a statement which would have deserved more discussion in Greece.

I have read several books about the history of Modern Greece and one of the threads running through all of them is the ambivalent relationship between Greeks and foreigners, particularly with Europe and the USA. Whenever something went wrong in Greece, the reflect was to blame Greek woes on 'foreigners'. One of the best descriptions of this phenomenon I read in Stathis Kalyvas' book on Modern Greece: 

"Most Greeks see Western Europe (and the United States) as unwelcome meddling foreigners, even though they have largely profited from their interventions. Conversely, Europeans (and Americans) are exasperated that Greeks have failed to see those benefits, even though their inverventionism has been driven primarily by their own self-interest and has been imposed over the Greeks."

Notwithstanding what Tsipras said to Merkel, there seems no doubt that the majority of Greeks blames their present woes on foreignes, particularly on Germans. And they have good arguments to support their viewpoint: (a) The EU, since 1981, sent billions and billions of subsidies to Greece without controlling their proper use. Thus, those billions found their way into crony networks (and, as some argue, destroyed Greek agriculture in the process); (b) after Eurozone entry, foreign banks lent billions and billions to Greece not on the basis of an assessment of the country's debt service capability but, instead, on the assumption of implied support from the Eurozone. And no one stopped them from doing that; (c) EU authorities had known all along that Greek statistics had been 'doctored' but, due to political pressure, they chose not to do anything about it; (d) Foreign corporations (Siemens is always the case in point) unleashed corrupt conduct among Greek politicians by dumping bribes upon them; etc. etc.

Most notable of all is the conviction of many Greeks that all of today's problems were caused during the last 5 years, during the Age of the Memorandum. Without the Troika's austerity obsession, so the way of thinking goes, there would have been a relatively smooth way out of the Great Crisis.

Personally, I had an eye-opener back in 2012 when I read the following in Prof. Aristides Hatzis' paper (see below): "When Greece entered the EC, the country’s public debt stood at 28% of GDP; the budget deficit was less than 3% of GDP; and the unemployment rate was 2-3%." I remember the late 1970s very well because I made my first visits to Greece then and formed my opinion about the country. Outside the large cities, Greece clearly showed a level of wealth and living standard way below that of Central Europe. Apart from that, however, Greeks seemed quite satisfied with their conditions of life. Maybe some Greeks spent too much time in cafés and/or were a bit more corrupt than usual but it all seemed to work alright.

Only 13 years later and long before Greece's Eurozone entry, a young Greek university professor by the name of Yanis Varoufakis said in a TV interview during the 1993 election campaign that "the state of the Greek economy is in terminal decline." Well, if the Greek economy was in terminal decline then, the Eurozone entry put a gigantic turbo on that development.

I have become convinced that most of Greece's current problems have their origin during the period 1981-2009; a true Age of Folly. I link two articles below which shed light on my argument. Prof. Hatzis summarizes the Age of Folly as follows:

"Today’s crisis in Greece is mainly the result of PASOK’s short-sighted policies, in two important respects:
(a) PASOK’s economic policies were catastrophic; they created a deadly mix of a bloated and inefficient welfare state with stifling intervention and overregulation of the private sector.
(b) The political legacy of PASOK was even more devastating in the long-term, since its political success transformed Greece’s conservative party (“New Democracy”) into a poor photocopy of PASOK. From 1981 to 2009 both parties mainly offered welfare populism, cronyism, statism, nepotism, protectionism, and paternalism."

Greece as a precautionary tale of the Welfare State, by Prof Aristides Hatzis
Lies, damned lies and Greek statistics, by Sigrún Davídsdóttir

Monday, July 27, 2015

Before Raiding The Mint, Think Again!

My understanding is that the ECB distributes the printing of Euro banknotes to printing companies and/or national mints all over the Eurozone so that every member gets a piece of this (very profitable!) business. Greece, I understand, has the responsibility for printing 10 Euro banknotes; perhaps even others.

I have read that some members of SYRIZA have had a marvellously creative plan: take over the national mint of Greece; appropriate right away the 10 BEUR or so which the mint holds in inventory of printed 10 Euro banknotes; and fire up the printing press to print more of them. Greece would have truly taken the expression "money printing" to a new level!

The banknotes on inventory in the national mint ARE NOT reserves of the Bank of Greece. Instead, they are property of the ECB. They only 'become money' when they are put into circulation by the Eurosystem. Whoever appropriates them, expropriates the ECB. Whoever prints more of them for his own use is producing counterfeit money.

How do these creative thinkers of SYRIZA expect the ECB to react to expropriation and to printing counterfeit Euros? I doubt their reaction would be 'ambigiously creative'. It would be very much straightforward (and not at all good for Greece!).

Before Raiding The Bank Of Greece, Look At Their Balance Sheet!

One of the so-called Plan B's allegedly called for a take-over of the Bank of Greece so that its reserves could be used to finance the transition from Euro to Drachma. Good plan! However, it might be worthwhile to look at the BoG's balance sheet before embarking on that plan (see the table at the end of this post).

The BoG shows total assets of 176 BEUR. Of those, 127 BEUR are claims against domestic financial institutions, hardly of any value to the government. Then the BoG owns about 8 BEUR of Greek government bonds. Unlikely that they would be a useful source of transition financing. Neither would domestic securities of 6 BEUR be.

When it comes down to it, the BoG has the following assets which could be of value for transition financing:

27 BEUR - securities of foreign issuers
  4 BEUR - gold, gold receivables, SDR's and foreign bank notes

The key question is where those assets are being held. I had once suggested that the BoG should open accounts with Central Banks of friendly countries, such as Russia, in order to hold those assets there. I presume, however, that most of those assets are being held in accounts with the ECB and other national Central Banks of the Eurozone.

Picture this: Greece has just unilaterally declared default and the intention to Grexit; it has put a stop on all foreign debt service; and it has repudiated bonds held by the ECB. And now Greece wants to sell some of the above assets to create liquidity for paying governmental bills.

Message from the ECB to the BoG: "Given the unilateral actions you have taken, we have to advise you that we have blocked all balances in your accounts with the Eurosystem until clarification of the current situation".

Answer from the BoG to the ECB: "Gee, we hadn't thought of that. Sorry. Didn't mean it. Please disregard our actions".



Balance Sheet of the Bank of Greece (BoG)
Assets (outstanding amounts at end of period in EUR millions)
End of period Jun 15
Claims on MFIs 128.552
Domestic 126.671
Other euro area countries 1.357
Other countries 524
Claims on non MFIs 7.704
          Domestic 7.704
               General Government 7.297
                of which     Central Government 7.297
               Other sectors 407
          Other euro area countries 0
               General Government 0
               Other sectors 0
          Other countries 0
               General Government 0
               Other sectors 0
Securities other than shares and derivatives 32.626
          Domestic 6.018
               MFIs 420
               General Government 5.598
               of which     Central Government 5.598
               Other sectors 0
          Other euro area countries 23.559
               MFIs 3.054
               General Government 17.842
               Other sectors 2.663
          Other countries 3.049
               MFIs 152
               General Government 824
               Other sectors 2.073
Money market fund units 0
Shares and other equity excluding money market fund units 597
          Domestic 11
               MFIs 0
               Other sectors 11
          Other euro area countries 565
               MFIs 565
               Other sectors 0
          Other countries 21
               MFIs 21
               Other sectors 0
Fixed assets 806
Gold, gold receivables, SDRs and foreign banknotes 4.155
Remaining assets 1.893
Total Assets 176.333

Yanis Varoufakis: "Si Tacuisses, ..."

"Si tacuisses, philosophus mansisses" - if you had kept your silence, you would have stayed a philosopher. Or as a Minister said to the British Prime Minister in a satirical British sitcom: "If you'd kept your mouth shut we might have thought you were clever."

These quotes have passed through my mind of late whenever I heard/read yet another pronouncement by the former Greek Finance Minister. The latest episode is the teleconference call with members of international hedge funds which the Ekathimerini made public. According to the Ekathimerini, Varoufakis had been advised that the call was being recorded when it began.

Was it an attempted 'financial coup', as some have called it, that a team was assigned to work on a parallel currency, perhaps even on Grexit? Not at all! On the contrary, given the turbulences of the last 6 months, I would have considered it irresponsible not to examine and evaluate all alternatives. Like a Plan B or Plan C. Was it unacceptable that the Finance Minister repeatedly denied when asked about the existence of a Plan B? Not really. As we know since Jean-Claude Juncker publicly revealed it: "When things get really serious, you have to lie". Obviously, one shouldn't publicly reveal it but, instead, get the job done quietly.

What shocked me was the absolutely careless way in which Varoufakis reported on the issue. When the coordinator of the call, former Chancellor of the Exchequer Norman Lamont, reminded him that "there are certainly others listening", Varoufakis responded "I know. I know they are. And even if they do (i. e. tell others about it), I will deny I said it". Well, at long last we have an explanation why Varoufakis was so adamant after the 'fingergate' that "I never gave the finger. I've never given the finger ever. It was a gesture I've never made in my life" (only to post a video the next day which proved that he had given the finger).

This issue that the Finance Minister would not have access to information (i. e. tax numbers) managed in a division of the Finance Ministry will hopefully be further explained by the media. The way Varoufakis explains it sounds simply too far-fetched. If only the Troika had control over revenues, why would the Troika have insisted for months to get up-to-date data about tax revenues? How could the Finance Ministry control the payment of public bills when it had no control over revenues?

Be that as it may, having childhood friends can come useful, particularly if they have meanwhile become IT professors in the USA. And particularly if they know how to hack computers. So, Varoufakis continues, he approached this childhood friend and "we decided to hack into my Ministry's own software program in order to be able to break it up to just copy, just to copy the code of the tax system's website onto a large computer in his office so that he can work out how to design and implement this parallel payment system."

Leaving aside the question of whether the parallel payment system which Varoufakis and his team had come up with was a good idea or not (I think it was close to a joke), it is simply mind-boggling that a former Finance Minster, barely out of office, would officially go on record for the above. And when a self-declared champion of democracy and rule of law does it, one's mind ceases to comprehend. Greece's State of Law may not be as good as some wish it to be but I would assume that hacking is against the law in Greece as it is everywhere else.

Varoufakis now claims that all this fuss about the teleconference call is that "they want to present me as a rogue Finance Minister". Well, if hacking - and/or inducing a university professor to hack - is against the law, then 'rogue' is too polite an expression.

On his third-month anniversary as Finance Minister, when I had begun to realize that Varoufakis had embarked on a totally wrong track, I sent him the following email: "Form now carries more weight than substance. Humility, which the ancient Greek philosophers wrote so much about, is required because, as Bill Gates once said: 'Success is a lousy teacher. It seduces smart people into thinking that they cannot lose'".

Bill Gates was right.

Saturday, July 18, 2015

Why Not Simulate Grexit?

With all this discussion about a temporary or permanent Grexit, I want to come back to an idea which I first floated in June 2011: if Greece can't make the necessary adjustment within the Eurozone but if Grexit is the worst option of all, why not hold on to the Euro but simulate Grexit for a certain period of time?

The benefits of a Grexit, according to textbooks, seem obvious: imports become more expensive so that domestic production becomes more interesting; exports become cheaper so that the economy gets further stimulated that way; overall, Greece becomes 'cheaper' and thus, again according to textbooks, more competitive. What the textbooks do not explain are all the possible collateral effects of a Grexit.

There is another way to make imports more expensive: selective inport taxes! Through the selection, one could steer economic effects. For example, absolutely necessary imports could be exempted from import taxes. On other products, the import taxes could be staggered all the way up to 100% (as, I believe, Greece once charged on imported cars). The higher the luxury and/or non-necessity of an import, the higher the import tax. Particularly products which are currently imported but which could also be supplied in Greece should carry high import taxes (such as some agricultural products) to stimulate import substitution.

There is another way to make exports cheaper: subsidize them! How this would work in practice is too complicated to analyze here but there must be ways how the objective can be accompished, namely to export more so that domestic employment goes up.

All of this would have to be incorporated into a longer-term 'infant industry protection and industrial development plan' and it would have to be carefully monitored (preferably by someone like the OECD) so that the system is not misused for short-term gains. The basic principle is simple: increase domestic economic activity by exporting more and by substituting certain imports.

There would be the immediate outcry that all of this would be in violation of EU treaties. It definitely would be. But frankly, how compliant with EU treaties would be a Grexit?

Thursday, July 16, 2015

Paul Krugman --- Schäuble's New Fan?

Priceless!

3h3 hours ago
Krugman shrugs off Greek vote saying euro exit may yet be best
Stefan Loesch added,

Two Interesting Finds On Twitter

No. 1
Mordorandum1: 172 députés pour
Mordorandum2: 199 députés pour
Mordorandum3 : 228 députés pour


No. 2
"In 1997, Arnulf Baring (of the German-British family of Baring bankers) unleashed the following 'Nostradamus'-like prediction of how the euro would end (from a German perspective)...
"They will be subsidizing scroungers, lounging in cafes on the Mediterranean beaches.

Monetary union, in the end, will result in a gigantic blackmailing operation.

When we Germans demand monetray discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More they will perceive us as a kind of economic policeman.

We risk once again becoming the most hated people in Europe."
It appears that Arnulf pretty much 'nailed it'."

Wednesday, July 15, 2015

Alexis Tsipras: From "For Whom The Bell Tolls" To "The Sun Also Rises"?

Not too long ago, Alexis Tsipras recommended to his European 'partners' that they should read Hemingway's "For whom the bell tolls". Judging from last evening's interview, it seems that this 40-year old has discovered that the bell tolled for him. If he left it there, Hemingway would consider him a loser. Tsipras now needs to surround himself with people who can convince him that "The sun also rises" and who can show him the way how he can live up to the role which destiny has laid before him --- to become the leader who makes the sun rise again for Greeks.

Perhaps last evening was just another show of the brilliant showmaster. I am inclined to think that not. The signs of having been through a 9-day crash course in growing up to the real world were too visible. Some of his statements seemed to be reflections on how he truly felt.

To be sure, there were a few statements which he better should not have made. At one point, he said something like "I put my signature on a text which I don't believe in". There were a few others like that. But all told, these 'wrong' statements amounted to far less than 10% of the total. It is interesting to note that Central European media today focused entirely on these statements.

Over 90% of his statements caused in me disbelief that they would have come out of the mouth of Alexis Tsipras. The most extreme example was where he said something like "Raising the retirement age to eventually 67 is something which actually we should have proposed ourselves". Come again? Which Northern politician would dare these days to suggest that the retirement age should be raised to 67? Angela Merkel tried that a few years ago but she has backtracked since then.

Another statement where I questioned my hearing was where he said something like "Austerity and solidity will encourage foreign investment". Well, Mr. Tsipras, that's the whole point! If Greece could be reformed to become an attractive place for investment and an easy place to do business, foreign monies would flow into the Greek economy en masse. Whose money? Well, to begin with, the billions and billions which Greeks hold offshore earning zero interest, which could then be invested in Greece with much greater return potential! Money alway flows to places where the risk-adjusted return is the highest.

I am surprised that Tsipras would have justified austerity that way. Austerity alone, as important as it may be, will not attract a single Euro in foreign investment. Anyone who wants to know what attracts foreign investment should look at the criteria which the World Bank uses in evaluating countries as to their "Ease of Doing Business". Lay out a road map for Greece's becoming one of the easiest places to do business in Europe and you are home free!

To sum us: I had fallen for Tsipras' wonderful soundbites once before and I ended up regretting it. However, I am not sure that last evening's statements were the usual soundbites of Alexis Tsipras. They were more like the reflections of a man who had gone through an enormously high-speed and painful growing-older process. A bit like a woman who has, against her original intent, given up her virginity and who now wondered whether it was all worth it.

Perceived personal defeat and disillusionment can also be fertile ground for strong leadership to emerge. My gut tells me that Tsipras is aware of the historic opportunity he could have. The majority of Greeks apparently still stands behind him. It now all depends on the advisers with whom he surrounds himself; on the team he forms.

I think the large base of that team would have to consist of reasonable center-left politicians/technocrats with a fair representation of the Left and Right, just to keep the minority views present at all times. Responsible "Social Democrats" instead of passionate "Socialists". Socialists, as the saying goes, get into trouble when they run out of other people's money. Responsible Social Democrats understand that instead of going after other people's money, one should insist on a fair share of other people's incomes (and make sure that these incomes are there!). Or put differently: if one wants to milk the cow longer term, one better make sure that the cow is and remains healthy and strong (or as in the case of Greece: that the cow is made healthy and strong in the first place). I will close with one of my favorite Churchill quotes:

"Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon".

Sunday, July 12, 2015

Warning Notice: Observing Greece Can Lead To Manic-Depression!

The Greek situation has been something like an emotional roller coaster ever since the spring of 2010 but the intensity of the roller coaster has assumed health-threatening dimensions in the last week.

First the ecstasy of a landslide referendum and then the agony of not getting any praise for it from Europe. Then early signs that Greece had no intention of seriously playing ball (going to a meeting in Brussels without a new proposal but promising it would come the next day; in other words: déjà-vu all over again...). If that was a trick, it was a good one because it made the positive surprise of suddendly seeing a proposal which the Eurogroup could not possibly object to so much greater.

In short, yesterday at this time, I thought one could soon close this miserable chapter of the last 6 months and move on to more optimistic possibilities for Greece. I was already thinking of Alexis Tsipras' stageing a rally to motivate Greeks to return their money to the banks.

Ooops, that was thinking too fast. Reviewing what has been published since last evening and throughout today, the end finally seems near. Not a positive end.

I can witness every day how this emotional roller coaster affects my Greek wife (who really is not affected at all by Greece's problems). And, more importantly, I can see how my wife's emotional roller coaster affects me even though I, neither, am affected by Greece's problems in any way. Not yet, that is to say, because a Grexit would have some impact on my Austrian taxes...

Now I think of all our relatives and friends in Greece who are definitely affected by Greece's problems. To them, this emotional roller coaster must simply be unbearable.

Europe's leading politicians, protected from the painful human reality through a wall of advisers, seem unaffected by manic-depressive feelings. If they were, they would quickly bring this situation to a close, one way or another.

Saturday, July 11, 2015

Money Speaks Louder Than Words (or rescue programs)

Assuming that Alexis Tsipras can get a deal (and implement it!) in the next few days, which I hope, he might consider the following.

Tsipras has demonstrated an unbelievable talent for motivating the Greek people; even those who would normally not vote for him. The evening rally after the referendum is but one testimony to that fact.

What if Tsipras, upon completion of a deal, were to stage the rally of his life. A rally to appeal to the patriotism of Greeks in order to motivate them to bring their money back to bank accounts? My best friend in Thessaloniki (Yiannis, the Marxist) has refused my appeals over the last months to take his money out from his bank. He asked me what would be the purpose. I told him that the purpose would be that he keeps the value of his savings. He replied what his savings would be worth if the country went down the tubes? What if everyone did that?

Is Yiannis the only Greek who thinks that way? I could see a rally where Tsipras heats up the Greek psyche that the best way for the banks to get out from under the pressure (or blackmail, as it was once referred to) of the ECB would be if Greeks returned their money to the banks. He could credibly assure Greeks that their money would be safe, owing to the deal with the Institutions in place. It would just be a matter of firing up confidence among Greeks that they can do something to help themselves. It sounds far-fetched but having witnessed Tsipras' rallying skills over the last months, I think he might be able to pull it off.

The next thing Tsipras could ponder is how Greece can get some of the Greek money stashed away in foreign bank accounts back into the country, either as domestic deposits or, even better, as investments in the real economy. A tax amnesty would not do the trick if nothing else changes. However, as soon as Tsipras figures out a way to offer attractive (and safe!) investment opportunities, Greeks will be the first ones to take advantage of them. Why would they keep their money at zero interest rates in Switzerland if they could earn attractive returns in their home country?

And the last point is that money which presently enters the country as unvoluntary loans from official institutions is replaced, partially, by money which comes to Greece voluntarily in the form of foreign investment. What does that take? Well, just like above: attractive (and safe!) investment opportunities!

Government austerity does not necessarily mean austerity for the whole economy. If money were to flow back into banks and into investments, that would have the same effect as if the government doubled its spending. Money is a fungible entity. It needs to get into the economy and be put to profitable use. Where it comes from is of secondary importance.

Churchill once said: "Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon." Not until Tsipras begins to understand this will he be able to reach the place in history books which would be there for his asking.