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Thursday, July 31, 2014

Greece - Staggering Amount of Private Debt!

One of my readers recently posted the following figures about Greece:

Private debt: 220 BEUR (122% of GDP)
Unpaid taxes: 68 BEUR and rapidly rising
Unpaid social security contributions: 20 BEUR

This article from Macropolis states the figures in a different way:

Unpaid private debt: 160 BEUR (88% of GDP)
Consisting of:
Non-performing loans: 77 BEUR
Unpaid taxes: 67 BEUR
Unpaid social security contributions: 16 BEUR

Whatever the correct figures are, the trend is clear: the figures are mind-baffling!

One difference between Greece's sovereign debt and the above private debt is that in the case of sovereign debt, most of the creditors are OUTSIDE the country. If the borrower doesn't pay, damage is occurred outside the country's borders.

In the case of the above private debt, both the borrowers and the lenders are INSIDE the country. If damage occurs, it occurs within the country's borders.

I understand that various ideas are being analyzed as to how to deal with the problem. I would offer 3 words as solutions: reschedule, reschedule and, again, reschedule. Allow the factor of time to make a contribution to the solution. If credit problems are solved too quickly, unnecessary damage might be caused (deterioration of assets values due to liquidation, etc.).

A private economic agent, be that an individual or a company, will not generate any optimism about pursuing new opportuntities if he has to worry that the creditor's 'guillotine' might fall down on him any moment. That guillotine must be moved far away so that people don't have to worry about it all the time. Furthermore, the farther the guillotine is moved away, the greater the hope of the private economic agent that he may eventually escape it.

Having spent most of my career in banking, I have seen innumerable cases how energies can be wasted between borrowers and lenders with things which cannot be changed anyway. If a borrower can't pay, he can't pay. Why talk to him every day about this situation? That won't make the situation better!

These private debtors must be put into a situation where they can devote their energies to new value generating enterprises, whatever they are. The more value they create, the more debts they will be able to settle later.

Argentina - Significance for Greece?

The world of international finance no longer is what it used to be 40 years ago when I grew up in it.

Then, it would have been inconceivable that a country of the 1st World (remember: as an EU member, Greece IS a country of the 1st World!) would receive a haircut on its sovereign debt after only a couple of years of crisis. Why? Because the holy principle was that sovereign debts must be honored unless one wants to chance getting excluded from financial markets for a very, very long time. And any haircut would have represented an inexcusable precedent.

Then, any country which would have retroactively changed the terms of its foreign debt documentation (like Greece did with the retroactive CAC) would have chanced its reputation as a good place for foreign investment for a very, very long time. Why? Because the holy principle was that laws cannot be changed retroactively and any such action would have represented an inexcusable precedent.

In short, the world of international finance then was a world where principle & precedent ruled. In the years since the crisis, we have seen repeated examples how principle & precedent simply went out the door. What the long-term price for that will be, no one can tell today.

A hedge fund by the name of Elliott Associates brought the sovereign country of Argentina to its knees. Argentina is in default. And? Prices on the Argentine stock exchange exploded this morning! That, too, could not have happened 40 years ago.

Elliott could not have been successful 40 years ago. Why? The international financial community would not have allowed Elliott to be successful!

When Argentina rescheduled its foreign debt in 1983, I was the chief negotiator of the 8th largest creditor bank. Argentina had around 500 creditors at the time. There were no Goldman's; no Elliott's --- they were all banks. The banks did not hold any anonymous bonds; they had official loans.

Citibank, the most exposed but also most experienced bank in Latin America then, was the supreme organizer of the sovereign debt reschedulings in Latin America and Bill Rhodes was their supreme leader. If decision makers of today would only know how Citibank and Bill Rhodes dealt with the problems then!

Every creditor bank knew, of course, that, at the end of the day, they would restructure their loans; i. e. stretch the maturities way into the future and possibly agree to lower rates. What else can you do when a country has no money to pay back its loans? No bank in its right mind would have ever expected to be bailed out by any government. Still, while the end-of-the-day result was known upfront, the activities and negotiations during the day were hectic. Principle & precedent had to be observed. Voluntariness of the participating banks had to be pretended so that loans could be kept on performing status.

Yes, there were hold-out's among the 500 banks; at least some which attempted to be hold-out's. Those hold-out's experienced what coordinated pressure of the international financial community can mean.

What if a major creditor bank had behaved like Elliott? That major creditor bank would have been reminded by the international financial community that no bank can function exclusively on its own; independent of financial partners who provide funding and other services. That major creditor bank would have been reminded that it might lose support from the international financial community if it did not 'play ball'.

Obviously, there were always some hold-out's who could not be persuaded. Typically, those were very small banks with very small exposures. To deal with them was not worth the effort. They were simply paid out by the other creditors.

What could all that mean for Greece?

Well, principle & precedent are no longer the forces which they once were. That opens a lot of new options for the conduct of debtor countries like Greece. If you know that you are not going to get crucified for violating principle & precedent, you might as well try to do it. Perhaps the Athens stock exchange explodes the day after Greece goes into default. No one can predict any longer.

There are clearly established rules of conduct in the world of international finance. They are not in writing but they are understood by all. Argentina violated just about every such rule in the book in the last 15 years. First, they unilaterally repudiated part of their debt. Then, they blackmailed creditors into an enormous haircut. And then they played a lot of silly games which might be fun games at a private party but which have no place in the world of international finance. That certainly played into the hands of Elliott because Elliott could argue that a country which plays such games shouldn't complain if creditors play similar games.

While the role of principle & precedent has been weakened dramatically in recent years, I would still argue that adhering to the rules of conduct remains as important as it has ever been. Should Greece, in the future, decide that certain principles and precendents should be tested in dealing with its sovereign debt, Greece would still be well advised to adhere to the rules of conduct. In fact, the more one adheres to the rules of conduct, the more chances one can take regarding principle & precedent.

Tuesday, July 29, 2014

If Greeks Are Bold and Wise, Then They Can Truly Be Rich!

"When I look at Greece I see one of the richest places in the world with untold potential for a booming sustainable economy, one with more than enough human and natural resources for everyone to live very, very well. So let us indeed think like the ancient Greeks, and look forward into the unknown with vision and courage. Otherwise we shouldn’t even call ourselves Greeks, as we will not deserve the wealth of this land. It is ours to safeguard, not squander through petty-mindedness. But If we are bold and wise, then we can truly, be rich” - see original article by Pavlos Zafiropoulos.

Nikos Dimou argued that Greeks are using all their energy to widen the distance between wishful thinking and reality, and he defines that distance as the 'misfortune of being Greek'. True, living in fantasy without any relation to reality is not a good recipe for happiness, at least not for sustained happiness.

On the other hand, Martin Luther King once spoke about 'having had a dream' and one can rightfully wonder if the US would have a black president today if King had never had that dream.

Regarding Greece, I come down on the side of Pavlos Zafiropoulos. If the distance between dream and reality is as wide as it presently is in Greece, the issue is how to bring reality closer to the dream and not how to wipe out the dream in favor of reality. Zafiropoulos' dream may be unrealistically beautiful; only time can tell. But there can be no doubt about the fact that Greek reality today is a lot worse than what the country has potential for.

It wouldn't hurt if Greek leaders of all walks of life read Zafiropoulos' article and, instead of explaining why that dream cannot ever become reality, started asking 'why not?'.

Greece - A Triumph for Hedge Funds?

As Greece stabilizes financially and as Greek debt instruments increase in value, there are frequent articles like this one extolling the success of hedge funds which have benefited from the Greek tragedy. As much as I mistrust hedge funds and pure financial investors as possible creators of an economic turn-around, I think a clarification is in order before one concludes that hedge and/or vulture funds exploit the impoverished local tax payers.

If a hedge fund purchased Greek paper when it was trading at 14% and sold it when it was trading at 50%, the fund made a ton of money but that ton of money did not come out of the pockets of impoverished tax payers. Instead, it came out of the pockets of those who had purchased that paper at 100% and now sold it at 50%. Theoretically, Greek tax payers themselves could have made that ton of money: Greece would have had to obtain enough financing to re-purchase all of its debt at 14%. However, chances are that there wouldn't have been enough sellers at 14%.

Now, what happens if vulture funds à la Argentina buy the Greek paper at 14% but don't sell it in the market at 50% but, instead, wait for final maturity and insist on getting paid 100%? Again, Greek tax payers don't pay more than the amount of debt which they had originally contracted. The difference is that they cannot benefit from the haircut which other creditors were willing (or had been forced) to accept. Still, that could be interpreted as 'exploiting impoverished tax payers' because when the majority of creditors agrees to a debt restructuring involving debt relief, they do so because they recognize that they cannot get their money back from impoverished tax payers. If a minority does not go along and succeeds in getting paid 100% in the end, they have taken their profits from impoverished tax payers and not from 'the market'.

Monday, July 21, 2014

A 30% Reduction in Total Public Sector Payroll?

"According to the figures, in 2009 the number of people working in the state sector either as permanent employees or on fixed term contracts came to 952,625 people. In December of 2013 that number had fallen to 675,530 - a drop of 277,095 or about 70,000 per year". See original article.

Now, I must admit that this small detail had escaped my attention... if one can consider a 30% reduction in total payroll a small detail. On the contrary, one of the angry comments which I heard frequently from Greeks was that "so far, they haven't fired one single public sector employee". And the Troika is making a big fuss out of sending 12.000 public sector employees into the mobility scheme.

How does that square with the above numbers? And, furthermore, how come that there has been so much discussion about a few thousand lay-off's and no reporting at all about the reduction of a few hundred thousand?

Friday, July 11, 2014

Greece's Trade Statistics --- Huge Differences Between Bank of Greece and ELSTAT!

There must be a very significant difference in the reporting of foreign trade between the Bank of Greece (BoG) and ELSTAT. As an example, I show below only the figures for 2013 (EUR; 000's omitted) but the same differences occurred in previous years.


2013




BoG ELSTAT



Exports 22.535,0 53.014,0
Imports 39.764,0 57.815,0

----------- -----------
Trade deficit -17.229,0 -4.801,0

Differences of such magnitude must mean that the BoG and ELSTAT follow totally different rules for reporting Greece's foreign trade. I have inquired several times, even at the BoG, but I have not been able to get a satisfactory explanation.

It would all be alright if the differences netted out and resulted in the same trade balance. However, they don't. And it does make a difference whether a trade deficit is 17,2 BEUR or 4,8 BEUR.


Post Scriptum
Thanks to an ELSTAT link provided by one of the commentators below, I have now been able to shed a bit more light on this issue. When the BoG talks about exports/imports, they only include goods. When ELSTAT talks about exports/imports, they include goods, services and cross-border personal spending. That, of course, is not quite proper because exports/imports are goods and nothing else. But even when looking at the export/import of goods only, ELSTAT's figures differ from those of the BoG by a few billion.

The way ELSTAT calculates 'their' exports/imports, the balance is more affine to the current account balance. However, it is NOT the same as the current account balance because that also includes things like other income, current transfers, etc.

Bottom-line: it would be a lot more convincing if ELSTAT and the BoG reported the same figures when it comes to exports/imports of the country.

Monday, July 7, 2014

Not All Foreign Investors Are Good For The Greek Economy!

"Greece’s successful return to international capital markets in April has boosted confidence in the country’s medium-term prospects, encouraging hedge funds and private equity groups to take a closer look at Greek companies that have survived the crisis".

This comes from a FT Special Report on Greece. I would argue with vehemence that what the Greek economy definitely DOES NOT need is hedge funds and private equity groups.

Private equity groups are financial investors. When PE companies invest, they do so with the explicit purpose of achieving a financial return, preferably within a 5-year time frame. The real business activities of the acquired company are not an end per se but instead only a means towards an end, whereby this end is the financial return.

Hedge funds have the same interests as PE companies with the only difference that they don't even give a damn about the real business activities of the target. Their sole objective is to achieve a quick financial return regardless of the methods applied.

Both, private equity and hedge funds are legitimate business activities. They wouldn't exist if they didn't serve a purpose. My only point is that the purpose they serve is not a purpose which serves the well-being of the Greek economy.

There can be no question that the only long-term solution for the Greek economy is foreign investment, both as a source of capital as well as a source of know-how transfer. Whoever disagrees with that is disagreeing with common sense. However, there are different types of foreign investments and investors and the challenge for Greece will be to pick the right ones.

The 'right' foreign investor for an economy like Greece's is an investor in the real economy who takes a long-term commercial view when making the investment. He doesn't invest only because taxes or labor costs are low because taxes and labor costs can quickly become high again. He invests because he sees an opportunity to expand his global business through a presence in the Greek economy and, ideally, because he sees Greece as a good location to serve other markets in the region. He invests because he sees resources in the Greek economy which are only waiting to be tapped (like talented and well educated human resources; like natural resources; like logistic advantages; etc.).

There is one aspect of overriding priority which I would advise every Greek official who decides over foreign investment to follow: "Know thy partner!" One has to understand what the foreign investor's culture and his motives are. The answer to that question can almost always be found in the investor's track record. And, at the end of the day, it comes down to a judgment about the investor's owners and managers.

About 30 years ago, BMW acquired a small Austrian engine manufacturer. Today, more than half of all BMWs sold in the entire world are run by engines made in Austria, several thousand people are employed in Steyr and BMW is Austria's largest tax payer. After the opening of Central and Eastern Europe, BMW could have easily found cheaper places within the radius of a few hundred kilometers (several car manufacturers went to Hungary, Slovakia, etc.). Instead, BMW expanded in the more expensive Austria because they were happy with Austria's infrastructure and labor resources. BMWs Austrian website states the following: "Of particular importance to us are good relations with the people and the region which is their working and living home. Also the dialogue with employees and neighbors, customers and partners and the respect for shared values and ideals. BMW engages itself publicly, culturally as well as socially". Clearly, BMW has been an ideal foreign investor for Austria.

In the late 1990s, BAT acquired the Austrian monopolist tobacco company as part of a privatization program. During the first years, investments were made into Austrian production and output increased substantially. Today, the Austrian company is owned by a Japanese company. All Austrian production has been closed and transferred to more efficient locations (economies of scale). Consequently, there is no longer R&D in Austria. Job losses in Austria were substantial. Clearly, BAT has not been a good foreign investor for Austria.

I sincerely hope that Greece will not fall for PE companies and/or hedge funds!

Greece's Capacity to Repay Foreign Debt

John Maynard Keynes wrote in 1919 about Germany's capacity to pay indemnities to the Allies as reparations. Below is a brief excerpt whereby I replaced 'Germany' with 'Greece'.

"Estimates of Greece's ability to repay foreign debt depend on the assumption that she is in a position to conduct in the future a vastly greater trade than ever she has had in the past. It is only by the export of specific commodities that Greece can pay. It is certain that payments can only be made by Greece over a series of years by diminishing her imports and increasing her exports, thus enlarging the balance in her favour which is available for effecting payments abroad. Greece can pay in the long run in goods, and in goods only, whether these goods are furnished directly to Eurozone partners, or whether they are sold to others and the other credits so arising are then made over the the Eurozone partners".

Well, not quite. Keynes only talked about the product side of the current account. Particularly with regard to Greece, the services side of the current account is equally important because it generates large revenues from abroad (tourism, shipping, etc.).

But still: a country's ability to repay foreign debt depends on the country's ability to generate a surplus in its current account. One can, of course, achieve that surplus by radically cutting imports (as Greece did). However, cutting imports is of no sustained value because once they are cut, the end of the line is reached. In consequence, only through an increase in revenues from abroad (exports, services) can Greece entertain the hope of ever repaying at least part of its debt to foreigners. And the nice thing about increasing exports and services is that it creates domestic employment, domestic wage/income taxes and domestic social contributions --- all revenues for the state.

I am presently celebrating the 3rd anniversary of having repeated the above points over and over again.

An Anglo-Saxon Version of Prof. Hans-Werner Sinn?

"There were many factors that together triggered the original euro crisis in late 2009 and early 2010. Chief among them was growing doubt that European economies and their governments would be able to service their enormous debts. Added complications were the lack of enforced (or even enforceable) fiscal rules for the eurozone, a severe banking crisis, huge differentials in productivity across the continent and the resulting balance of payments and trade imbalances – all of this coupled with a palpable absence of political leadership, both at the national and the EU levels".

This is one of the most concise summaries of the origins of the Euro crisis which I have read. It comes from the economist Dr. Oliver Marc Hartwich whom I had never heard of before. Given his name and his location (Australia), I thought that he probably was an economist of the Anglo-Saxon tradition. In the 'about me' section of his blog, he has two captions: 'love me.... or loathe me...'. No doubt, the man is controversial. He reminded me a bit of an Anglo-Saxon version of Prof. Hans-Werner Sinn. I looked up Dr. Hartwich's s background in the interenet and --- he is a German! Germans simply can't win in this game...

Still, his article is very interesting and his conclusion is as follows:

"We are likely to see renewed doubts about Europe's fiscal viability and speculation on Euro periphery debt. This would then also trigger questions about the future of the Euro as a currency. Of course, the European Central Bank can (and will) try everything to stop a new crisis from escalating, just as it has done so far. It can create more money to pass on to banks which lend it to goernments. Similarly, fiscal policy can also invent new bailout schemes or extend existing ones. Such policies can continue as long as there is the political will to do so. But the required interventions to keep a dead currency alive and bankrupt banks and governments solvent will need to become more exterme over time".

Academic Degrees and Common Sense!


Sunday, June 29, 2014

The Wrong Multiplier --- Again!

Below is an interesting article about the never-ending issue of the multiplier used in the Greek memorandum by the IMF:

Original article (in Greek)
Google translation (in English)

Thursday, June 26, 2014

About Time To Read Up On Franklin Delano Roosevelt?

This very interesting paper (in German) outlines the measures which FDR took, starting in 1933, to get the US economy out of its depression. FDRs first priority was, as any leader's should be, to kindle spirits, courage and optimism in the society ("the only thing we have to fear is fear itself"). He used the instrument of 'fireside chats' to bring his message across. Secondly, FDR stigmatized the financial sector as 'unscrupulous money changers' that needed to be brought under control. And, thirdly, he stressed that investment, and only investment, would get the US out of its dire straits.

I used to think that FDR was the champion of deficit spending. Far from it!

FDR embarked on the celebrated ‘New Deal’ after taking office in 1933. From 1933-37, nominal GDP rose 63% and inflation-adjusted GP rose 43%. Unemployment declined from 25% to 14%. However, the government’s share of the economy – contrary to all myths – remained flat during this time (revenues, expenses, budget deficit)!!! Public spending on consumption even declined from 59% to 56% of total public expenditures! What really prompted the turn-around was private sector investment which grew by 140% during the period in real terms. Obviously, government policy and FDRs fireside chats had a lot to do with the optimism which prompted the private sector to invest, but psychology is half the game in the economy.

The generally accepted school of thought nowadays is that, when in depression, no one other than the state can trigger the stimulus required to get the private sector going again. That may be true when there is no leadership around. 

If there is leadership à la FDR around, the private sector will undoubtedly live up to the role which it is supposed to play in a market economy --- not as a predatory tiger to be shot. Not as a cow that is to be milked. But, instead, as a healthy horse, pulling a sturdy wagon (paraphrasing Churchill).