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Saturday, February 6, 2016

Lagarde: Debt Relief For Greece!

Christine Lagarde of the IMF considers debt relief for Greece as important as the reform of the Greek pension system, reports the Ekathimerini. Well, in a way she is quite right!

Those arguing in favor of debt relief create the impression that the immediate consequence of such debt relief would be a relaxation of fiscal pressures. That is true only where debt relief leads to an immediate reduction in interest expense. Most of the EU financing for Greece is currently (and until 2022, I believe) free of interest. Even if one forgave all of that debt, there would be no impact on Greece's fiscal balance in the next years.

Greece has spent about 5,7 BEUR annually on interest in the last couple of years. One would have to examine who that interest was paid to. If the recipients of that interest forgave their debt, Greece would immediately benefit.

I don't have the numbers but I would guess that the largest recipient of Greek interest is the IMF since I believe IMF loans carry an interest rate of about 3,5%. I would further guess that the second largest recipient group of Greek interest are the remaining private bondholders. After all, their interest rates are somewhere in excess of 5%. However, it would be next to impossible to engage the remaining private creditors in a debt relief program at this time (or ever). They would likely prefer to remain hold-out's à la Argentina.

My recommendation: the IMF, ever so concerned about debt relief for Greece, should (1) publish a breakdown of the recipients of the 5,7 BEUR in Greek interest, (2) sort the recipients from top down and (3) start negotiating with the first one on the list.

The IMF would be negotiating with itself!

Wednesday, February 3, 2016

Intellectual Thought vs. Pragmatic Common Sense

I take the liberty of publishing an email exchange with a Greek who teaches economics at a German university. I have only made a couple of minor changes in order to keep the exchange confidential.

Here is what the Greek wrote to me:

I have been following your blog ObservingGreece for quite some time now and would like to congratulate you on offering so many informative aspects and interpretations of the Greek economic crisis. You can perhaps imagine that for someone like me—a young professor of economics and economics education of Greek descent working at a German university—the ongoing Greek tragedy has been, and continues to be, both perplexing and frustrating at the same time. I am now experiencing the same mixture of feelings over the refugee crisis. Will Europe ever get its act together? I am reminding myself every day anew that hope never dies.

Sometimes I am wondering what academic economists can do—apart from entering politics. Perhaps the (second) best thing we can contribute is a level-headed analysis of what is going on. A former PhD student and I took the courage last year to attempt a game-theoretic analysis of the then ongoing confrontation between Greece and its creditors. We discern several indications that the Tsipras government followed a brinkmanship strategy and that the eurozone responded rationally by holding out; we thus reject the notion that the actions of the Greek government were just erratic and lacked coordination. We argue instead that the decisions of the Greek negotiators, including asking the voters to reject the earlier terms demanded by the creditors in a referendum, can be explained by the logic of strategic bargaining.

As a result of risk-taking on both sides, the deal struck between the two sides became more costly for everybody. The outcome of the confrontation between Greece and the eurozone thus resembles a classical prisoners’ dilemma: If both sides had acted in the common interest right from the start, a better deal for all would probably have been feasible. Instead both sides decided to trump the other and, by doing so, ended up with a much worse deal.

Perhaps you might find our work interesting? If so, you can find the working paper here (link eliminated). Your comments—including critical ones—would be highly welcome.


And here is my reply.

Thank you for your mail. In order for you to understand where I am coming from, let me quote from John Nash’s ending speech in the movie „A beautiful mind“:

"I have always believed in numbers. In the equations and logics that lead to reason. But after a lifetime of such pursuit, I ask what truly is logic? Who decides reason? My quest has taken me through the physical, the meta-physical, the delusional, and back and I have made the most important discovery of my career. The most important discovery of my life. It is only in the mysterious equation of love that any logical reasons can be found.“

Let me translate that into my own background. I, too, believe in logic, numbers and reason. But where John Nash’s quest in the academic world took him to the mysterious equation of love (in the movie, that is), my quest was in the business world and it took me to the solid basis of pragmatic thinking and common sense. To me, it is a waste of energy to analyze whether SYRIZA’s negotiations proved or disproved the game theory. The only things which matter to me are the questions: Did it work? Were the desired results achieved? Are we better off now? 

I agree with you that the results do correspond very much with the prisoner’s dilemma. But they only do so because one side in the negotiations decided to approach the whole subject as though it were an exercise in game theory. Game theory only works where people play games. 

Yanis Varoufakis may go down into history as one of the most interesting and flamboyant Finance Ministers of his time (and more). Perhaps like another John Maynard Keynes. But there is no question that in terms of results, he’s got to have been the worst Finance Minister the world has ever seen. He literally did enormous damage to his country. Why do I say that? Well, a pragmatic and common sense assessment: he could not convince any of his negotiating partners of his view of things and, in the end, he could not even convince his own Prime Minister, his boss, so to speak, of his views. There is no better measure of what failure is. Was/is Varoufakis right or wrong in his views? Well, I think he is right on more points than he is wrong. But the pragmatic and common sense reaction to that would be: „The graveyards of the world are full of people who were right!“

What could academic economists do for their country? Well, maybe this article which I wrote a long time ago will give you some ideas: An appeal to Greek brainpower.

I will look at your paper in the next days.

Tuesday, February 2, 2016

Managing Activities Or Managing For Results?

This was one of the life-long questions in my management career: should I agree with my staff, as performance criteria, certain activities or should I agree certain results (regardless of activities). To give an example: what matters, in the final analysis, is the amount of profit contribution which an account manager can generate from his customer portfolio. If he achieves those results, I should not care whether he 'works hard' or only plays golf with his customers. Experience shows, however, that results have typically something to do with activities: if a salesman doesn't regularly call on his customers (i. e. an activity), his results are likely to deteriorate. Thus, most managers are inclined to not only manage for results but to also control activities in the process. In a way, this reflects mistrust in the account manager. The manager typically lacks trust that his account manager will opt for the right activities in order to achieve the agreed results.

This was a long way to lead into the primary issue of Greece's pension reform: the Greek government says to the Quadriga "we will deliver the results you want to see" and the Quadriga says "yes, but we want you to achieve those results in a different way". Essentially, this means that the Quadriga does not trust the Greek government to achieve the desired results in the way they plan to do it.

If one steps back and thinks what really happened in Greece since 2010, one sees a lot of 'managing activities'. If this was done because it was viewed as the only way to achieve desired results, one should conclude that 'managing activities' was not very successful. At the same time, I do not recall many instances where Greece on its own stepped forth and announced which results it planned to achieve.

This time it's different! The Greek government takes no issue with the Quadriga about the desired results. Instead, they have committed to achieving those results. They just want to achieve them in a different way than the Quadriga would like to see.

What's the big deal for the Quadriga? Are they prepared to jeopardize the results by insisting on activities which demotivate the other side? So far, the Quadriga has not made it clear as to why they want to have the cake and eat it at the same time, i. e. have Greece commit to results but at the same time force Greece to pursue activities which Greece does not want to pursue.

I once blew my stack when one of my account managers tested my nerve in the endless discussion about "do you want to see activities or do you want to see results?" I said to him the following:

"Look, I can only describe to you under what bodily pressures you go to the kitchen for food and to the toilet for relief but it's up to you to determine when you go to the kitchen and when you go to the toilet. All I can tell you is that if you ever go to the kitchen when in fact you should have gone to the toilet, I will be very mad at you!"

Should one perhaps trust Greeks that they know when to go to the kitchen and when to go to the toilet?

Sunday, January 31, 2016

A Lesson From Cosco

The Chinese company Cosco was successful with its bid for 67% of the harbor in Piraeus. This was only a few weeks ago and yet, Cosco is already announcing major new plans, among others to transform Piraeus into a major holiday cruise port. I would like to draw attention to the following sentences in the respective article in the Ekathimerini:

"To that end, Cosco will embark on infrastructure investments that will gradually reach up to 135 MEUR".

"It (Cosco) is also beginning a consultation process with cruise groups in mid-March in Florida, in the context of the industry's main annual exhibition".

"Cosco officials will be noting all of the cruise groups' remarks and demands that it is prepared to satisfy, with the aim of providing services and facilities that Piraeus has not supported to date".

"A Cosco source said: 'Piraeus will roll out a red carpet to the groups which will support the project of turning the Greek cruise market into a giant'".

If the Greek government is truly interested in attracting foreign investments, it would be well advised to copy a page from Cosco's approach to attracting customers. One doesn't tell potential investors "Prove to us that you will make us happy!" Instead, one politely asks them "Please tell us how we could make you happy while becoming happy ourselves at the same time!"

A few years ago, I attempted to describe a Greek party that I could vote for. Its party program would be based on creating among Greeks 4 obsessions: "Obsession with import substitution"; "Obsession with exports"; "Obsession with tourism" and "Obsession with foreign investments". Many people will quickly remind me that the word 'obsession' sounds like a mental illness. True, if one wants to give it a negative twist. If one prefers to give it a positive twist, it's a means for generating enthusiasm.

Sunday, January 24, 2016

With Friends Like These, No Need For Enemies!

Scene 1: Varoufakis speaks about Plan X and its rejection.

Scene 2: Government reacts to Varoufakis' Plan X comments.

Scene 3: Grexit choice explored last year but Tsipras was not convinced.

Will there be more scenes in this saga? Perhaps some secret tape recordings to reveal the truth? In any event, there seems to be no love lost between these former political friends.

Saturday, January 23, 2016

A Surprise For 2016?

"I believe 2016 will be the year that Greece will surprise the world economic community," Alexis Tsipras declared in Davos. Could he turn out to be right?

Well, I suppose he meant 'surprise' in a positive way. And, yes, he could turn out to be right. Providing, of course, his government remains stable throughout the year.

I have no hard facts to support my position but I cannot ignore what happened in 2015. By all standards, Greece fell into political and economic chaos in 2015, at least during the first half of the year. In those days, it was clear to everyone that the small primary surplus of 2014 would evaporate and turn into a mega primary deficit in 2015, and that a small projected 2015 GDP growth would turn into a GDP decline to the tune of 3-4%. I do not recall any more positive projections.

And yet, 2015 did not turn out negative at all. The current account reached an all-time high and there WAS a primary surplus, not a small one at that and much larger than in 2014. I would go so far as to say that the figures for 2015 defy everything that happened during the year.

Which brings me to 2016. There seems to be some hidden resilience in the Greek economy which the naked eye does not see at first glance. And the statistics don't seem to catch it, either. And perhaps after nearly 6 years of crisis, of continuous decline, Greeks have become accustomed to that new level and begin building on it instead of only complaining about it. Perhaps more energies are really being put to better use now.

Of course everything could change quickly. The government could fall over the pension reform and political chaos could return. Grexit could happen. We've been through all that. BUT: if all of that were not to happen, I think there is a fair fighting chance that Greece will indeed surprise the world economic community in 2016.

State Budget Execution 2013-2015

Below is the development of Greece's State Budget (not to be confused with the General Government Budget!) for the period 2013-15 (in BEUR). The respective analytical comments by the Ministry of Finance can be found here. And this article in the Ekathimerini also makes analytical comments.

What stands out, in my opinion, is the year 2015. Throughout the year, particularly during the first 6 months, one could read that the Greek state was collapsing; that taxes were no longer being paid; that the small primary surplus of 2014 would turn into a huge deficit in 2015. And yet --- 2015 looks rather normal, if not quite good.

Another thing which stands out is that tax revenues before tax refunds are actually declining. This is quite surprising against the background of the seemingly countless tax increases which were made since 2010. One the other hand, one needs to bear in mind that, month after month, over 1 BEUR of taxes due are not paid. If those taxes were paid, the state would have huge surpluses.


State Budget Excecution
2013 2014 2015
I. State budget net revenue (1+2) 53.019 51.366 51.421
1. Ordinary budget net revenue (A+B+C) 48.423 46.650 46.589
A. Revenue before tax refunds 51.442 49.636 49.257
B. Privatization proceeds 86 384 254
C. Tax refunds -3.105 -3.370 -2.922
2. Public investment budget net revenues (A+B) 4.596 4.716 4.832
A. EU funds 4.520 4.649 3.900
B. Own resources 76 67 932
II. State budget expenditure (1+2) 58.459 55.063 54.950
1. Ordinary budget expenditure (A+B+C+D+E) 51.809 48.471 48.544
A. Primary expenditure 44.230 41.928 41.298
B. Military procurements (cash basis) 529 345 565
C. Guarantees called 879 587 703
D. Net interest payments 6.044 5.569 5.800
E. Loan disbursement fees (EFSF) 127 42 178
2. Public investment budget expenditure 6.650 6.592 6.406
A. Own resources 783 710 681
B. Co-financed 5.867 5.882 5.725
III.a. State budget primary balance (excl. interest) 604 1.872 2.271
III.b. State budget balance overall (incl. interest) -5.440 -3.697 -3.529

Friday, January 22, 2016

High Noon In Davos: Tsipras vs. Schäuble

Seldom have I witnessed such a discrepancy between what media reported and what actually happened. I watched the entire panel discussion yesterday in Davos on live stream. Never would I have thought what kind of a High-Noon-Event the media would make out of it.

Die Welt reported that Tsipras had made himself a laughing stock. So much so that, immediately after the discussion, yields on Greek bonds jumped high. On the other hand, the Greek blog KeepTalkingGreece reported that Schäuble had called Tsipras "stupid". What had actually happened?

At one point, Tsipras said that "we not only have to become more competitive, we also have to become more productive. We must not only look at labor costs". According to Die Welt, die audience was in shock and could only shake heads. Did Tsipras not even understand the difference between labor costs and unit labor costs? Did he not even understand that becoming more productive is a precondition for becoming more competitive?

I can literally picture how members in the audience, shocked by Tsipras' statement, immediately texted their brokers to sell Greek government bonds because if the Prime Minister is confused about unit labor costs, the country will have to go down the drain.

And Schäuble? Did he really call Tsipras "stupid"? Well, my impression was that Schäuble had decided to show his charming side on the panel. Early on in the discussion, he made comments like "as the Greek Prime Minister said" or "I agree with the Greek Prime Minister". This, of course, was not in relation to Greek finances but to the refugee problem, instead. As regards Greek finances, one would have had to be very naive to expect that Tsipras & Schäuble would suddenly fully agree. But as things go: Bill Clinton still gets praised for coining the phrase "It's the economy, stupid!" but when Schäuble says "It's the implementation, stupid!", some people see it as an offense instead of a reference to Bill Clinton's slogan.

Overall, I thought Tsipras handled himself well and Schäuble was far from his aggressive potential. In fact, I would give Tsipras credit for the best line in the entire discussion: Schäuble explained that any change to the existing agreement would require him to go back to the Bundestag and seek approval. This, he said, would be like "walking into a room full of dynamite carrying a burning candle". Tsipras's response was: "I do not recommend carrying a burning candle into a room full of dynamite. Instead, we should first remove the dynamite and light the candle thereafter!"

Not bad; not bad at all!