Friday, July 29, 2022

Greece - The Dramatic Return of the Current Account Deficit!

This blog was/is essentially a blog about Greece's post-2010 crisis. After the exit from the Troika-program in 2018 and since the assumption of power by the Mitsotakis government, the crisis has turned into a bit of a success story and Greece, today, is on its way towards investment grade. And without a crisis to observe, there was no further purpose for this blog. The surprisingly high current account deficit for May (up 47% over the previous year) prompted me to write again about this issue.

From the beginning in June 2011, the importance of the current account for an economy like Greece's was the major issue of this blog. The current account is quasi the operating cash flow of an economy: it measures money spent outside a country's borders against money received from outside its borders. If more money is spent abroad than earned abroad (deficit), the cash shortfall needs to be covered with funds from abroad (mostly foreign debt). If there is a current account deficit, a country is living beyond its means cross-borderwise. From an accounting standpoint, a current account deficit represents a transfer of domestic wealth abroad or, put differently, a reduction of domestic net worth.

2014 was the best year for Greece's current account (or the worst, depending on one's point of view): the contraction of domestic spending power had contained the growth of imports, exports were beginning to rise and revenues from tourism were strong. The current account deficit was 1,2 BEUR, the lowest in memory (then about 1% of GDP).

The figures below compare 2014 with the linearly extrapolated figures for 2022; i. e. 5 months extrapolated on a linear basis into 12 months). Since the tourist season is not reflected in the extrapolation, the actual 2022 figures may turn out quite a bit better. Still, the overall picture is a valid case for observation.

(in billions of EUR)

The number which jumps to mind is the 24,2 BEUR deficit! The worst deficit Greece ever had was about 35 BEUR in 2008 (then about 15% of GDP) and that eventually lead to the country's illiquidity. From 2014-2019, the annual current account deficit increased moderately. Since 2020, it is exploding and in 2022, it is likely to be about 13%! Given the huge amounts of foreign funding which will flow into the Greek economy out of the EU Recovery Fund, the current account deficit is likely to increase even further.

Inflow of foreign funds is great fun for the domestic economic agents: those funds represent revenues on the part of the recipients which leads to growth and wealth. The higher the inflow, the greater the fun (remember the 2000's?). The only problem is that pain can result once the inflow stops.

It all depends on how the money is spent. If the money is invested in projects of sustained economic value, the inflow will lead to sustained prosperity. If it is spent on short-term consumption, we will see a repeat of 2010 at some point in the future.

The challenge for the Greek economy is to increase domestic value creation so that exports can be increased and, perhaps, some imports substituted. To achieve that would be something that could truly be called a "structural reform". Greece seems far away from that.

Even though the current account deficit is approaching a dangerous level, there is no risk of a near-term financial crisis. Greece has a relatively small amount of interest expense and principal of debt doesn't really start maturing until the early 2030's. And, as mentioned above, money will flow in from the EU Recovery Fund. So there really won't be any major financial constraints during the 2020's. When there are no financial constraints while money flows rapidly, all sorts of memories of Greece's past come to mind.

Wednesday, March 23, 2022

The Perennial Problem of Greece's Current Account

The statistics published by the Bank of Greece go back to the year 2002. During those 20 years, Greece did not even once record a balanced current account (not to mention a surplus). In fact, I remember reading in history books that Greece has not once in its 200-year existence as an independent nation recorded a balanced current account (not to mention a surplus). 

What is a current account and why is it important for a national economy? The simplest description is that the current account represents the cross-border operational cash-flow of a national economy. Operational cash comes into a country as proceeds from exports, revenue from tourism, transfers from the EU, etc. Operational cash leaves a country as payment for imports, for interest on foreign debt, for transfers to the EU, etc.

When the cross-border operational cash-flow is negative, there has to be a 1:1 offset through a positive cash-flow in the capital/financial accounts. This is not a matter of economics but, instead, of mathematics. Again: if the current account is negative, there have to be, on a 1:1 basis, positive capital/financial accounts. If there were no positive capital/financial accounts, there could not be a negative current account. Put differently, a national economy which runs out of foreign currency can no longer import. Below are the Greek statistics since 2002.

During the 20 years since 2002, the Greek national economy incurred a negative cross-border operational cash-flow of 274 BEUR. Put differently, Greece paid 274 BEUR more for imports, interest on foreign debt, etc. than it received from exports, tourism, EU transfers, etc. 

That deficit was financed through a surplus of 45 BEUR in the capital account (e. g. EU subsidies), a 208 BEUR surplus in the financial account (e. g. debt) and another 20 BEUR which the Bank of Greece calls "balancing items", i. e. items which cannot be categorized.

Why is all of that important? It is important because it helps to explain the living standards in the national economy and what they depend on. Many of the capital and consumption goods which Greeks desire must be imported for the simple reason that they are not produced in Greece. In fact, when it comes to consumption goods, a walk through a shopping mall creates the impression that most of those goods are imported. Revenues from exports and tourism are not nearly sufficient to pay for all the goods which Greeks desire to import. Greece needs funds from other sources in order to pay for the imports which Greeks desire. Without those 'other sources', the living standards of Greeks would decline sharply.

As the above table shows, those 'other sources' are principally EU subsidies, foreign debt and some foreign investments. Without EU subsidies, foreign debt and some foreign investments, Greeks would have to accept significantly lower living standards.

The above table shows another 'Greek phenomenon': as domestic purchasing power increases/declines, the current account deficit increases/declines as well. During the heyday of the Euro-party (until the financial crisis), Greek consumers were awash with cash and imported nearly beyond imagination (excessive current account deficits). As austerity was imposed on the Greek economy, Greek consumers were short of cash and the current account deficit declined. 

During the last couple of years, things have improved for Greek consumers and, not surprisingly, the current account deficit returned to very high levels. Not excessively high, but very high nevertheless. That really leads to a disappointing conclusion: despite all the reforms in the decade of the financial crisis, the structure of the Greek economy hasn't really changed. It still has the characteristics of a developing economy, i. e. products which the consumers desire have to be imported and imports lead to indebtedness because there are not enough products/services which the national economy can export.

In short, the living standards of the national economy still depend on: (a) foreigners lending to or investing money in Greece and (b) various types of EU subsidies and financial support programs.

Is that a long-term perspective? Not really, at least not a very good one because it suggests that Greece will always be dependent on foreigners lending to or investing money in Greece. What if foreigners, for whatever reason, would one day stop doing that? 

There is only one way to make the Greek economy less dependent on foreigners and that is to increase domestic value creation. To produce more of the goods and services which Greek consumers desire so that they do not have to import them and to produce more of the goods and services which foreigners desire so that Greece can export them. 

There is no other way! And it is an urgent matter!

Wednesday, June 23, 2021

Greece Is Booming!

When my wife and I last left Greece on December 13, 2019, we had no idea that it would be 1-1/2 years until our return. Well, Corona did that to us. But now, since 3 weeks ago, we are back in Kalamaria, a beautiful suburb of Thessaloniki. And, frankly, it feels like the Greece we returned to is a different country than the Greece we had left.

The first signs that the Greek state was no longer as dysfunctional as it had often presented itself in the past came in February 2020 when Corona started showing up in several European countries. Greece immediately took action whereas most Central European countries pondered the situation and announced that they would take immediate action once that became necessary. With the benefit of hindsight, we now know that this indecisive approach was a big mistake.

The lockdown procedures where rather similar in most countries: prohibition to leave homes except for 4-6 specific purposes. In Austria, for example, there were extended debates about those exceptions leading to substantial delays. And when the exceptions were finally agreed upon, there was really no plan how to control them. Greece, instead, implemented quasi overnight a system where QR-codes had to be obtained for exceptions via SMS. And significant efforts were made to control compliance. I remember that the Greek authorities often announced the number of checks they had made, the number of fines and the total amount of fines. That obviously promoted discipline among the people.

When I told this to my Austrian friends, they said that such was the behavior of a police state. Well, police state or not, when it helps keeping infections and casualties low, Greece was far ahead of most European countries (only some Scandinavian countries were equally successful). So Greece came through the first wave literally as a hero and I could only marvel at that.

By October, the influenza vaccinations were scheduled to begin. Austrian authorities had campaigned for months to motivate people to get influenza shots. The vaccination rate had only been 8% the year before and they wanted to increase that rate to 20% this year. There was only one slight problem: Austria did not have sufficient vaccines! Something had gone wrong with the orders, the authorities explained. And while we were desperately waiting to get the vaccines (by December!), my wife reminded me literally every day that her Greek friends had already been vaccinated. That pained!

As the Corona vaccinations began in early January of this year, Austrians were informed about the national vaccination plan with all of its priorities but there was zero information as to how one could register for vaccinations. Again, my wife told me that her Greek friends were already registering and had received vaccination appointments. That was a very painful period for me. 

In summary, during our 1-1/2 year absence from Greece, I observed from Austria that the Greek authorities handled the situation much better than most other European countries, certainly better than Austria.

When we returned to Greece late last month, a number of things quickly caught my attention. Above all: this was not the country which was expected to be debt slaves for decades and live in poverty and depression. On the contrary, everything and everyone seemed to be booming like in the good old days: overcrowded markets, shoppers all over the place, full cafés and restaurants, overboarding traffic and traffic jams with gasoline prices 30% higher than in Austria, etc. This prompted me to look at some economic indicators which I hadn't done in a long time.

There is no question in my mind that Alexis Tsipras - despite all the chaos which he caused in many areas - accomplished two major things for the benefit of Greece. First, following the (self-inflicted) near collapse in mid 2015, Tsipras had signed practically everything which the Troika proposed without objections. The Troika measures were rather brutal in many ways and I do not believe than anyone other than a leftist politician could have done that (because the leftists in opposition would have torpedoed most of the measures). In sum, however, these measures had positive effects as evidenced by the fact that Greece is now being attested much better competitive ratings than only 5 years ago. And, secondly, Tsipras had refused to enter into a stand-by agreement with the Troika following the termination of the program in 2018. Instead, he opted for the cash reserve strategy and the Troika started it off with a dowry of 15 BEUR.

Since then, the Greek state followed the motto "the time to take up debt is when one doesn't need the money". Today, cash reserves of the state (financed with new debt) allegedly exceed 40 BEUR and another 30 BEUR will come from the EU Resilience and Recovery Fund. Since significant debt maturities will not come until the early 2030s, the Greek state is now completely 'overfinanced' for the next 10+ years and, thus, there cannot be foreign payment problems. Prime Minister Mitsotakis has pursued and even expanded the cash reserve policy - in the last year alone, foreign debt increased by 50 BEUR to 500 BEUR!

Rating agencies are allegedly considering an upgrade of Greece's rating to investment grade. This is very interesting in as much as Greece today has significantly weaker economic indicators than 5 years ago: the debt/GDP ratio now exceeds 200%, the fiscal budget (prior to Corona it had been positive!) is now deep in the red and the current account, which 5 years ago had been almost in balance, registered a deficit of 11 BEUR in 2020, which deficit is likely to increase in 2021. When Greece experienced the sudden stop back in 2010, these indicators were not worse than now.

The fact is, however, that the funds which will flow into Greece in the next few years will be reminisicent of the 'Euro-party' in the 2000's. The Euro-party ended in disaster because the funds were largely misapplied. Optimists argue that this mistake will not be repeated this time around, if only because of the EU's supervision. We will see. The fact is also that Greece now has, for the first time in a long time, a government which includes a significant number of competent and professional individuals. To me, the superstar is Kyriakos Pierrakakis who is responsible, among others, for Greece's digitalization. The man seems to be a magician. I recently read an article which claimed that new digitalization has already saved 23 million working hours in the public sector. There is undoubtedly a bit of propaganda behind that statement but still, there is positive evidence. My neighbor tells me that he can now take care of most of his official business without having to go to public offices. Even though he is not very computer-literate, he can handle most things electronically. And then there is the issue of the Greek land registry. This project had originally been started by King Otto and his 3,000 Bavarian public servants back in the 1830s and hundreds of millions of EU subsidies had been wasted in recent decades. Allegedly, this project is now nearing completion and Greece will have complete digital land registry.

Miracles are unlikely to happen. In daily life, Greeks will undoubtedly continue to live with corruption and tax evasion. However, in those places where it really matters (at the upper levels of public administration, politics, corporate governance, etc.) a trend in a positive direction should be expected. I would not be surprised if this lead to a positive feedback loop and I would certainly not be surprised if foreign investors were to show significant interest in Greece very soon. That would not only bring additional capital to Greece but, above all, know-how.

All of this could suggest that one should invest in the shares of Greek banks. After all, this is where the tsunami of cash will flow in the next years and the business of the banks should be booming. However this will also be the potential Achilles' tendon. The critical issue will be how all that cash is applied, towards profitable investments or towards unproductive investments and/or activities. Time will tell whether economic rationality will drive the conduct of Greeks in the future or not.

Sunday, January 31, 2021

Attractiveness Of Doing Business In Greece (rankings)

My last post discussed Greece's improvement over the last 10 years as regards perceived corruption (an improvement of about 30 spots in the ranking of about 180 countries). In that post I said:

"10 years ago when I had started this blog, one of my major arguments was as follows: Greece ranks the highest in the EU as regards perceived corruption and the lowest as regards attractiveness for doing business (which was the case then). If these tables could literally be turned (i. e. the lowest in perceived corruption and the highest in attractiveness for doing business), then Greece could well develop into the economic hotspot of the Eastern Mediterranean. How have these rankings developed?"

Below is the other important ranking, the World Bank's Doing Business Report for 2020. It measures about 190 countries in terms of their attractiveness for doing business. 

Here, too, Greece's ranking improved by roughly 30 spots. Depending on how one reads statistics, one could even argue by 40 spots. That would be the good news.

The not so good news is that Greece did not improve its position within the peer group (EU member countries). In fact, only the tiny Malta ranks behind Greece at position #84.

It is interesting to note that the significant improvement occurred during the years 2020-12, i. e. during the time when Greece was literally put through the wringer by its EU friends. 

Thursday, January 28, 2021

Corruption Perception Index For Greece

Transparency International (TI) publishes annually the Corruption Perception Index where they measure roughly 180 countries in terms of perceived corruption. As the title says, it is based on perceptions and not on objective measurements because the latter would be impossible in the area of corruption.

10 years ago when I had started this blog, one of my major arguments was as follows: Greece ranks the highest in the EU as regards perceived corruption and the lowest as regards attractiveness for doing business (which was the case then). If these tables could literally be turned (i. e. the lowest in perceived corruption and the highest in attractiveness for doing business), then Greece could well develop into the economic hotspot of the Eastern Mediterranean. How have these rankings developed?

TI just published their 2020 Corruption Perception Index where Greece ranks #59. In and by itself, that ranking is not very meaningful but it does become meaningful when one analyzes a longer term trend and the comparison with peer countries (in the case of Greece the EU). Below are the rankings of the last 10 years:

There clearly has been a change in the last 10 years, a change for the better. If 10 years ago the ranking ranged between 85-95, in recent years it has ranged between 55-65. Roughly speaking, once can argue that Greece improved its ranking by about 30 points in the last decade.

When, 10 years ago, Greece ranked the highest among all EU countries as regards perceived corruption, Greece nowadays leaves several EU countries behind: Slovakia, Croatia, Slovenia, Hungary and Bulgaria.

The often heard argument that "Greece will never change" seems a bit disproven by the above.

Saturday, September 26, 2020

Greece's Admirably Strong Financial Condition

As Greece prepared for its exit for the 'rescue program' back in 2018, two possible alternatives were discussed: (a) a back-up line of credit from the EU for the post-program period or (b) a cash reserve in lieu of that. The disadvantage of the back-up line was that it would have involved some kind of conditionality, the disadvantage of the cash reserve was that it would trigger incremental and unnecessary interest expense. 

I had supported the back-up line. Greece chose the cash reserve. It was funded through the last tranche of the program and through new debt issues subsequent to the exit from the program. Today, I must admit that Greece was right and I was wrong.

Owing to the collapse of interest rates, the cash reserve probably caused only minimal incremental interest expense for Greece. At the same time, the cash reserve assumed huge proportions and "cash is king and increases creditworthiness". 

Finance Minister Christos Staikouras is quoted in this article as “We, the Finance Ministry, have got the cash reserves to support any government decision. We have built strong cash reserves of 37.7 billion euros so as to support any choice made". It should be noted that these are reserves of only the Finance Ministry. It is safe to assume that there are further reserves elsewhere in the public sector which are not included here.

Prior to Corona, Greece's budget was more or less in balance (after interest expense) so that the cash reserve was indeed a reserve for future expenses. Corona has totally altered this situation and now the budget deficit for 2020 could reach 8-10 BEUR. Under normal situations, this would be a crisis scenario. With a cash reserve of 37,7 BEUR, it is not much more than a footnote. 

Greece's cash reserves will receive a substantial boost from the 750 BEUR Recovery Plan of the EU. At the same time, Greece is likely to take advantage of market conditions and issue new debt. In consequence, despite the cash outflow due to Corona, Greece is likely to increase its reserves substantially going forward. More cash reserves translate into better perceived creditworthiness which, in turn, will make the raising of debt even easier. A positive do-loop.

In sum, Greece's financial condition is admirably strong. There will be no major debt service until the early 2030's. Greece already has more than enough cash to sustain the expenses until then. There is no liquidity risk in the next few years.

This would certainly seem to be the time for investing in Greek bonds with maturities in the next few years!

Sunday, September 6, 2020

I Am Embarrassed To Be An EU Member!

The United Nations Convention on the Law of the Sea (UNCLOS) is the international agreement that resulted from the third United Nations Conference on the Law of the Sea (UNCLOS III), which took place between 1973 and 1982. The convention has been ratified by 168 parties. An additional 14 UN member states have signed, but not ratified the convention.

There are 15 United Nations member and observer states which have neither signed nor acceded either the Convention or the Agreements. Turkey is one of them.

Greece has 182 UN member states on its side. Turkey is one of 15 which abstained from being party to the agreement. Thus, Turkey has the legitimate right to define its own position of what their territorial rights in the Mediterranean are. The only question is one of legitimacy: when 182 UN member states declare something as law, is that equivalent to 15 member states ignoring that law? When 182 UN member define something as law, is it defensible that one non-signatory defies that law outright?

There can only be a political solution to this. In the meantime, however, every EU member state should ask itself the question whether an attack on Greece is 'only' an attack on an individual sovereign country (which it is) but whether it is not also an attack on the union which that sovereign country belongs to. In my opinion, the EU cannot assume a mediator's role in a conflict where the EU itself is being attacked. 

The deafening silence of the EU in this matter is beyond comprehension. Notwithstanding all the economic interests of major EU countries in Turkey and the respective dependencies, Turkey is a country which has violated in the extreme many of those values which the EU considers as their core values. And, most importantly, in the refugee situation, Turkey has essentially blackmailed the EU and gotten away with it so far.

Given the fact that Turkey, from the EU's standpoint, should actually be considered more as an adversary than as a partner, I found it quite amazing what a beautiful birthday party the EU ambassadors presented to the Turkish foreign minister. 

Would they have offered the same admiration to Putin after he took over the Crimean?

But the real affront was an interview by CNN with Jens Stoltenberg, the General Secretary of NATO. The reporter's question was very simple: "The Greek Prime Minister accused Turkey of violating Greek air space. How does NATO react to that?" Stoltenberg refused to answer this question. The CNN reporter asked whether there were possibly 2 standards: one when Russia violates Turkish air space for less than 30 seconds and the other when Turkey violates Greek air space for months on end?

It is truly embarrassing how Stoltenberg ducks the question and seemingly justifies Turkey's actions without considering the position of Greece, a co-equal NATO member. Regarding the EU: it is commendable that individual countries like France or Austria have taken a clear position to be on the side of their fellow EU member state Greece but the deafening silence on the part of countries like Germany and of the EU itself is absolutely embarrassing. 

As an Austrian, I am very embarrassed to be a member of this EU!