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Sunday, September 21, 2014

Did Scotland Avoid Becoming Another Greece?

In a recent article, Prof. Paul Krugman compared the Scottish drive for independence while maintaining the pound to the EU's drive for the Euro as a common currency. Here is an extract: 

"The obvious parallel is the push for the Euro; in pursuit of the political vision of European unity, leaders waved away the obvious economic problems. I don’t know how many times I encountered arguments along the lines of “You Americans are only raising these objections because you don’t want a competitor to the dollar”, which wasn’t the point at all. And sure enough, the Euro has turned into one of the great economic disasters of history, dealing a devastating blow to the very cause of European unity it was supposed to serve. It so happens that some of the economic issues involving Scottish independence are the same: Euro enthusiasts insisted that there would be no problem in creating a unified currency without a unified government, the SNP is insisting that there is no problem with maintaining a unified currency while breaking up the United Kingdom. But there is even less excuse this time around, since we have the Euro experience to enlighten us".

Well, the Euro experience has definitely enlightened us!

Saturday, September 20, 2014

Greek Media - Corruption, Clientelism and Censorship

I have come across this "first in a series of articles which chronicle the long history of corruption, lawlessness and censorship in Greece's media and journalism landscapes" (quote from the author of the article). To an uninformed outsider like myself, this is interesting reading which is why I publish it without comment from my part. 

Corruption,Clientelism and Censorship in Greece's Media Landscape

Greek Tax Revenues

According to ELSTAT, total tax revenues for 2013 were 83 BEUR (page 18 of this Economic Bulletin). Since the state records revenues on a cash basis (instead of an accrual basis), these are not all taxes due but only that portion which was actually collected. Interesting questions pop up when comparing this figure to the data compiled in this Macropolis article.

At December 31, 2013, after the state had collected the above 83 BEUR, there were still another 61 BEUR in taxes due to the state but not paid by the respective tax payers. This is referred to as 'legacy'. Put differently, had the state been able to collect all of the 'legacy' in 2013, tax revenues would almost have been twice as high as they actually were.

The word 'legacy' suggests that there was a one-time problem in the past which may or may not be cured going forward but since it is a one-time problem, it will not become greater. This is not the case here. Instead, from January-August of 2014, taxes due but not collected were 9 BEUR. Thus, the 'legacy' of 61 BEUR at December 31, 2013 became a 'legacy' of 70 BEUR by the end of August. Over 1 BEUR per month on average was the amount of taxes due but not paid so far this year.

Of the 2013 'legacy' of 61 BEUR, roughly 1 BEUR could be collected during the first half of 2014. That looks like a lot of money but it represents a collection rate of only 1,6%. The government hopes to collect another 1 BEUR of the 2013 'legacy' in the second half of 2014 which will bring the annual collection rate to 3,2%. At the same time, at least 12 BEUR will be added as 'new legacy' during 2014.

This has the characteristics of moving one step forward while retreating two steps at the same time: 2 BEUR of old debt is collected while 12 BEUR becomes new 'old debt' as the year goes on. On a net basis, 'legacy' will increase by 10 BEUR during 2014.

When debtors don't pay their obligations, there are always two questions to be asked: is it their unwillingness to pay or is it their inability to pay?

When tax payers could pay their taxes but are unwilling to do so, the full force of the judicial and executive should come down upon them. When tax payers don't pay their taxes because they are unable to pay, no judicial or executive is strong enough to make them pay. That would be like attempting to draw water from a dried-out well.

Who are those culprits who don't pay the taxes due? It can't be the receivers of wages/salaries or pensions because there the income taxes are withheld at the source. My understanding is that this group accounts for roughly one-half of the Greek tax subjects.

I can only guess that the culprits are those who have tax obligations as a result of deemed/assessed income or tax obligations stemming from non-income items (real estate, etc.). Here, again, the question is whether they are true culprits due to unwillingness to pay or whether they are victims due to inability to pay.

I read all the time how inefficient the Greek tax collection system is but, then, I often hear stories from friends where I have to marvel about the efficiency of the Greek tax collection system. One of my friends who is 59 and has been without official income for over 2 years inherited a small house in Litochoro. The authorities have now required him to produce evidence that the house was built before 1955, otherwise it would be deemed as an illegal construction and all sorts of penalties would become due. There is a court document on record where his grandfather swore under oath during the 1950s that he had owned the house since 1940. That, however, is not good enough. The authorities want an official record and my friend doesn't know how he can produce one. He fears the penalties might exceed what the house is worth today. Add to that the taxes he has to pay on income which he doesn't have but which he is deemed to have because he owns a car and the apartment where he and his family of 3 live and you can understand that the man fears to soon be financially wiped out.

Or my sister-in-law, a grammar school teacher with low income, who was presented an aerial photograph showing that her balcony in central Thessaloniki exceeded the approved limits. She had not made any changes to the balcony since she bought the apartment but that is irrelevant; she has to pay. Now, that is quite an efficient tax collection system as far as I am concerned!

And those very same tax authorities have trouble discovering swimming pools in Athens, to use that famous example? To identify the owners of anonymous corporations which own luxury real estate, yachts, etc.?

I am all for chasing past-due taxes from subjects who have the ability but not the willingness to pay. When it comes to tax subjects who have no ability to pay, one has to wonder how those tax obligations came into existence in the first place. It serves the state no purpose to build up 'legacy' when there is no hope of ever collecting that 'legacy'. More importantly, it is simply immoral to tell financially insolvent tax subjects that their tax liabilities keep going up.  If I were one of the latter, I wouldn't give a damn about a possible bank run. I would vote for SYRIZA if they promise to help me get out of my bind.

Wednesday, September 17, 2014

How To Eventually Cause a Bank Run? Warn Of It!

I have read in a couple of places that PM Samaras has warned of an unprecedented bank run which would occur if SYRIZA came to power. Well, one very good way to eventually cause a bank run is to warn of it! A government which so concerned about stability (as ND rightfully is) should not engage in tactics which are sure to lead to instability.

To scare people out of voting for a political competitor by threatening a bank run may eventually produce both --- the success of the political competitor AND the bank run!

SYRIZA's Balanced Budget Policy

Already in their First Economic Manifesto of June 2012, SYRIZA had stated that they would reign in government expenditures at a maximums of 45% of GDP and to increase revenues to about 45% of GDP. I considered that a mishap at the time; a mishap in the sense that in the enthusiasm to produce a First Economic Manifesto, the preparers of it had overlooked that they were in fact proposing a balanced budget.

Now, over 2 years later, SYRIZA has again published an Economic Manifesto; I called it Manifesto 2.0 in a previous article. All proposals smack of deficit spending and the Finance Ministry is already taking it apart. And what does SYRIZA say? Yiannis Dragasakis, chief economic spokesman of the party, insists that "we are not going to return to deficits".

Is SYRIZA perhaps a fiscally conservative party (possibly the most fiscally conservative party of Greece), after all? One would expect that if party leaders proclaim a balanced budget policy and if party members do not immediately engage in uproar, the stated policy enjoys broad support within the party. Given that SYRIZA vehemently supports a balanced budget policy in public statements, I would hope that they are challenged on that by the media. Anyone who proclaims a balanced budget policy should have to explain why he does that and, more importantly, how he proposes to accomplish that.

Incidentally, I first came across Mr. Dragasakis back in June of 2012 when I read an interview of his, which prompted me to write this article about him.

Monday, September 15, 2014

SYRIZA's Economic Manifesto 2.0

Back in June 2012, SYRIZA had put out its First Economic Manifesto on which I commented at the time. In a recent speech at the International Fair of Thessaloniki, Alexis Tsipras gave a speech which strikes me like an Economic Manifesto 2.0 of SYRIZA. I couldn't find a transcript of the speech so I limit myself to the summary of it published by the Macropolis blog and this summary from the KeepTalkingGreece blog.

The June 2012 Manifesto I had described as an 'arousing document' because it included all the right soundbites which a domestic audience suffering pain and humiliation likes to hear. To me, that was a major strength because without something arousing, a battered society is unliky to develop optimism about a better future. On the other hand, Manifesto 1.0 was short on plausible hard facts; on specific policies which would bring about that better future.

Manifesto 2.0 is short on 'arousing soundbites' and long on hard facts; on specific policies which will bring about a better future. Specifically:

1) Debt forgiveness - at issue is not a relief or a restructuring of sovereign debt; no, Tsipras calls for straightfoward debt forgiveness. He doesn't reveal specific numbers but one can calculate as follows: if debt forgiveness had to reduce sovereign debt to 120% of GDP ('sustainable' as per IMF), one would be talking about roughly 120 BEUR. If it had to reduce sovereign debt to 60% of GDP (Maastricht), one would be talking about roughly 240 BEUR.
2) 6,5 BEUR to restart the economy
3) 5 BEUR for two-year job creation program
4) 2 BEUR for humanitarian crisis

For detailed measures I refer to the above-linked articles. The bottom line is that Manifesto 2.0 plans to reduce sovereign debt by 120-240 BEUR and increase spending by 13,5 BEUR. Clearly, if Greece succeeded in reducing sovereign debt by the mentioned amounts, there would be an annual saving in interest expense of 3-6 BEUR. When asking how the increased spending would be financed, that saving in interest expense is about the only sure source but it depends on a totally unpredictable event (debt forgiveness). All the other sources which Tsipras outlines rest on shaky grounds (cutting down tax evasion and fuel smuggling, EU structural and cohesion funds, etc.). These potential revenue sources have been mentioned by others forever.

Macropolis concludes that "Tsipras' next challenge is to start fleshing out the policies. His aim will be to build his party's credibility with those Greeks who doubt that such a program could be implemented". I would tend to disagree with this assessment. Tsipras' first and foremost task should be to convince those who will have to fund the program that it will work. The ultimate test for Tsipras and SYRIZA is to convince lenders/investors. If he succeeds with that, Greek voters will quickly fall in line.

ADDENDUM on September 16, 2014
Upon reflection, I overlooked one major constituency whom Tsipras should attempt to convince that his program will work. Perhaps it is even the most important constituency. It is not foreign lenders; it is not foreign investors; it is --- Alexis Tsipras' own compatriots, the wealthy Greeks who have enormous sums of money stashed away offshore. To be sure, no wealthy Greek will ever repatriate all of his money, if for no other reason than for fear of having to pay up taxes. However, if they only bring back part of their money, many of Greece's growth financing challenges would be solved in a hurry. Wealthy people have a way of avoiding tax risks: they don't have to bring their money back in their own name. They can bring it back as back-to-back loans or in the name of foreign corporations or whatever. And they will undoubtedly bring money back as soon as they are convinced that the risk-adjusted return is greater in Greece than where they presently have the money. Clearly, should wealthy Greeks ever trust their own country, they probably would find no better investment opportunities than in a country which is on the economic rebound and which has a lot of economic catching-up to do!

Saturday, September 13, 2014

Why Greece's Non-Oil Exports Don't Grow!

I have raised this question several times in this blog: given the significant internal devaluation since the beginning of the crisis and given that the Euro itself has also declined against third currencies, it is hard to understand why Greece's non-oil exports do not show any significant growth.

The below article from Brookings gives the best explanations I have heard so far. Its bottom line is that "the failure of the internal devaluation to improve Greece’s export performance resulted from increasing costs and placing new risks and burdens on the productive economy that cancelled out any competitiveness gained from the fall in labor costs".

Why Internal Devaluation is Not Leading to Export-Led Growth in Greece

Monday, September 8, 2014

Marfin Investment Group (MIG) - Tale of a Zombie!

Every once in a while it happens that I start digging myself into a subject and the more I dig, the greater the appetite to dig even more. Typically, this happens when the digging does not lead to plausible answers but, instead, raises even more questions. This is what happened to me a few months ago when I stumbled into the dealings between Piraeus Bank and the Marfin Investment Group (MIG). I published 5 articles about it at the time and rested my case afterwards. I couldn't rest it for very long because an article about the former Governor of the Bank of Greece, George Provopoulos, brought the issue right back to my mind. Hardly had that issue died down in my mind, Piraeus Bank brought it back to the surface by proudly announcing that they had taken a 144 MEUR profit on a transaction with the MIG Group.

I had made a review of MIGs 2013 Financial Report back in May of this year and in the back of my mind I had stored the information that the group was in a very weak financial condition. Now I read that this group was so strong that a bank could take a 144 MEUR profit on it? That deserved some further research and I reviewed the Financial Report of the MIG group for the first 6 months of 2014, as per June 30, 2014. I will begin with only a few points and then draw some conclusions:

1) the MIG Group has annual sales of about 1,2 BEUR and employs close to 12.000 people. If that were one single company, one would have to say that it is a reasonably large company, though not a giant, and presumably a major factor in its industry. The MIG Group, on the other hand, is spread over a seemingly endless number of companies in several different industries. Its corporate structure and complexity resemble that of an S+P 500 multinational. The obvious question is how such a complex corporate structure can pay off when the aggregate of the businesses is comparatively small.
2) consolidated tangible assets amount to 2,3 BEUR and are exceeded by consolidated liabilities of 2,5 BEUR. A classic case of overindebtedness and insolvency. The group can avoid the latter by putting some value to intangible assets but there is no way of telling what that value really is.
3) all major group companies are still losing money in the first 6 months of 2014, and some of them losing a lot of it! In fact, all companies together lost about 80 MEUR in the first 6 months of the year before taxes!
4) the group has total interest-bearing debt of over 1,8 BEUR! Put differently, total debt is about 50% greater than annual sales which is a staggering relationship by all standards!
5) of that total debt of 1,8 BEUR, 831 MEUR is officially in default, i. e. financial conditions and contractual obligations regulating this debt (covenants) were not met. This gives lenders the right to terminate the contracts and make the borrowings repayable immediately. Put differently: but for the grace of the lenders, the MIG Group survives financially on a day-to-day basis.
6) as is customary, MIGs auditors (Grant Thornton) make only a 'review' and not an 'audit' of interim financial statements. What is not customary is that auditors make specific reference in their review to the fact that the MIG Groups's current liabilities exceeded current assets by 982 MEUR (!), "a fact that may indicate the existence of uncertainty regarding the group's ability to continue as an ongoing concern". Translated into plain English, the auditors are saying that the group is illiquid and cannot meet its short-term obligations. No auditor can suggest such a situation without simultaneously justifying the continued corporate existence: "Group's management has planned appropriate actions in order to enhance the group's financial position and going concern assumption, a condition which has been taken into account in the preparation of the financial statements according to the going concern principle". The plain English translation of that would read something like: "While the group no longer is an ongoing concern, management promised us that they are planning to correct this and that promise, and only that promise, allows us to still consider the group as an ongoing concern".
7) when browsing through the Financial Report, one wonders how the group can still exist when it is overdebted and in default all over the place? Presumably, no lender alone wants to trigger a financial collapse (at least not for the time being) and they all hope that they will lose less money if they can avoid financial collapse.
8) as an icing on a bad cake, MIG changed, once again, its accounting principles in the first half of 2014 and re-stated figures of comparable periods. They are now accounting for their investments in subsidiaries at cost. That way, they prevent any future write-downs of investments for impairment reasons. Changing accounting principles is always a sensitive issue. MIG has now changed theirs for the second time in only a couple of years.

These few points alone (one could write pages about more problems) suffice to describe that the MIG group is a financial zombie. It is hard to say whether it is an operational zombie as well. On one hand, there seem to be decent operating companies active in interesting branches of the real economy. On the other hand, why are decent operating companies active in interesting branches of the real economy losing so much money? Why do they have so much debt? The problem is: even if they had no debt at all, they would still be losing money!

One puzzle is how the enormous level of consolidated group debt has built up. One ought to research that question. Normally in a group, the debt builds up at the holding company level because the holding company buys companies all the time and finances these purchases with debt. In the case of the MIG Group, most of the debt is in the operating subsidiaries. How did it get there? What was it used for?

Since the operating companies are decent companies active in interesting branches of the real economy, they definitely seem to be worth saving. Is the membership in the MIG Group a benefit or a hinderance in that effort? I would say a hinderance. When looking through MIGs Financial Report, one wonders whether group management has time for anything other than dealing with banks and lawyers, negotiating and documenting agreements, etc. It’s hard to spend the morning negotiating convertible bond issues with banks and lawyers and return in the afternoon to deal with day-to-day issues of the dairy industry… And what the synergies are between the dairy industry and aviation would need to be explained to me!

The thing which bothers me the most is that both, MIG and Piraeus Bank as its major shareholder and lender, have a habit of making bad news look as good news, presumably hoping to fool readers. Piraeus brags about having made a profit of 144 MEUR on one transaction with MIG when in actual fact all they did was to upwrite the value of assets without any apparent reason/justification for doing so. And MIG, on page 10 of its Financial Report, makes it appear that almost all of its divisions are making very solid profits when one has to look into the details on page 53 to see that they are making enormous losses.

MIG tells a great story about itself on its website, describing itself to be "uniquely positioned to take advantage of an expanding array of investment opportuntities in the South-East European region; opportunities which traditional investment vehicles lacking MIGs regional focus, scale, expertise, and/or investment flexibility and financial resources may find difficult to identify and exploit". Piraeus Bank tells a great story about its relationship with MIG and how that fits its overall strategy of "enhancing the viability of troubled assets against extensive collaterals"

Successful enterprise typically requires a combination of hard and soft facts. Both, MIG and Piraues, seem very strong in the area of soft facts; in the area of story-telling.

When it comes to hard facts, it seems clear that the MIG Group is a financial zombie and Piraeus Bank a rather adventurous lender, to say the least! 

PS: I understand that Piraeus has now received permission to trade the convertible MIG bonds which it acquired a couple of months ago. Presumably, they will look for innocent depositors to take some risk off their books. Message to those innocent depositors: STAY AWAY FROM THOSE MIG CONVERTIBLES!!!

Friday, September 5, 2014

Privatizing Greek Beaches

It's only a few years ago that I first got to know Paliouri Beach in Chalkidiki. Arguably the nicest beach I have gotton to know in Chalkidiki.

At first, this looked like a rather underdeveloped beach/bay. A touch of 'raw nature'. True to form, there was an abandoned hotel ('Xenia') covered by trees and bushes. Everything looked really down-trodden. Except for the beach, of course, because that was of the finest.

I remember telling my wife that this was just a phenomenal example of Greek waste of resources. What a beautiful touristic development one could build up in the bay if one only put money and know-how behind it.

We visited Paliouri Beach again last week. It seems that my dream has come true. The Hellenic Asset Development Fund had put Paliouri up for sale and the Russian investor Iwan Sassidis, of distant Greek origin, acquired the object for 14 MEUR. He got 320 acres of land for it which he is now going to develop. Presumably a kind of resort like Sani Beach on the other side of the Kassandra peninsula.

While I should have been happy that my dream had come true, I felt the opposite. I pictured a Sani-type of resort in the bay and that, of course, would be the end of a 'raw-nature'-type of a bay. Not to mention the fact that 14 MEUR strikes me like a very low price for that kind of prime real estate. Immediately, thoughts about back-room deals between power brokers came to mind.

It is always easier to criticize than to propose solutions. I criticized Paliouri as an abandoned area and now I feel critical about some Russian investor crowding the beautiful bay with a huge resort. Something tells me, though, that there have got to be solutions between abandonement and luxury resorts; something which is better suited for the Greek coastline than abandonement or luxury resorts.