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Tuesday, October 15, 2019

Greek State Budget Out of Control!

The Ministry of Finance has reported disturbing developments in the Greek State Budget: since the beginning of this year, monthly results are clearly in excess of the targets. Below are the data for the last 4 months (in MEUR).


June: +1.954
July: +2.565
August: +3.178
September: +3.012

Given the history of Greece's fiscal excesses, one is likely not to be surprised that, once again, there are excesses. One would only wonder what type of excess it is. An excess over spending limits? An excess over deficit limits?

Surprise, surprise! The above figures are excesses of primary surpluses relative to their targets. Put differently: the creditors had imposed stiff primary surplus targets and Greece is over-performing by far. And this despite the fact that election presents were distributed this year!

This could literally get out of hand going forward. As the economy picks up, tax revenues will increase and surpluses will grow further. The Greek state will soon be swimming in cash.

Lucky Mitsotakis!

Friday, October 11, 2019

Borrow To Improve Your Credit Risk!

On Wednesday this week, Greece raised 487,5 MEUR in short-term debt (13 weeks) at an overall yield of minus 0,02%. A week before, Greece had raised 1,5 BEUR in ten-year money at a yield of 1,5%. What has caused this dramatic increase in Greece's creditworthiness?

The Greek state currently does not need to borrow to finance budget deficits. There is a significant primary surplus, large enough to pay interest on debt which means that the overall budget will at least be in balance, possibly even positive.

Neither does the Greek state need to borrow in order to refinance maturing debt. The amount of debt which matures in the next few years is minimal. Apart from the fact that the Greek state is sitting on a ton of cash in the first place (allegedly upwards of 25 BEUR).

So what is the investors' risk by making new loans to Greece? Virtually none as long as maturities stay within the next 10 years. During this time, Greece has very little debt maturing and the interest expense is very low, too. Given this situation and considering the high cash reserves, the risk of another external payments crisis in the next few years is virtually zero.

So why does the Greek state borrow?

There is an old saying that "banks like to lend money to borrowers who don't need it". Well, there is some truth to it in the case of Greece. As pointed out above, Greece currently does not need money. Greece could use money to voluntarily prepay more expensive debt with less expensive debt where loan agreements permit that or to increase its cash reserves. Even if cash reserves yield no interest income at this time, as long as the debt incurred to build up cash reserves is zero, there is no harm in doing that. Put differently, Greece can increase, at zero cost, cash reserves which, in turn, motivate investors to lend more money to Greece because Greece doesn't need the money and has enough reserves to pay the loans back.

And the moral of the story?

THE HIGHER GREECE'S ZERO-COST DEBT, THE BETTER THE COUNTRY'S PERCEIVED CREDIT RISK AND THE HIGHER INVESTORS' MOTIVATION TO LEND MONEY, PROVIDED THAT THE MONEY IS USED TO BUILD UP RESERVES WHICH, IN TURN, FURTHER IMPROVE THE PERCEIVED CREDIT RISK.

We didn't learn that at university...

Thursday, September 26, 2019

Lucky Mitsotakis

According to the State Budget Execution Bulletin, the Greek state (not to be confused with the wider grouping of the Greek general government) registered a primary surplus of 2.906 MEUR for the period January-August 2019 (8 months). The budget estimate for the period had been a negative 272 MEUR. Thus, the Greek state overperformed to the tune of 3.178 MEUR (that's over 3 BEUR!).

Given that the Greek state had annual interest expenses between 5-6 BEUR in recent years, it looks very likely that the state will be able to pay all interest expense out of its own revenues in 2019. In other words, an overall budget surplus.

At the same time, the Greek state has accumulated cash reserves to the tune of 25-30 BEUR out of the last tranche of the latest program and from new borrowings. Since Greece does not have major debt maturities in the next few years, these cash reserves guarantee that Greece will not have a sovereign debt problem for a number of years.

This is an extremely solid financial situation! Fanatic supporters of the new Prime Minister might be tempted the credit Kyriakos Mitsotakis with this result. Well, not even a magician could have achieved such results in less than 3 months.

I could go on and on explaining why SYRIZA was a terrible government for Greece but I have to say this: no other government than a Tsipras-led government could have accomplished that Greece today is viewed as a stable (politically and economically) member of the Eurozone and of the EU. Tsipras accomplished that by performing an incredible somersault. Essentially, he agreed to every screw that the EU put upon him. Perhaps it helped that he started enjoying being viewed as the darling of international elites, which undoubtedly he has become. Unwittingly, he made it possible for his successor to embark on a growth strategy for Greece.

If any government other than a Tsipras-led government had attempted to do the same thing as Tsipras has done, Tsipras would have mobilized the masses on the streets and the result would have been terrible for Greece.

Thus, Tsipras has become sort of a tragic figure. He has done everything no one else could have accomplished and yet, someone else will get the praise for it. And that someone else is Kyriakos Mitsotakis. Lucky Mitsotakis, one could call him.

It is not often that a new political leader inherits a situation where most of the dirty and painful work has been done by his predecessor. The situation is a bit comparable to Germany in 2005 when chancellor Gerhard Schröder was voted out of office for having legislated too many tough reforms (Agenda 2010). Angela Merkel succeeded him as chancellor and, for several years, she could collect the praise for results of reforms undertaken by her predecessor who paid for that with his career.

One should be so lucky as Mitsotakis! He inherited a state budget which is operationally cash-positive and huge cash reserves. Mitsotakis will not have to spend any of his time negotiating new rescue loans for the simple reason that he doesn't need any new cash. Since 2010, Greek governments had to spend much of their time negotiating rescue loans, thus leaving less time for more productive things like making growth plans for the future.

Mitsotakis now has plenty of time to focus on growth plans and growth measures for the future. He was lucky to inherit a perfect trampoline. He will be judged by how high he can jump with it.

Saturday, August 31, 2019

Manipulating Adults In The Room

The official trailer of Kostas Gavras' new movie "Adults in the Room" is out (the movie itself will be released on September 28). The movie is based on the book with the same title by Yanis Varoufakis.

There is one statement by Varoufakis in the trailer which displays the gigantic manipulation of Greek public opinion which was his trademark throughout:

"The rescue plan was to save the German and French banks. Their colossal debt was transferred upon the Greek people."

Yes, the rescue plan was to save German, French and very many other banks. But the colossal debt of Greece was not transferred upon the Greek people. That colossal debt had already been with the Greek people. What happened was that the risk from that colossal debt, previously carried by German, French and very many other banks, was transferred from those banks upon the tax payers of the lending countries.



ADDENDUM per 02.09.2019

The question has been raised in the comments in which countries those banks which had purchased Greek bonds were located. The graph below provides some clarification:



ADDENDUM per 02.09.2019

Below is a review of the above-referenced movie:

Venice Film Review: "Adults in the Room"

Sunday, August 18, 2019

Champions Of Default

When I started this blog back in June of 2011, we were in the midst of what I would call a "hysteria about default". From the top EU echelons down, the impression was broadcast that a sovereign default was the end of the world and had to be avoided at all cost. In fact, it was exactly the fear of Greece's default which lead to the unfortunate first financing package for Greece in May 2010.

Having been through two sovereign defaults during my banking career, I failed to understand the hysteria. It was a relief to hear the Chief Economist of Citibank say that the major problem was "that the Europeans did not understand that a sovereign default was quite a normal thing" and that there had been dozens of sovereign defaults in prior decades. That assured me that I was not totally wrong with my opinion.

Against the above background, I am now quite pleased to finally have statistical evidence about the frequency of sovereign defaults. The graph below shows sovereign defaults since the year 1800. Greece is not alone with 7 defaults; my home country Austria is right up there with Greece, also with 7 defaults. Spain, Russia, Germany and Portugal follow right behind.

But most important is the recent past. Since 1975, there have been almost 50 sovereign defaults. Each sovereign default was handled 'the normal way': existing creditors restructured their maturities by extending them and lowering the interest rate; official lenders provided the Fresh Money; and the IMF put together a program which was the basis for the agreement of all creditors.

Only Greece was different. Here, the EU elites felt that they didn't need to learn from professionals with previous experience. Instead, they assured themselves that the EU was different and required a different solution. The end result was that, today, European tax payers carry the risk which was previously carried by private creditors. Great showing!

Monday, July 8, 2019

Mitsotakis Clear Winner, Tsipras Not Too Big A Loser And Pollsters Discredited

In January 2015, riding on a wave of unforeseen popularity, SYRIZA registered 36,34% of the vote. In September 2015, after some of the most dramatic and economically damaging months in Greek history caused by SYRIZA, the party - despite broken promises and defections of radical leftists - still registered 35,46% of the vote.

In May 2019, after 4-1/2 years in government, SYRIZA faced broad voter disaffection and registered only 23,76% of the vote at EU elections. They had lost roughly one-third market share (!) relative to 2015. To make matters even worse, ND - who had been kicked out of office by SYRIZA back in 2015 - came out at 33,12% of the vote, almost exactly 10 full percentage points ahead of SYRIZA.

At that point, Alexis Tsipras took the flight forward and called early elections, presumably fearing that the longer they waited, the worse the situation would get for them.

Since the EU elections, media discussion did not even focus on SYRIZA's chances for a recovery. Instead, the discussion focused on the margin by which ND would win (10-12% were the most frequently quoted margins) and whether or not SYRIZA (and Tsipras) might even be sent to the dustbin of history. I do not recall a single poll showing SYRIZA at 25% or more, prompting a headline in the Ekathimerini a day before the election of "Tsipras eyeing more than 25%", essentially suggesting that Tsipras had unrealistic hopes. That commentary by Angelos Stangos included the following paragraph:

"In short, after all the despicable things this government has done under the leadership and guidance of Alexis Tsipras (there should be no doubt on this point), it will not bode well for the country’s future if, say, ND gets 40 percent and SYRIZA gets around 30 percent. This would make the leftists the absolutely unchallenged opposition and would strengthen Tsipras’ position beyond any possible reproach from detractors in the leftist camp. He would even be able to gloat about not suffering a real defeat."

ND getting 40%? Didn't sound unrealistic at all. SYRIZA getting around 30%? What was the man smoking?

Well, SYRIZA ended up getting 31,53% of the vote, 'only' 5% less than at its peak in January 2015. If one were to add the 3,44% which Yanis Varoufakis' party registered (after all, Tsipras and Varoufakis were on the same team back in January 2015), one comes to 34,97% of the vote, only fractionally less than in January 2015.

It is clear that the predictions of SYRIZA's and Tsipras' impending political death were greatly exaggerated. On the contrary, those SYRIZA party members who had believed the polls must have celebrated a victory party on the night of the election.

ND's win with 39,85% of the vote was most remarkable but not a total surprise relative to expectations. The winning margin over SYRIZA of 8,32% was certainly a disappointment to those who expected 10-12%.

And what can one make of that?

After worst-case scenarios before the election, SYRIZA came away from the election still standing. Actually still standing strong. When considering all the (unnecessary) pain which SYRIZA's policies inflicted on the Greeks and particularly when considering the complete disappointment which Tsipras must have been to his religious followers, a loss of 5% in market share is certainly a loss but not a defeat.

ND, in its direct battle against SYRIZA, was not all that successful. It could have obliterated SYRIZA but it did not. ND's remarkable win seems more the result of having obliterated smaller parties.

Yanis Varoufakis, after 4 years as an international media star, has returned to the nitty-gritty of domestic Greek politics. His 3,44% were undoubtedly an achievement which many would not have considered him capable of. Whether Mera25 will indeed be "the only ray of hope in this bleak setting" (Varoufakis) remains to be seen. It would be better for the country if ND succeeded in becoming that ray of hope which many Greeks so urgently wait for.

Sunday, June 30, 2019

Greece Is Flush With Cash!

The Ministry of Finance's Annual Report about Borrowing and Debt for the year 2018 provides very interesting information about the solidity of Greece's public financing.

The bad news is that Greece's public debt now (at December 31, 2018) stands at 359 BEUR or 181% of GDP. Those are numbers which would, under normal conditions, signal a near-term catastrophy.

The good news is that those numbers currently present no problem at all. Very little of that debt will mature in the next few years and 83% of it is owed to the official sectors of other countries. One cannot think of a more stable financier than such official sectors. Last but not least, since the debt owed to the official sectors of other countries comes at extremely low interest rates, total interest payments in 2018 amounted to "only" 6,2 BEUR, which is less than 3,5% of GDP. Such a low ratio of debt service costs would normally represent a solidly financed public debtor.

And as a footnote: the 3,5% of GDP of interest expense just happens to be the same as the 3,5% primary surplus requirement which Greece's creditors have required. Put differently, Greece has an overall balanced budget (if not even a slight budget surplus).

To top off the good news: the Greek public sector is literally flush with cash: the Central Government has 27 BEUR in cash reserves and state entities have another 24 BEUR, bringing the total to 51 BEUR. Those reserves would cover interest payments and debt maturities for many years to come.