Follow by Email

Tuesday, July 31, 2018

Pierre Moscovici Interviewed About Greece

A short article in the Ekathimerini referred to an interview which EU Commissioner Pierre Moscovici had given to the Austrian magazine Profil. Here is the original interview.

Right in his first response, Moscovici made the bold prophecy that "the Greeks will now see that their sacrifices mattered." His argument seemed to be that Greece now has more flexibility to provide for more social justice but he gave no specifics. In that same response, Moscovici described pre-crisis Greece as follows: the country's economy had been very weak, taxes were not paid, public administration was inefficient as evidenced by the fact that there was not even a nationwide real estate cadastre. A superficial reader could interpret this to mean that now, after 8 years of reforms, the economy is strong, taxes are being paid, public administration is efficient as evidenced by a nationwide real estate cadastre. Well, Moscovici didn't say that, of course. Instead, he reverted to the common phrase that "much progress has been made but there are still steps to be taken."

"The market now have confidence in Greece again. Greece has recovered the freedom to pursue its own policies. We have stopped the growth of debt" - bold statements by Moscovici.

Moscovici blames the German Finance Minister Schäuble for having been too aggressive in 2015, for having brought the idea of Grexit into play. At the same time, Moscovici believes that Schäuble's aggressiveness was in response to the unfortunate conduct of the Greek Finance Minister Yanis Varoufakis. And that brought the conversation to the subject of Varoufakis.

"Varoufakis is a brilliant and eloquent person, but he is a fake. He was the wrong person at the wrong time in the wrong place. I have had many meetings with him. At least in the beginning we had a good relationship. But he was never interested in a true compromise. He always lectured all the others. His methods were not those of a statesman but, instead, of a spy. He secretly recorded conversations and negotiations. That may perhaps help the sale of his books but one doesn't generate trust that way. Furthermore, all his talk about Plan B increased the danger of a Grexit. It's alright if you have disagreements with some of your friends but if one disagrees with everyone, then one is a lone wolf."

Moscovici praised the recent debt relief agreement, emphasizing that Greece will not have to pay any interest until 2032. Presumably, he only referred to the ESM debt here. Moscovici also mentioned that the subject of debt relief might be revisited in 2032.

Moscovici was quizzed about the figure of 50 BEUR which, at one time, was used as the target for privatizations and which now is obviously unrealistic. Moscovici sidestepped this question by saying that the EU Commission had never mentioned this figure.

Finally, Moscovici was quizzed about Greece's military expenses. The interviewer tried hard but he/she could not get Moscovici to say that Greece's military expenses were too high.

Bottom line: an uninformed reader could well come to the conclusion that Greece had been in deep trouble 8 years ago, that 8 years of EU-guided reforms had delivered positive results and that a bright future was ahead for Greece.

Monday, July 30, 2018

No Longer A Task Force To Turn To!

One expression keeps recurring whenever some form of disaster strikes Greece (be that the refugee crisis, forest fires, etc.), namely that "the Greek state is dysfunctional."

One conveniently tends to forget that there once was an EU Task Force for Greece whose mandate it was, among other things, to help the Greek state to become more functional. Its mission statement proposed that "the Task Force is a resource at the disposal of the Greek authorities as they seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

Whether it is a nation-wide real estate cadastre with zoning maps, emergency plans for natural disasters, waste management, etc. etc. - all that and many, many more things fall into the category of an 'efficient public administration'.

The trouble with the TFGR was that it was "at the disposal of Greek authorities" to be used by the Greek authorities "as they seek to build a modern and prosperous Greece." It couldn't have any authority on its own because that would have been considered an interference with Greek sovereignty.

There no longer is a TFGR which the Greek state could turn to for assistance but it is highly doubtful, in my opinion, that the Greek state, on its own, can accomplish something within a short time frame for which other countries have required decades and centuries of experience and culture to develop - a well-functioning state and public administration. The TFGR falls into the category of missed opportunities.

Wednesday, July 18, 2018

A Lesson From Fraport's Success

Fraport Greece, the 14 regional Greek airports which were acquired in 2017, reports records in revenues and earnings. Pre-tax earnings were 20,4 MEUR. Since after-tax earnings were 14,4 MEUR, mathematics would indicate that the Greek state shared in Fraport's success to the tune of 6 MEUR. Total revenues were 233 MEUR and the target for 2018 is 300 MEUR. One doesn't need a calculator to figure out that this is VERY substantial growth!

From the distance, I can visualize my Greek friends, with whom I discussed Fraport on many occasions, blaming the government for having given away such a profitable company on the cheap. I cannot judge this because I don't know the details of the transaction but I would guess that as long as the Greek state shares 30% of Fraport's earnings, it sounds like a reasonable deal.

My point is a different one. The idea of foreign investment is not only to share in the success (albeit it a very important goal!). The principal idea of foreign investment, from the beneficiary's point of view, should be to obtain something which could not have been obtained otherwise (in addition to tax revenues). Things like new investment, new employment, etc. The most important derivative of foreign investment is the transfer of know-how in all respects, above all know-how in management, so that the foreigners' experience can be leveraged-up into domestic progress.

What is Fraport doing differently than before? Is it really only the access to capital? Very unlikely. Access to capital can be destructive when that capital is invested and managed poorly. One of the great secrets of China is that they acquire (and often steal) foreign know-how. When investments are managed well and profitably, capital will come on its own.

Tuesday, July 17, 2018

Comparative Charts About Greek Pensions

I came across the below selected charts in a paper by the Austrian think-tank Agenda Austria where they analyze Austrian pensions. They come to the conclusion that Austria should switch to the Swedish pension model (both, higher pensions and lower contributions than at present). Perhaps someone will some time compare the Greek pension system to the Swedish model. The source of the graphs is the OECD:

1. Actual vs. Legal Retirement Age

The dots show the legal retirement age and the bars the actual one. For men, the legal retirement age in Greece is 65, the actual is about 3 years below that. That puts Greece roughly in the middle of the group. Interestingly, for women, the legal and actual retirement ages are identical at 60.

2. Contribution Rates

Here, too, Greece is in the middle of the group with 20% of gross salaries. One wonders how there can be such huge differences among pension systems (33% in Italy, 16% in Belgium).

3. Pension Gap

The table shows pensions as a percentage of the former gross income. Here, too, Greece is in the middle of the group with a rate of 70%. I am highly suspicious of the chart because the 90% for Austria seems far from reality and the 101% for the Netherlands seem unreal.

Sunday, July 15, 2018

Bloomberg's Model Shows Dramatic Decline In Greek Interest Expense

The source of the below graph is Bloomberg, as presented in this article. The graph shows annual debt payments broken down into bond maturities, loan maturities and interest on both. What stands out is the interest payments shown in this graph. It's a bit hard to tell from the width of the bars how much the underlying interest is in Euros but a full column represents 5 BEUR. And there is at best one column (2019) where the interest bar spreads over half a column, i. e. interest in the area of 2,5-3 BEUR.

In recent years, Greece has spent on average about 5,5 BEUR on annual interest. The Bloomberg graph would suggest a dramatic decline in interest, much more so than I read in the recent debt relief agreement. So either Bloomberg's numbers are wrong and/or they know something which the world hasn't been told yet. If someone from Bloomberg reads this, a clarification would be welcome.

Saturday, July 14, 2018

The Farce Of EU Elites' Jubilation About Greece

Tansparency International has published a report on the "Evaluation of the Level of Corruption in Greece and the Impact on Quality of Government and Public Debt." Here are the highlights (very interesting reading!) and here is the full report.

The highlights list 10 "other key facts" (other than corruption) which underline my previous argument that the recent jubilation by EU elites about Greece having turned the corner were rather a farce.

Sunday, June 24, 2018

"The Greeks Can Now Smile!" - After Having Benefited From The "Biggest Solidarity The World Has Ever Seen.”

Government spokesman Dimitris Tzanakopoulos is credited with the promise that the Greeks can now smile following the successful settlement of Greece's exit from the 3rd program in August and ESM chief Klaus Regling reminded Greeks that they had been the beneficiary of the world's biggest solidarity effort ever. No better way for Alexis Tsipras to celebrate all this than by putting on a red tie.

It would be unfair to spoil the party by diminishing Greece's accomplishments. Only 3 years ago, the vast majority of politicians, commentators, analysts, etc. expected chaos for Greece's future: declaration of default and perhaps even repudiation of debt; exit from the Eurozone; breakdown of domestic stability; etc. It is unquestionably to the credit of Alexis Tsipras that all of this could be avoided and that now, 3 years later, the political establishment is celebrating Greece as a great success story. The fact that Tsipras accomplished this by essentially accepting just about everything, without resistance, that was put before him is a moot point. The end justified the means. I would further venture to say that no non-leftist government could have gotten away with accepting just about everything the creditors demanded.

If Tsipras celebrated with a red tie, the EU and Eurozone leaders celebrated with an effusion of self-praise. That, I think, was inappropriate, to say the least. The way the EU handled, beginning in the spring of 2010, the external payment crisis of Greece was a blunder of historical proportions and here is a compilation of articles I wrote about the subject back in 2012.

So how good is the new agreement which was reached a few days ago?

I propose that in any debt crisis, be it personal, corporate or sovereign, the borrower is faced with 2 principal issues: (a) the amount of interest he has to pay and (b) the amount of loan instalments he has to repay. The unique character of sovereign debt is that loan instalments never really get paid, i. e. nominal debt is hardly ever reduced. Instead, loan instalments are always refinanced. As a result, to offer an overindebted borrower like Greece an extension of maturities is nothing other than the recognition of reality. Those who consider this substantial debt relief should explain why they would prefer to waste time and effort every few months to renegotiate individual debt maturities.

So the crux of the matter is interest expense. Interest expense flows through the budget which means that it comes out of government revenues. Every Euro of interest payments is a Euro which is not available for other government expenditures. Pensions may have to be cut in order to pay interest. The point is: if one wants to give a sovereign borrower debt relief, one has to reduce his interest expense.

In 2016 and 2017, Greece's interest expense was stable at 5,6 BEUR. Back in 2011, Greece's interest expense had been 15,0 BEUR. The enormous reduction in interest expense, particularly when considering that debt was increased during this time, reflects that Greece has received substantial debt relief in recent years.

If the new agreement reduces Greece's interest expense below the 5,6 BEUR, then it is debt relief. If it doesn't, it is no relief at all.

The published information does not allow me to pass judgment on this. There are references about not applying the step-up interest margin on a certain portion of the debt which only means that interest expense would not increase; neither would it decrease. There are references about a further deferral of EFSF interest which would also hold interest expense stable but not reduce it. There are references about finally distributing to Greece SMP profits which had so far been held in an escrow account. This would be a significant reduction of interest expense. And there are references about replacing some expensive IMF debt with cheap ESM debt. This, too, would reduce interest expense.

At the same time, Greece is taking on quite a load of new debt for the primary purpose of building up a cash buffer. That cash buffer, of course, would increase interest expense.

In short, the principal benefit for Greece seems to be that its debt has now been regularized. That is in and by itself a very significant benefit because only if one's debt is regularized can one begin to commit time and resources to things other than debt negotiation. Whether or not Greece's budget will be relieved of interest expense as a result of the agreement remains to be seen.