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Friday, January 30, 2015

A Question of Prof. Krugman's Integrity

Economics not being an exact science, one has no choice but to accept certain unprovable arguments even though common sense might suggest that they are wrong. This contest between unprovable arguments and common sense I experience quite often when reading columns and/or blogposts by Prof. Paul Krugman.

In this piece in the NYT Krugman has, so I believe, overdone it and one is inclined to question his integrity. And one is reminded of Prof. Niall Ferguson who once wrote several articles attempting to prove Krugman's lack of integrity.

Krugman, off the bat, aims at destructing the myth that the rescue loans which Greece has received since 2010 have been subsidizing Greek spending. Well, if that is a myth to Krugman, then he is probably the only one to whom this is a myth. The figures have been public knowledge for everyone who ever took the time to look at IMF reports on Greece. From 2010-12, rescue loans totalled 247 BEUR, of which 206 BEUR went to debt service. A whopping 83% of rescue loans only served the creditors. However, there were still 41 BEUR which stayed in Greece to finance the primary deficit. How would Krugman call that other than 'subsidizing Greek spending'?

But Krugman's real fast one is yet to come. He says that "it’s true that Greece (or more precisely the center-right government that ruled the nation from 2004-9) voluntarily borrowed vast sums. It’s also true, however, that banks in Germany and elsewhere voluntarily lent Greece all that money. We would ordinarily expect both sides of that misjudgment to pay a price. But the private lenders have been largely bailed out (despite a “haircut” on their claims in 2012). Meanwhile, Greece is expected to keep on paying".

Excuse me, Prof. Krugman, was Prof. Ferguson perhaps right when he accused you of a serious lack of integrity?

Whether or not the private lenders paid a price or the European tax payers bailed them out (which I argued at the time was the prodigal sin) has absolutely zero bearing on Greece as the borrower. All it did to Greece was that it changed its obligors from private lenders to the Troika. Had the private lenders not been bailed-out by the tax payers and had they all gone bankrupt, it wouldn't have made one cent worth of difference to Greece as the borrower. On the contrary, the insolvency judge of those lenders might have radically called all those loans in order to maximize cash. To suggest that it was the other way around is simply unacceptable.

Krugman essentially suggests what the EU has signalled that it is willing to do: reduce the debt service burden by lowering rates, extending maturities and installing longer grace periods for interest and by lowering the primary surplus requirement. What Krugman ignores is that SYRIZA is not satisfied with what Krugman suggests and what the EU has signalled it would be prepared to do. SYRIZA wants a straight-forward haircut for demagoguery reasons. They are so fanatic about their dogma that they don't even realize that the Krugman proposal (like the EU plan) would be much more beneficial to Greece than a haircut.

FM Varoufakis: "We Don't Want the 7 Billion!"

"We don't want the 7 billion" - This is what the new Greek Finance Minister Yanis Varoufakis told the NYT in an interview after assuming the position. It is totally consistent with what Varoufakis has published in his blog in recent years. The theme was always: "Greece should not take on one more Euro of debt only to repay debt. If that means default, it means default".

It's going to be very difficult for Varoufakis to backtrack from this position. February 28 (the expiry of the present Troika agreement) is approaching with great speed. Even with the 7 BEUR, Greece might face a bit of a cash squeeze in the next months, so much more so without it.

One cannot help but interpret this as Varoufakis' throwing down the gauntlet. Two cars are racing at each other in a Game of Chicken and one of the two drivers has just thrown the steering wheel out of the window. Or to use the language of soccer: "Either the home team will win or the visitors, but there won't be a draw!"

Thursday, January 29, 2015

Words Are Easy; Action Speaks!

Zerohedge published an Open Letter from Alexis Tsipras to Germany titled: "What you were never told about Greece". If I were Tsipras, I would not have published that letter because it is so obvious that I wasn't its author and, above all, it's not my authentic language. But there are other reasons, too.

The letter reminds me a bit of President Obama's educating Republicans what politics is all about. It is serene wisdom on one hand and assumed ignorance on the other. And, by the way, the letter does not contain anything which the German public has never been told. All one has to do is to read the weekly column of Jakob Augstein in Der Spiegel, to read blogs like NachDenkSeiten or Spiegelfechter or, to make it easy, to simply listen to Gregor Gysi, Sahra Wagenknecht or Oskar Lafontaine when they speak in the Bundestag and/or on TV talkshows.

The comparison with the Germany of the 1953 Debt Conference is often made. Perhaps one should imagine how it would have been perceived if, prior to the conference, Germany would have published an Open Letter to the Allies explaining to them what German virtues are all about and how "a great opportunity for the West was about to be borne in Germany; an opportunity the West could ill afford to miss".

Must Debt Relief be "Deserved"?

As is well know to my readers, I am for a Greek debt relief but against a haircut. Strictly on the basis of economic – and not political – grounds. A well-structured debt relief provides the same benefit for Greece as a haircut (perhaps even more) and it causes less one-time pain for the creditors. Both sides have to be happy!

SYRIZA has presented the argument that Greece deserved the same debt forgiveness as Germany in 1953. I argued that 1953 was not a good example because no one would have had to take a loss on German debt if, instead of a haircut, there would have been a well-structured debt relief. And now I read this article by Leonid Bershidsky, a former publisher of Forbes in Russia, in Bloomberg’s ("Germany deserved debt relief; Greece doesn't!"). Given his background, Bershidsky obviously has some very strong feelings against anything which comes from the left. But still, his article is worth reading and there will undoubtedly be many who will consider it as a reality check for Greece. Here is an excerpt:

“Of course there are political arguments for Greek debt relief, as there were in the German case 62 years ago. European leaders are worried that Greece might leave the euro zone and trigger its disintegration. It might be less costly to write off some of the debt than to deal with such dire consequences of a tougher stand. Then, however, the problem should be framed in these stark terms: Greece's creditors would be paying ransom to its far-left government so it doesn't mess up the common currency, which Greece had no business adopting in the first place. If that is the case, we should be spared parallels with the 1953 London conference. It had far nobler goals, and Germany was much better positioned to put creditors' generosity to good use than is Syriza's Greece”.

Wednesday, January 28, 2015

SYRIZA: Don't Fool Around With Tourism!

"We do not want to continue the current saturated model of intensive exploitation of tourism". 

This is how Alexis Tsipras is quoted in this Daily Mail article. Apparently, the context is that SYRIZA objects to all-inclusive deals which, in their mind, bring no value to the local economies. Whether that makes sense or not is something for experts in tourism to discuss.

My point is a different one. When providers of a service attempt to tell customers what they should and should not do, that generally doesn't work so well, at least as long as customers have a choice. If I think an all-inclusive deal is the best for my family vacation, then I will get an all-inclusive deal. If I can no longer get it in Greece, I will get it elsewhere. 

I am all for trying out new experiments but I wouldn't necessary try out my experiments with one of the most important sectors in the economy! Experiments can also fail!

Tough Talk Between EU and Greece?

Suppose the Troika negotiation didn't get anywhere and, at some point, the EU has had enough of Greece. They prepare a take-it-or-leave-it proposal and present it to Greece's Chief Negotiator. And then imagine that the following dialogue would take place:

Chief Negotiator of Greece: "No Greek government could accept such a plan!"

Chief Negotiator of the EU: “ your parliament and your constitution. The EU is an elephant. Greece is a flea. If this flea continues itching the elephant, it may just get whacked by the elephant’s trunk, whacked good. We pay a lot of good European Euros to the Greeks. If your Prime Minister gives us talk about democracy, parliament and constitution, he, his parliament and his constitution may not last very long!"

Rest assured! No European politician would ever talk like that. I am only paraphrasing above what President Johnson said to the Greek ambassador over the Cyprus issue in June 1964.

Greece's Primary Surplus of 4,5% of GDP!

Per the end of November 2014, Greece reported a year-to-date primary surplus of 3,6 BEUR. After closing the books for 2014, Greece reported a primary surplus of 1,5 BEUR for the entire year.

Now, I have tortured my ageing brain; I have used my calculator; I have used Excel. Whichever way I slice it,  my result says that, if the primary surplus for 11 months was 3,6 BEUR and for 12 months 1,5 BEUR, there must have been a primary deficit of 2,1 BEUR in the 12th month. Is there anything wrong with my math?

We have heard that Greeks started not making tax payments in December in anticipation of tax cuts by the new government. If that is the primary reason for the December deficit, then one has to expect that the January result will be equally bad. If not worse because in January it was already quite clear that SYRIZA would be the new government.

For 2015, Greece - before SYRIZA (BS) - had budgeted a primary surplus of 3,3 BEUR. That seems to be a bit less than what 2014 would have been had taxes continued to flow in December. So, at best, a stabilized primary surplus was budgeted. In 2014, the most difficult quarter was the first quarter when March produced a primary deficit of about 1 BEUR. Presumably, this year's March would be similar.

It is hard to imagine that Greece currently runs a primary surplus when tax payers continue to be on strike. Furthermore, the emergency measures which SYRIZA is implementing with incredible speed will add expenses which had not been included in the original 2015 budget. What does that tell us?

It tells me two things: first, it tells me that, as has often been discussed, the Greek banks might run out of money if there is an accelerated deposit flight. And, secondly, it tells me that the government itself might run out of money only for its regular operations, not to even mention the extraordinary maturities of bonds which start coming up in March.

The longer the Troika negotiations last, the tighter the situation for SYRIZA will get. Do you suppose the Troika knows that?

Tuesday, January 27, 2015

Prof. Paul Krugman Discovers The Importance of Cash Flows in Greece!

It's good to feel vindicated from time to time. With all this hype that has been going on for years over the sustainability of Greece's debt, leading to the self-conviction of many that the most important thing which Greece needs is a haircut --- I have always said that the level of Greece's debt doesn't really matter. What matters the most is how much debt service flows through the budget. The level of debt is totally irrelevant when it carries a zero interest rate and when it has no maturities. That's also called equity.

As I have written before, Greece currently spends about 4,5% of GDP on debt service (actually not a high percentage) and that percentage goes down to about 2,5% when considering ECB interest rebates. SYRIZA can't touch the debt owed to private creditors at this stage, so they can never get the debt service down to zero. But with some touch negotiations with the Troika, SYRIZA ought to be able to bring the overall percentage of debt service (net) down to 1% or even a little less.

And now witness what Prof. Krugman writes in this blogpost: "Most discussion is framed in terms of what happens to the debt. But at this point Greek debt, measured as a stock, is not a very meaningful number. After all, the great bulk of the debt is now officially held, the interest rate bears little relationship to market prices, and the interest payments come in part out of funds lent by the creditors. In a sense the debt is an accounting fiction; it’s whatever the governments trying to dictate terms to Greece decide to say it is". Put differently, the message is: "It's the flow, not the stock, stupid!"

I once argued that Greece's decision point would come when a primary surplus was reached. As long as there was a primary deficit, Greece paid interest not out of its own resources but out of new borrowings. With a primary surplus, Greece has to decide what it uses that surplus for: for domestic investments or for paying interest to foreigners.

So I guess Prof. Krugman, who has been a fierce proponent of idea that Greece's debt is not sustainable, now agrees with me (Sorry! I agree with him!) that there should be two major negotiating points with the Troika: How to get the debt service close to zero and how to use much or most of the primary surplus for domestic investments.

Was Nun Auf Tsipras und Seine Regierung Zukommt

For those who read German I link below my assessment of Tsipras/SYRIZA after the election, as published in

Was nun auf Tsipras und seine Regierung zukommt

If you can't open this link because of restricted access, you can also find it here.

Monday, January 26, 2015

Alexis Tsipras - It Was Just Like Obama's First Election Night!

Back in 2008, I was a passionate admirer of Barack Obama. First of all, he could deliver such wonderful soundbites in his speeches. And, secondly, he was an outsider to the Washington establishment of cronies and lobbyists. He had the power of the people behind him and I believed him when he promised to really change America. His acceptance speech in the evening of the election was the last time I could see the Obama of the campaign. From then on, he retreated behind closed doors; no more arousing speeches; no longer a revolution against the establishment. The President Obama seemed like another person from the Obama of the campaign.

I have not been a passionate admirer of Alexis Tsipras. However, I did, from the start in June 2012, like his beautiful soundbites. Of course I noticed that he could rally a lot of people behind him but I thought that most of them were the 'crazy ones'. At the outset of this election campaign, I thought the 'crazy ones' would commit such blunders that voters would get scared. Today, I know that 36% of voters cannot be crazy. And I know a few other things.

Tsipras, in his words and in his writings, has made a dramatic shift to the center in recent weeks. If this was only fake, then he is a great actor. SYRIZA's latest policy statement reminded me a bit of what George C. Marshall could have recommended for the reconstruction of Germany after WW2.

As I prepared a guest commentary for a Swiss online paper last evening, something began to dawn on me, and I had to scratch my head when I realized it. Much of what Tsipras has been saying in words and in writings in recents weeks is VERY similar to what I have been writing in this blog since the start. Some examples:

* Greece must drive the process of change and not the Troika.
* Greece must be the owner of the problem and of the solutions and not the follower of the Troika's commanded solutions.
* A National Economic Development Plan is needed and it is Greece who has to make it.
* The increase in tax revenues must come from those who never paid taxes and not from those who always paid them.
* All the parasites of the Greek system must get scared that someone will come along and stop their game.
* Etc.

A Greek economist who allegedly is a close adviser to Tsipras but whose name I didn't catch (his German was perfect!) summarized SYRIZA's policies last evening on Austrian TV. There was not anything which I would have disagreed with. There has been a massive shift in support for Tsipras and SYRIZA outside of Greece in the last days/weeks. A well-known Austrian economics professor called for a public demonstration in Vienna last evening to show support for SYRIZA. A feeling seems to develop, to an extent also in Germany, that any decent human being simply must support SYRIZA.

Despite all my agreements with Tsipras' recent words and writings, why would I still hesitate to throw my support behind him? Here are a couple of reasons which come to mind off the bat:

* I am generally suspicious of rapid changes from Saulus to Paulus.
* While I could buy that Tsipras has changed from Saulus to Paulus, I cannot imagine that his voters and future parliamentarians can also make that change.
* When someone after over 30 years of experience with an exploding public sector still thinks that the public sector is part of the solution and not part of the problem, then I scratch my head.
* Everything I have written about concerned the private sector and private enterprise in general. I have not heard much from Tsipras about the private sector and private enterprise.
* I have almost become obsessesd with the idea that foreign investment is part of the solution for Greece. I have not heard much from Tsipras about foreign investment.
* I have always expressed surprise about Greek corruption and cronyism when, in day-to-day life, I would meet Greeks who are decent human beings with high ethical and moral standards. Still, I find it hard to believe that the SYRIZA leadership and upper ranks consist only of Greeks of high ethical and moral standards and none of the parasites. Something tells me that many of them have been parasites of the Greek system just like so many others.
* Etc.

I generally prefer to see the glass half full instead of half empty. So let me say that Tsipras' glass is half full. But it is still far away from becoming full and it could become empty again very quickly. As Nick Malkoutzis formulated it in this outstanding commentary in Macropolis: 

"The thinking goes that if the people are visibly on SYRIZA’s side its bargaining position will be impregnable. This is the dream, at least. The nightmare is that people will be on the streets protesting because of the failure of a SYRIZA government to reach an agreement with Greece’s lenders, leading to the European Central Bank putting a stop to liquidity. It is a scenario in neither side’s interests but that does not mean it cannot happen".

Or as I once quoted a Greek proverb:

"Any fool can throw a stone into the sea but, once he has done that, not even a hundred wise men can get it out again".

Thursday, January 22, 2015

A Precise Prescription for Greece

A reader by the name of William Hunt posted the following commentary to this WSJ article:

Prescription for Greece -

1. Default on its debt
2. Leave the Euro zone
3. Recover on their own with no access to international financial markets

This has occurred all through history, so it is not anything new.  Projected recovery time - 5-10 years. Get on with it.

Well, it certainly is a crystal clear and concise prescription!

Germany's Debt Forgiveness of 1953 - The Wrong Precedent!

Germany's debt forgiveness back in 1953 is now being universally cited as the proper precedent to justify a haircut for Greece. I think that this is an extremely poor example. To me, Germany of 1953 is a classic example of a mistaken haircut.

Assume the amount of debt which was forgiven in 1953 had, instead, been converted into a 50-year bond with an interest rate adjustable to something (perhaps GDP; perhaps government revenues; etc.) and a 20-year interest capitalization period. No cash outflow would have burdened the German economic miracle during the next 20 years. At the same time, the German economic miracle would have put Germany in a position to pay all debts which it had assumed. The classic example of making a borrower strong enough so that he can pay his debts.

By 1973, Germany would have easily been in a position to pay annual interest on the bond. And by 2003, Germany would have easily been able to repay or refinance that bond.

And the moral of the story is? Well, if you want to get money back from a poor borrower, the first priority must be to make the borrower strong again. If you only forgive his debt, he may have less debt but he remains poor.

Wednesday, January 21, 2015

Prof. Yanis Varoufakis - Always Good for Innovative Ideas!

Prof. Yanis Varoufakis wrote an article in his political blog where he introduced a new line of argumentation which I have never heard before and which I find innovative, for sure. I did not read the original but this German translation of the article instead.

Varoufakis makes reference to Greek bonds (volume not revealed) which the ECB under Jean-Claude Trichet purchased in the secondary market during 2010/11. The only possible benefit for Greece of the ECB's purchasing bonds in the secondary market is that Greek yields are contained and facilitate new borrowings. Since nobody would have lent to Greece at the time, Varoufakis argues correctly that Greece had no benefit from those bond purchases which were done under the exclusive responsibility of the ECB. Apparently, these bonds begin maturing by June of this year.

And here comes Varoufakis' innovation: had the ECB not purchased these bonds under their exclusive responsibility, then these bonds would have been subject to the 2012 haircut and would have been reduced by 90%. Why should Greece pay 100% for something which would have been 10% if only the ECB had not made such a blatant mistake?

Good question!

At the same time, this argument could be made for all rescue loans, too. Without the rescue loans, the debt would have remained private and would have been subject to the 2012 haircut.

All I can say is that it will be interesting to watch how this negotiation will unfold over the next months.