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Friday, October 24, 2014

A Brutal Assault On SYRIZA!

"SYRIZA forsakes what appeared to be its own values and allows the current government to continue it’s demolition job, it seems Greek citizens would have to simply go back to sleep while the obliteration continues…" 

This is what Stavros Katsoulis concluded in his article titled "Is Mr. Tispras and the SYRIZA/left party the solution to Greece's problems?" Mr. Katsoulis seems to be a true left radical who feels disappointed/disillusioned by SYRIZA's having become more 'moderate' in the last couple of years. The article was published on the website of the United People's Front which describes itself as follows: 

• EPAM (United People’s Front) was founded on 16 July 2011, following the dramatic events of May 2010 when Greece lost its national and popular sovereignity and the resistance of the people square-gatherings in almost every major Greek city.
• EPAM is open to everybody regardless of political beliefs or social status.

1. Unilateral debt repudiation according to the international law.
2. Cancellation of all memoranda and international treaties signed since 2010 with the IMF, the EU and the ECB.
3. Exit from the European Union and the eurozone, and return to national currency.
4. Nationalization of the major banks starting from the Bank of Greece, in order to control the economy, to redefine the credit policy and to control capital traffic.
5. Trial and punishment of all those responsible for the bankrupcy and the loss of sovereignity of the country.
6. New Constitution.

Well, this is a clear and unequivocal position, for sure! The question of interest would be how many votes this position would gather in a national election. And then the question would be whether this is a viable course of action for Greece. 

Sometimes I wonder whether perhaps the only way to get such romantic feelings out of the minds of many Greeks would be go for this kind of strategy and to let the results speak for themselves.

Thursday, October 23, 2014

Greece - Will the Axe Drop?

"As long as the Samaras-led government continues to act pompously and unsympathetically toward its citizens, however, Greece will have its head shackled to the guillotine. Until, and if, the axe drops, that is!" - Justine Frangouli-Argyris in the Huffington Post.

Wednesday, October 22, 2014

Taking Stock of Greece

"In a nutshell, the Greek banking system, as well as the Greek economy, have undergone profound (and long overdue) structural changes. Reform of the euro area financial architecture is also building confidence. Growth can resume, provided that major local or international political, geopolitical and economic risks are evaded" - Prof. Eleni Louri-Dendrinou.

Prof. Louri-Dendrinou is taking stock of Greece after 5 years of crisis. Quite obviously, it is an assessment which SYRIZA would be unlikely to share because of the overall positive tone. How could SYRIZA expect to replace the current government if it were to agree that there have been positive developments in Greece?

On the other hand, SYRIZA might want to, at least internally, ponder this article and determine whether perhaps some of the points are valid. If some of the points are indeed valid and if there are indeed positives among all the negatives which SYRIZA sees, SYRIZA should build on those positives instead of wiping them out altogether.

Austria & Greece: Two Presidents Meet

As the Austrian President Heinz Fischer is visiting Greece for a couple of days, he will also meet with the Greek President Karolos Papoulias. The two heads of state will have interesting subjects to discuss, among them: the usefulness of their office and the compensation that goes along with it.

The Austrian President has almost exclusively ceremonial responsibilities; his constitutional powers are close to zero. Politically, he is a bit of a male version of the Queen. From what I understand, the constitutional powers of the Greek President are not any greater.

The two offices also have in common almost identical compensations: the Austrian President's annual compensation (not including expenses accounts) is 328.188 Euro. The Greek President's annual compensation (not including expense accounts) used to be 322.000 Euro until about 2 years ago. They were then halved and my understanding is that President Papoulias decided to forego his entire compensation. No such intent has been reported about President Fischer so far.

In an interview prior to his visit, Fischer said he found it hard to imagine how Austrians would have reacted if they had to suffer the same kind of austerity measures as Greeks. President Papoulias might consider asking his Austrian counterpart how he would feel if his compensation would be cut in half. Or perhaps only down to the level of the US President.

The Austrian President is extremely eloquent at saying nothing. He will express great sympathies for the suffering which many Greeks have to endure and he will cite the European solidarity. Whether the Greek President is eloquent I cannot judge because the last thing I have heard of him was when he asked "Who is Mr. Schäuble?" President Fischer is not known to ever have asked such a provocative question.

That leaves the question of the usefulness of their offices and how a potentially useless office could best be used to offer society moral leadership and ethical guidance. Both Presidents seem to share impeccable ethical and moral values. Whether or not they are putting them to use as political leaders is not apparent.

Sunday, October 19, 2014

Why Greece Could Fail

In their book "Why Nations Fail", the authors Acemoglu/Robinson argue that the pillar for sustained political and economic success are a nation's institutions. They coin the terms "inclusive institutions" and "extractive institutions".

Prosperity is generated, so the authors, by investment and innovation, but these are acts of faith: investors and innovators must have credible reasons to think that, if successful, they will not be plundered by the powerful. Order without inclusive institutions may enable an economy to escape poverty, but will not permit the full ascent to modern prosperity. The authors' explanation is that if the institutions of power enable the elite to serve its own interest – extractive institutions – the interests of the elite come to collide with, and prevail over, those of the mass of the population. They argue that there is no natural process whereby rising prosperity in an autocracy evolves into inclusion. Rather, it is only in the interest of the elite to cede power to inclusive institutions if confronted by something even worse, namely the prospect of revolution. The foundations of prosperity are political struggle against privilege.

Yannis Palaiologos of the Ekathimerini blows into the same horn when he writes that Greece's closed society is central to the current malaise: "Some analyses went a little deeper and saw clientelism as the core pathology, an acid corroding everything in Greek life, leaving the country in the hands of well-connected mediocrities and spreading mutual mistrust across the body politic. But even that does not go deep enough. Greece’s biggest problem, which it has done little to deal with, is its lack of openness as a society. It is a stance with deep roots and wide-ranging implications, which decisively undermines its hopes of recovery".

The definition of a problem is always much easier than the proposal for a solution. It's quite a while since I read the book but I do remember that one of the authors' argument was: if a society is controlled by an entrenched elite, particularly a corrupt elite, then it is next to impossible to bring about change in a normal and evolving way.

Would that make a case for Alexis Tsipras?

Thursday, October 16, 2014

Greece - Why Go For Self-Destruction?

"It is impossible to imagine why the government, instead of stressing the increasing instability in Europe and the country’s good fortune at already having secured a loan from the IMF of 12 billion euros at a rate of 4 percent, insists on borrowing from the markets, where the yield of Greek 10-year bonds has skyrocketed to 7 percent" - Ekathimerini, October 16, 2014

"Typically, the more stable and reliable funding is more expensive while the 'hot' money may often be cheaper and less cumbersome to obtain. With Greece's sovereign debt, the opposite is true. The stable and reliable funding comes from EU institutions and, as far as I know, it accounts for almost 80% of Greece's sovereign debt by now. Its cost, if I am not misinformed, is 2% at the most; perhaps even closer to 1,5%. The cost of the anonymous bond money has been down to 5% earlier this year, albeit only for a 3-year tenors. 10-year bond money, which is still rather short-term, would probably cost today 6-7%. Somebody needs to help me out with logic: there is 2% stable and reliable money available but the current government does everything it possibly can to switch to anonymous bond money for shorter terms and at 5% more cost? There must be a reason for doing that except --- I can't fathom it!" - Klaus Kastner, October 2, 2014

There couldn't have been a better example than the last couple of days of what can happen if one throws one's luck into the hands of anonymous bond markets! This only re-emphasizes the question why the government is so eager to throw its luck into the hands of anonymous bond markets. My understanding is that the government's desire is driven by Alexis Tsipras' promise to 'tear up the memorandum' (Greek translation: 'get rid of the shackles of slave owners') once he is in power. So the government seems intent on pre-empting that promise, not by tearing up the memorandum but, instead, by letting it lapse.

The various, extremely painful downsides of the memorandums (if not to say their mistakes/errors) have been debated ad nauseum and I will not belabor them here. However, there has been far too little focus on the infinitely more valuable aspects of the memorandums. I will now be rather controversial and argue what would have happened to Greece if there hadn't been those memorandums; if there hadn't been EU-support; if there hadn't been support of the Euro financial system. Those who think that I am exaggerating are invited to look at Argentina. There it happened more than once during the last 30-40 years. 

Without the memorandums; without EU-support; with the support of the Euro financial system ---

1) The Greek state would have had to default on a large portion of its domestic liabilities (wages/salaries, pensions, etc.).
2) Capital controls would have had to be implemented including a domestic deposit freeze.
3) The banks would have had to be nationalized.
4) Imports of many goods would have come to a sudden stop.
5) Within a short time, Greece might have had a GDP only half the size of what it was before.
6) Etc.

This is assuming that Greece would have decided to hold on to the Euro. Had Greece opted for the Grexit, the situation would have been even more dramatic.

Why does the Greek government fall for Alesix Tsipras' tactics instead of pursuing a self-confident and constructive strategy. A strategy which focuses on the positive aspects of the memorandums and which promises to correct the mistakes/errors of the memorandums which have caused unneccessary pain? 

My sense is that, in the present situation of the Eurozone, Greece could get from the EU just about everything it wants as long as it is within a constructive and controlled framework. If Greece wanted to reprofile its debt to official lenders with a significant extension of maturities, it would get it. If Greece wanted a reduction of interest rates on the debt to official lenders, it would get it. If Greece wanted some financial room for maneuver to establish a social safetey net for the one-third of the population in poverty, it would get it. Etc.

My sense is also that the only thing which the EU does not want is a Greece which returns to its former ways. A Greece which becomes destructive and uncontrollable, and - frankly - a danger for the Eurozone and a nuisance for the EU. Isn't that a legitimate case?

Even if that were not a legitimate case, it is still in the selfish interest of Greece to continue on a constructive and controlled course. The energies must be used for striking better bargains with the EU; not for self-destruction!

Tuesday, October 14, 2014

Sofia Voultepsi - A Government Spokesperson Gone Berserk

In the event that Alexis Tsipras as Prime Minister proceeded with “heroics in Europe”, Sofia Voultepsi, a government spokesperson is quoted as saying, “it won’t be long before the ATMs shut down in Greece, as they did in Cyprus".

I have written before that the best way to eventually start a bank run is to warn of it. I have also written before that, in the sensitive world of high finance, it is often impossible to retract statements after they have been made. And that the wrong statements can become very, very expensive.

Ms. Voultepsi's statement may have been prompted by her being upset about the fact that “SYRIZA curses all day, it is a sewer and a foul stench", as she said. What she may have overlooked in the hectic of events is that close to one-third of Greeks, according to polls, currently favor SYRIZA and it is not a clever political strategy to communicate to one-third of voters that they are a sewer and a foul stench. 

If I were a supporter of ND, I would begin to wonder whether a party which makes such statements really deserves my support.

Gone Missing --- Website of Greece's Ministry of Finance

My primary sources of statistical information about Greece have traditionally been

the Bank of Greece,
the Ministry of Finance.

For quite some time now, I have not been able to access the website of the Ministry of Finance where they have detailed statistics about Public Debt and Budget Execution.

Is that a problem of my computer or a problem of the Ministry of Finance?

Tuesday, October 7, 2014

Sweetheart Deals for Greek Banks

I have read a translation of this article by Prof. Yanis Varoufakis in the German language Griechenland-Blog. It is a summary of all the support actions which the Greek banks have received from the state so far, namely:

1) A 41 BEUR recapitalization after the PSI.
2) Another 41 BEUR in state guarantees for ELA funding from the ECB.
3) Recognition of the 37,7 BEUR losses from the PSI as tax-effective losses.

At issue is point (3) which means that future profits (during the next 30 years) up to 37,7 BEUR will be tax-free. Obviously, if there are no future profits, there will be no benefit from saving taxes on them. If, however, there are future profits, the potential tax saving will be roughly 10 BEUR. In accordance with IFRS accounting rules, the banks record those 10 BEUR as 'deferred taxes' on the asset side. Put differently, a rather substantial portion of the banks' assets are future claims which will only be worth something if there is sufficient future profitability.

The risk that there might not be sufficient future profitability and that those claims might not be worth all that much was apparently too much for the bankers to sleep well. So, the government and parliament passed a law that, regardless whether or not there is future profitability, the banks will have that claim against the state. The side effect of this measure is that the banks can now count those 'deferred taxes' towards their capital base (subject to ECB approval).

What is to be made of all that?

First, there is no question that a state - if it wants to avoid total collapse of its economy - needs to bail out its large banks if and when they get in trouble. The cost to society of not doing that would be so much higher. So the question is not whether the state should have supported its banks. Instead, the only question is whether that support was commensurate and what the state got in exchange for the support it provided.

The logical answer would appear to be that if a bank gets into trouble and needs to be bailed out by the state, the state should get full ownership and the right to replace the board of directors and the management of the bank. That would be too simple a logic. If a bank has a temporary liquidity crisis (a bank run) but is otherwise relatively sound, the state should get less in exchange than from a bank which has essentially become insolvent.

The PSI essentially wiped out the entire aggregate equity of Greek banks. Put differently: even without the 'normal' problems like non-performing loans, etc., the Greek banks had lost their equity. That certainly was a situation where the state could have applied the above simple logic. Did it? No, it certainly didn't! Instead, judging from everything I have read about the recapitalizations, they were EXTREMELY shareholder-friendly! Far from full ownership! Why? No outsider will find the answer to that question.

The 41 BEUR guarantee for the ELA funding is a moot point, as far as I am concerned. Greek banks would have survived without this funding because they could draw on the ECBs target-2. ELA funding was less expensive, as far as I know, and - most importantly - it enabled the banks to buy government bonds. So here I think the benefit was rather mutual.

Recognizing the 37,7 BEUR losses from the PSI as tax-effective losses to be applied against future profits would also appear within the limits of normality. After all, the banks did incur these losses. What is totally out of the ordinary is that the state would guarantee the banks that they will get their future benefit regardless of whether they make profits or not. So that is quite a present for the banks, indeed. What did the state get in exchange? Allegedly, the state will get bank shares as collateral but I have not been able to find details about this collateral arrangement anywhere.

By and large, it seems that the Greek state has been extremely generous to its banks, particularly to the owners of its banks. Will the state need to be generous again in the future?

According to Bank of Greece statistics, the aggregate capital & reserves of all Greek banks is around 70 BEUR. That number is easy to remember because it is identical to the amount of non-performing loans in the Greek banking system. So, if all those non-performing loans were to be repaid in full, the Greek banking system would be in good shape. If they are repaid in half, the banks will again need equity and they will look to the state for support. And if the non-perfomers turn out be complete losses, then the banks' equity is - once again - wiped out. The only thing which is certain at this time is that the requirement on the part of banks of future state support can definitely not yet be ruled out.

Back in 2008, AIG needed to be bailed-out by the US government. AIG was the world's largest insurer at the time and no one really thought that the company was anywhere close to insolvency. However, they needed money in a hurry; a lot of money. It started with 85 BUSD and ended up with 185 BUSD. Given those dimensions, the US government struck a tough bargain (these days, lawyers are arguing in court that it was a 'punitative' bargain). Existing shareholders had to watch how what used to be 100% ownership eventually ended up being only 8% ownership and how the US government took a hefty 22 BUSD profit when it finally exited from AIG. Maurice R. Greenberg, the legendary former CEO of AIG and formerly one of its major shareholders, says he lost 90% of his multi-billion USD net worth in the process and he is now suing the US government for 40 BUSD in damages.

The way the US government bailed-out AIG was anything but shareholder-friendly. If the Greek government had done the same with its banks, all those banks would now have new owners, new boards of directors and new managements. Perhaps the Greek government should read up a bit on the AIG bail-out as it prepares for the next bank support program.