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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.

Sunday, June 3, 2018

At Some Point Germans May Discover That They Are In Deep Trouble

Below are some interesting charts which I picked up in this Zerohedge article.

First, the phenomena which got the problem countries into trouble in the first place - current account deficits: Greece & Co. had been spending much more money outside their borders than they had revenues outside their borders, having to cover the gap with loans from outside their borders. Today, 8 years later, the situation is as follows:

There are current account surpluses wherever one looks. Almost wherever one looks: France seems to have become rather problematic with a current account deficit representing almost 4% of GDP but Greece's current account deficit is now minute compared to what it used to be.

A current account surplus doesn't mean that the domestic economy is in order. All it means is that the country is financially self-supporting as regards its economic activities outside its borders. It has enough revenues outside its borders to pay for all the essential and non-essential imports the country is buying. Theoretically, the country could be barred from any foreign credit and yet, it could continue its cross-border transactions.

The next chart is particularly interesting. The credible narrative had been that the ECB's Target2 payment system - as a quasi unlimited credit card - allowed countries to run current account deficits even though the foreign private banks were no longer funding them. That was certainly true in the early years but following that logic and seeing current account surpluses now, one would expect Target2 claims of the North to decline.

The following chart shows the development of the (in)famous Target2 balances:

The earlier narrative no longer holds because Target2 claims of the North, specifically of Germany, have increased phenomenally even though current account surpluses were recorded in most countries. There is only one other explanation: capital flight. Now here is something to ponder for all those who always blame Germany for bleeding out the suffering South: Germany has run up nearly a trillion Euros worth of Target2 claims so that, mostly, Italy and Spain could transfer money out of their countries (even back to Germany). Should Italy or Spain ever exit the Eurozone, the Bundesbank might say to them "We want you to give us our money back" and Italy or Spain would respond "The money is already back in your banking system, except it's now in our name and no longer in yours!"

Much has been said about the brutal internal devaluations which the South has had to go through. No doubt that's true for Greece but when one looks at Italy, one sees that nominal unit labor costs, the most crucial element of international competitiveness, have actually increased by 10% since the crisis began. The new Italian government intends to increase deficit spending which is unlikely to favorably impact nominal unit labor costs.

And now to the final chart which leads J. P. Morgan to the conclusion that an exit from the Eurozone may be Italy's best option:

Italy's net foreign investment position is only minimally negative which leads J. P. Morgan to conclude that an Italian Euro exit should be a lot less threatening to creditors than a Spanish one. Put differently, with a current account surplus and a walk-away from Target2 liabilities, Italy would owe only very little to foreigners. Well, not quite because the above foreign investment position is a net between assets and liabilities. While the assets/liabilities are not necessarily owned/owed by the same parties, it is still a fact that there are about 3 trillion Euros of Italian financial assets outside the country's borders and foreign creditors would use all legal expertise to get a hold of some of them.

The old saying goes "If you owe the bank 100.000 Euros, you have to be nervous. If you owe the bank 100 million Euros, the bank has to be nervous." Germany has many more reasons to be nervous about an Italian exit from the Eurozone than Italy itself. And here is another thought.

Deutsche Bank, once Germany's financial calling card, is in great difficulties. Should Germany ever be called upon to bail-out Deutsche Bank, they will discover that Deutsche Bank is counter-party in derivatives with a notional amount totalling almost 3 times the GDP of the United States!

Certainly at that point, Germany will stop educating others about reforming their financial sectors and economies.

Wednesday, May 30, 2018

Parallel Currency - Revisiting Justified?

Ever since it became public that Yanis Varoufakis had worked on a Plan X for a parallel currency, the term 'parallel currency' has assumed a bad odor. When it became public that Star-Lega of Italy were also eyeing the alternative of a parallel currency, markets went into shock. But why?

Before the introduction of the Euro, every country had a parallel currency. It was called 'local currency'. Business was conducted in other currencies as well and they were called 'foreign currency' (I remember when, years ago as a tourist, Greeks seemed to prefer getting paid in Deutsche Marks rather than Drachma). The difference between the two currencies is that the local currency was the only legal tender in each country and it could be printed by each country whereas the foreign currency had neither advantage.

With the Euro, the members of the Eurozone gave up their local currency and opted for a foreign currency as their only legal tender, a foreign currency which they could not/cannot print. What's badly missing now is a local currency which a country can print, even though it may not be legal tender. In short, a parallel currency.

Greece, actually, already has one parallel currency - postdated checks. If B accepts a check from A, dated for payment 3 months later, in lieu of cash payment, then the postdated check has assumed the character of a currency. B will only accept the postdated check in lieu of cash payment from A if he knows that he can pay his creditors' bills with that check. I do not know how common this practice is today but I remember that, only a few years ago, I was told that postdated checks were a rather common form of payment among small businesses.

Assume that Greece starts with a parallel currency called 'Drachma' with an exchange rate of initially 1:1 to the Euro. Assume further that the Bank of Greece commits that the new Drachma is fully backed by the gold reserves of the Bank of Greece, i. e. each holder of a Drachma can redeem his notes in gold at the current gold price. I doubt that Greeks would have a problem accepting this new Drachma at the same value as the Euro. The only problem is that the Bank of Greece will not have enough gold to back all the new Drachma issued.

As a result, the new Drachma would be backed by the full faith and credit of the Greek state, no more. And since the Greek state would generously print the new Drachma (that would be the idea of the whole thing), it is near certain that this new Drachma would lose value against the Euro very quickly.

The great advantage of a parallel currency over a Grexit would be that Greece remains a fully-fledged member of the Eurozone and those who have Euros can happily continue to do business in Euros without incurring any additional fees. The advantage for the Greek economy is that the state could provide financial breathing space by issuing the new Drachma. Greeks may discover that it is better to receive payment in a parallel currency of lesser value than no payment at all in a Euro of full value.

The great challenge of a parallel currency lies in its implementation. Since it is not legal tender (only the Euro is allowed as legal tender within the Eurozone), no one can be forced to accept it. And people will only voluntarily accept payment in a parallel currency if they know that they can pay others in the parallel currency and how much they can buy with it.

Perhaps the time has come to revisit Yanis Varoufakis' Plan X.