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Thursday, October 30, 2014

How SYRIZA Could Succeed

The prominent radical Slovenian philosopher Slavoj Zizek made the statement which I reproduce below. He made that statement in an interview with a Greek newspaper. I picked up a German translation in the blog NachDenkSeiten. I hope my re-translation into English is half-way correct.

"There is no way to succeed in Greece if one has no other idea than to try out a leftist government which then fails, only to have afterwards nice historical memories in the sense of ‘gee, how nice it was then!’ No. In Greece we have a corrupt and clientelistic state. I am aware that what I say now may sound crazy and that certain Marxists will crucify me for it. However, I think that SYRIZA must strike alliances with some truly productive capitalists who are also tired of this situation. We must be pragmatic. Perhaps SYRIZA should form a credible middle-class party which will finally turn Greece into a totally normal state, a state which has some similarities with a normal liberal democratic state. The absence of such a state is a hurdle for SYRIZA but it is at the same time a unique chance. To put in into Marxist language: the middle-class parties are dumb not to occupy this territory and the voters know that. Of course, not all SYRIZA voters are leftists, I know that, but they are sick and tired of the existing middle-class parties. And they hope that someone will finally govern”.

I can't think of a better advice for Alexis Tsipras than the above.

The Ease of Doing Business in Greece

Much ado has been made about the fact that the recent Doing Business Report of the World Bank/IFC showed Greece at the bottom of Europe. Only few commentaries have noted the fact that Greece actually improved its ranking from #65 to #61 over the previous year (out of a world-wide total of 189). Not even that is the key point, however, because such a minor improvement may be due to statistical errors.

The major point, though, is that Greece now ranks in 61st place in a ranking where Greece ranked in position #108 at the beginning of the crisis. That is an improvement which cannot be attributed to statistical errors!

Yes, Greece still ranks at the bottom of Europe. The only countries of significance ranking below Greece which I could find are Croatia and Cyprus. On the other hand, Italy is only marginally better than Greece. Whether that is a compliment to Greece or a criticism of Italy is a moot point; it is a fact.

If Greece jumped 47 positions since the beginning of the crisis but did not overtake any European peers, that can only mean that those European peers also improved their positions. Again, that's not bad for Greece but good for Europe, instead.

The two categories which prevented Greece for attaining an even higher position were 'registering property' and 'enforcing contracts'. The good news is that this cannot be a surprise to anyone and that, according to what I have read, much focus is being put on these two areas (i. e. EU Task Force). The not-so-good news is that it takes a very long time to register improvement in such areas.

Below are links to articles which I have written on the subject since the beginning of the crisis.

Greece vs. the Former Yugoslav Republic of Macedonia
Which way to the future, please?
The ease of doing business in the EU
Doing business with corruption
Doing Business Report 2014

Tuesday, October 28, 2014

A Rather Unsophisticated Analysis of the ECB Stress Tests

The results of the stress test have been released and we now know that all but 25 of the 130 or so largest banks have passed it. Certainly all the really 'big players' have passed it. Everything fine?

Yes and not really. Clearly, any detailed examination/audit of the largest banks is always a good thing. However, the markets will never trust a bank only because the ECB says that it can be trusted. There is much more to the secret of what makes up confidence.

How safe, to take just one example, is Deutsche Bank? Safe enough to pass the ECB stress test, for sure. But safe enough to withstand a major confidence crisis?

At the last reporting date, 30 Jun 14, Deutsche reported total assets on balance sheet of 1.665 BEUR (that is one-thousand-six-hundred-sixty-five billion). A bank is as good as the loans which it has on its books? Once upon a time, perhaps, but no longer today. Deutsche's loans amounted to 388 BEUR; that's only 23% of total assets.

Quite strikingly, Deutsche reported 'total financial assets at fair value' of 927 BEUR. Those were composed of 'trading assets' (211 BEUR), 'positive market values from derivatives' (485 BEUR), 'designated financial assets' (176 BEUR) and 'financial assets available for sale' (55 BEUR). Altogether, these financial assets represented more than half, 56% to be exact, of total assets of Deutsche.

What are those financial assets? Well, typically there is not a customer on the other side but a 'counterparty' instead. Typically, those counterparties are publicly rated, publicly rated by the same rating agencies which gave sub-prime paper a triple-A. And, typically, many of these assets are not traded in a public market where one could derive market prices. Instead, their value is often derived from a formula, be it Black-Scholes or whoever else. The reported value of those assets is as good as the formulae applied. When the formulae no longer work, the value of those assets can no longer be determined (as LTCM found out in 1998).

The equity ratios calculated by the ECB are not based on notional amounts but rather on imputed amounts. The equity requirement is a function of the risk-weighting of the assets (more risk requires more equity and vice versa). The point is that the risk-weighting is done by the banks themselves using very, very complex formulae. Any such system is always prone to manipulation. As a result, one must also look at the equity ratios based on the notional amounts in the financial statements.

Deutsche financed its total assets of 1.665 BEUR with equity of 68 BEUR, i. e. equity accounted for 4% of total financing. That is about twice the equity ratio which Deutsche reported only a couple of years ago; truly a significant improvement. It translates into a leverage of 24:1. Compared to the roughly 50:1 leverage which Deutsche had had, this looks very good. However, such leverage levels are still in the category of hedge funds. One can still argue that Deutsche is a hedge fund with an associated commercial bank.

The ECB examined each bank on its own merits. What was not examined, as far as I know, was the interdependency among the banks. Deutsche probably has its risk financial assets hedged with corresponding financial liabilities but on both sides they have counterparties. If a counterparty fails, Deutsche loses its risk protection.

Looking at the results overall, one gets the impression that the ECB examination had one very positive impact: it made the bankers nervous. Bankers should always be a bit nervous. Nervous about making bad loans; nervous about buying the wrong securities; nervous about getting caught at doing untoward things if they were to do untoward things. Most of the banks had taken some rather significant measures in the last year to improve their reported financial strength. Some banks have even announced to change and improve conduct and culture. Whether those are only temporary phenomena owing the the ECB examination or whether longer-term change will indeed result remains to be seen.

Monday, October 27, 2014

Beware of Cross-Border Capital Flows!

I very much enjoy reading John Mauldin's weekly Thoughts from the Frontline. The latest piece is titled A scary story for emerging markets. Mauldin predicts a rather gloomy future for the emerging markets because he fears a soon-to-happen turn-around of the massive capital flows which had gone into these markets since 2008. The possible outcome for emering markets he describes as something which could rival Greece's economic disaster over the last 5 years.

I comment on this article here because, in my opinion, it has a direct bearing on what happened in Greece (and in the Eurozone overall) since the arrival of the Euro. Of all the many reasons which are cited as causes for Greece's problems, if I had to pick one as the most important one, I would pick cross-border capital flows.

No Greek government can misspend foreign capital if there is no foreign capital in the first place. The same goes for the Spanish banking sector and construction industry. Cross-border capital flows can cause a boom as well as a bust. When cross-border capital flows are distorted by a fixed exchange rate (or a common currency) and, additionally, by a misperception of risk resulting from the implied support of a common currency zone, then all hell can brake loose. To me, the story of Greece and the story of the EZ-periphery is a story of cross-border capital flows!

Let me cite this key paragraph from Mauldin's newsletter: 

"Broad-based, debt-fueled overinvestment may appear to kick economic growth into overdrive for a while; but eventually, disappointing returns and consequent selling lead to investment losses, defaults, and banking panics. And in cases where foreign capital seeking strong growth in already highly valued assets drives the investment boom, the miracle often ends with capital flight and currency collapse. Economists call that dynamic – an inflow-induced boom followed by an outflow-induced currency crisis – a “balance of payments cycle,” and it tends to occur in three distinct phases. 

In the first phase an economic boom attracts foreign capital, which generally flows toward productive uses and reaps attractive returns from an appreciating currency and rising asset prices. In turn, those profits fuel a self-reinforcing cycle of foreign capital inflows, rising asset prices, and a strengthening currency. 

In the second phase, the allure of continuing high returns morphs into a growth story and attracts ever-stronger capital inflows – even as the boom begins to fade and the strong currency starts to drag on competitiveness. Capital piles into unproductive uses and fuels overinvestment, overconsumption, or both, so that ever more inefficient economic growth depends increasingly on foreign capital inflows. Eventually, the system becomes so unstable that anything from signs of weak earnings growth to an unanticipated rate hike somewhere else in the world can trigger a shift in sentiment and precipitate capital flight. 

In the third and final phase, capital flight drives a self-reinforcing cycle of falling asset prices, deteriorating fundamentals, and currency depreciation… which in turn invites more even more capital flight. If this stage of the balance of payments cycle is allowed to play out naturally, the currency can fall well below the level required for the economy to regain competitiveness, sparking runaway inflation and wrecking the economy as asset prices crash".

I am not sure that Greece ever had  a first phase but it certainly had a second phase and it is still living through the third phase, intensified by the fact that Greece could not play out a natural balance of payments cycle with declining exchange rates.

I have argued early on that even the economically most solid country can get into trouble through cross-border capital flows if it has a freely convertible currency and free movement of capital. If foreigners dump irresponsibly high volumes of capital on the economy and if they withdraw that capital at a point where the economy has become used to having it (perhaps even addicted to it), a foreign payments crisis is around the corner.

Sunday, October 26, 2014

How the Oligarchs Ruined Greece

"By bailing out Greece without demanding fundamental reforms, the European Central Bank, the European Commission, and the International Monetary Fund have only strengthened the status quo. Even worse, the troika has lined the pockets of the very forces that brought about the economic collapse in the first place".

Prof. Pavlos Eleftheriadis, Oxford University, in Foreign Affairs.

ADDENDUM October 27, 2014
Below is an article by Nikos Kostandaras, Managing Editor of the Ekathimerini, published in the New York Times.

Greece's economic and political traps

Greece to Pay 89,4 MEUR to the EU Budget Because Of Growth!

Imagine that you are a Head of State attending a plush dinner party with your colleagues from other EU member states after a hard day's worth of haggling and somewhere between the main course and desert, an assistent comes up to you and tells you that the party will cost you roughly 2,1 BEUR. That is how the British Prime Minister must have felt the other day. And the Greek Prime Minister wouldn't have enjoyed his desert either because his bill came to 89,4 MEUR. A much smaller amount but nevertheless.

One never ceases to learn more about the mysteries of how the finances of the EU work. The general picture is easy enough to understand: member states make contributions to the EU and they receive funds back from the EU. Depending on the balance, that makes them a 'net contributor' or a 'net recipient'. The idea is that the stronger countries are net contributors and the weaker countries net recipients. So far, so good.

The mystery starts when one wants to understand the contributions. They are largely calculated on the basis of GDP items. But here is the trick: they do not only depend on one's own GDP but also on one's own GDP relative to that of other member states. If growth of country A outpaces growth of all the other member states, country A will have to pay for that dearly via higher contributions. The mechanism is apparently that contributions are made in advance based on GDP projections and, at the end of a period, there are adjustments based on real GDP data. That's how the UK got into trouble because it significantly outpaced growth of the other member states.

And here comes the Catch 22: earlier this year, the EU started to calculate how much of the hidden economies should be brought on the official books of each country. UK officials calculated that sex work generated 5,3 billion pounds and another 4,4 billion pounds coming from the sale of drugs (cannabis, cocaine, etc.). A boost of 10 billion pounds to GDP which also boosted the calculated EU contribution. A lot of buck for the bang, as American slang would describe that...

The most extreme example of EU calculations is that Greece now has to pay up growth-related EU contributions of 89,4 MEUR even though the country has had a 25% GDP decline in the last 5 years. That will make the Greek government think twice before it brings too much of its hidden economy on its official books.

Much to my surprise, France and Germany are the largest beneficiaries of this exercise, receiving rebates of 1.016 BEUR and 779 BEUR, respectively. Particularly the German rebate is a surprise because Germany, despite low growth on its own, has grown faster than most of the other member states. Perhaps the Germans pay fewer visits to brothels and sniff less cocaine than the investment bankers in the City of London.

True Europeans might have expected the British Prime Minister to respond as follows to the 2,1 BEUR bill: "Great Britain and all the other member states have signed treaties which govern the contributions to and receipts from the EU. Great Britain will certainly not only claim its receipts forcefully but will also pay its contributions without delay". Instead, David Cameron was quoted as saying: "I will not pay!"

The Greek Prime Minister would totally upset the European establishment if he announced "I will not pay!" Naive democrats might wonder why the Greek Prime Minister cannot do what his British counterpart can do. The answer is simple: Greece is not the UK.

Below are two articles from The Guardian and a chart which provide detailed information about the above.

Britain's two billion Euro bill explained 
Paying for bad habits: sex work and drugs lift UK's EU bill

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.