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Thursday, April 17, 2014

Reviewing Horst Reichenbach's Prediction of 2011

I came across an article titled "Good news! Greece will grow again in 2014!" which I had posted on October 30, 2011, i. e. 2-1/2 years ago. At that time, I meant to be a bit sarcastic because the prospect of another 2 years or more of economic decline didn't really strike me all that positively. Today, I must admit that Horst Reichenbach, the Head of the EU Task Force who had made the above prediction, was right and that I was wrong when I expressed this warning at the time: "Or does anyone really believe that social peace can survive another 24 months the experiences of the last 24 months"?

Life is all about perceptions. What was a terrible perception 2-1/2 years ago (i. e. living another 2-1/2 with economic decline) is nowadays being turned into a positive perception (i. e. there may well be growth in the first digit after the zero this year). 

If foreign creditors remain happy as long as Greece has surpluses in the primary balance and in the current account, and if Greece can adjust to living with unemployment above 20% and one-third of its population in very dire straits, this thing can go on for a very long, long time.

The Economist --- 4.796 Words Too Many?

My computer counted 4.796 words in this Economist article titled "The Prodigal Son" which analyzes Greece's return to the markets (which The Economist considers a milestone). There is not one single word among the 4.796 words relating to key statistics of the Greek real economy. It is all financial talk.

Perhaps The Economist and others should re-read Keynes' book on "The Economic Consequences of the Peace" written after Keynes had resigned in frustration from the Versailles Conference. It is all about Germany's real economy and includes no financial talk.

Foreigners Transfer Money to Greece and Greeks Transfer it Abroad --- Strange!

"January-February 2014: Under portfolio investment, a net outflow of €2.7 billion was recorded, mainly as a result of a rise in residents’ investment in foreign Treasury bills and a decline in non-residents’ holdings of Greek government bonds and Treasury bills. This development was partly offset by an inflow for the purchase of Greek shares by non-residents, as well as by a decrease in residents’ holdings of foreign bonds. Under “other” investment, a net inflow of €2.7 billion was recorded, mainly due to non-residents’ increased holdings of Greek deposits and repos" - Press Release Bank of Greece.

This is a curious statement by the Bank of Greece because one could interpret it as meaning that, while Greeks are smart to put their money outside the country, foreigners are dumb and put it into Greece. 

Here is how portfolio investments work: suppose you have 10 TEUR on deposit with Eurobank. One day, you go to your local Eurobank branch, where you also have a portfolio account, and ask that they take your 10 TEUR from the deposit account, buy German bonds for 10 TEUR and put them in your portfolio account. You may think that your money is still with your local Eurobank branch but it isn't! Eurobank has, on your behalf, transferrred the money abroad to buy German bonds. If Eurobank goes bust and/or if Greece exits the Euro, it does not concern you. You still own German bonds denominated in Euros. They just happen to be held in a portfolio account at your local Eurobank branch and the assets in that account are your property and not the bank's.

Footnote: from 2011-2013, Greek residents did the above to the tune of more than 50 BEUR. They did not transfer money to any Swiss bank account. Instead, they simply moved money from a deposit account to a portfolio account at a Greek bank. This little trick made them immune against any bank bankruptcy or Grexit.

From January-February 2014, Greek residents moved 2,7 BEUR from their deposit to their portfolio accounts at Greek banks. Put differently, they transferred money abroad, possibly without knowing it. Foreigners did the reverse during this period: they transferred 2,7 BEUR to Greek banks. Perhaps that is a coincidence; perhaps something could be read into it.

My own experience has been that it is never smart to do the opposite of what those are doing who are 'in the know'. If I saw Greeks moving money outside the country, I would think twice before I moved money into Greece.

Wednesday, April 16, 2014

What Would Jesus Christ Have Done?

Greek author Nikos Dimou seems to literally enjoy testing Greek traditions for rational sense. In this article he wrote that "as Easter approaches, we will again spend money on bringing the (supposed) Holy Fire, receiving it with the honors afforded to a head of state". Jesus Christ would probably have helped the poor rather than pay for transport of the Holy Fire, Dimou added.

Well, I guess if one really wants to infuriate traditionalists and/or believers, one can't do much better than the above. At the same time, there are probably many Greeks who agree with Dimou. My wife certainly does.

Since Greece doesn't strike me as a very secularized society, I can see that there would be violent reactions against any perceived mockery of traditional beliefs. For me as a non-Greek, it is very difficult to form an opinion about this but I would very much hope that there will be commentaries and/or discussions in the Greek media about Dimou's position.

Tuesday, April 15, 2014

Greece 50 Years Ago!

This is a nice video about Greece in1963. Maybe a little poorer country than today but also maybe a little happier country than today.

Anybody Confused About Greece's Primary Surplus 2013?

I have read about Greece's sensational primary surplus for 2013 so many times that I simply took it for granted. This article in the respectable German blog Querschuesse prompted me to look into the details of the primary surplus. The article is based on the Ministry of Finance's General Government Data Bulletin December 2013 and its State Budget Execution Bulletin December 2013. Finally, I have also reviewed this article from the MacroPolis blog.

As can be expected, there is always a confusion of terms and terminology. There is not one single primary balance. It all depends... on how one defines what.

My understanding is that the figures originate in the Ministry of Finance and are subsequently verified by ELSTAT. From there they go to Eurostat where differences of opinion are sorted out with ELSTAT. When all is said and done, Eurostat incorporates the figures into the European System of National and Regional Accounts (ESA95). Quite independent of that is what the Greek government agrees with the Troika as to what the primary balance is. All clear so far?

There is not just one balance. Instead, there is the balance of the State Budget (SB) and the balance of General Government (GG). The GG is the aggregate of the SB, Local Governments, Social Security Funds and Extrabudgetary Funds. As a layman with budget figures, I would guess that what counts is the bottom line and the bottom line seems to be the General Government (GG). And the real bottom line is ESA95 for the General Government. Still with me?

What then is the primary balance of the GG balance? I would argue that it is primary revenues minus primary expenses (i. e. excluding interest expense, adjustments for arrears, one-time effects, etc.). That primary balance of the GG was minus 450 MEUR in 2013 compared with minus 707 MEUR the year before. Yes, an improvement. No, not a sensational improvement. And now come the adjustments.

The first adjustment is for 'other expenditures'. Typically, these are a-periodic items like settlements of past arrears or advance payments. They were minus 5.770 MEUR in 2013 compared with minus 334 MEUR in 2012. This would suggest that substantially more arrears were settled in 2013 than in the year before.

Note, however, that after making the adjustment for other expenditures, the new balance is minus 6.220 MEUR for 2013 compared with minus 1.041 MEUR the year before. All of a sudden we have a substantial deterioration!

The last adjustment is the interest expense which was 6.599 MEUR in 2013 compared with 12.864 MEUR the year before. Put differently, interest expense was cut in half in 2013.

Making this final admustment leads to an ESA95 of minus 12.019 MEUR for 2013 compared with minus 13.905 MEUR the year before. A very modest improvement, particularly when considering that the interest expense was cut in half. Querschuesse takes an even more radical approach by concluding: when adding to the ESA95 the cost of bank recapitalizations and making adjustments for arrears and taxes not refunded, the overall deficit comes to about minus 33 BEUR.

I suppose the moment of truth will come when Eurostat releases the official figures for all EU-countries on April 23. In the meantime, I have to resign myself to the fact that in all the tables of the Ministry of Finance and among all the different primary balances reported there, I could only find one primary surplus. That was the surplus of 603 MEUR in the State Budget, that is primary state revenues minus primary state expenses. There one has to keep in mind that the state can play around with its expenses: if payments are deferred into the next year, the current year's expenses are lower.

Cynics may question what the point of all this is when the Greek government and the Troika have already agreed on what the primary deficit was; whatever that was...

Monday, April 14, 2014

How Greece Miscalculated

The question then becomes why Greece fared so poorly and how that performance contributed to its recent economic disaster. The most straightforward interpretation of the Greek figures is that it simply failed to integrate effectively with the rest of the European economy. The rest of the periphery was tying itself into EU supply chains, experiencing capital deepening and ungrading technological capabilities, contributing to a rise in underlying growth potential. Greece wasn’t. The southward rush of capital that occurred in the 2000s may therefore have pushed Greece much, much farther beyond potential than was the case in Spain or Portugal. In other words, we see another example of the way in which the Greek government’s profligacy was more symptomatic of the economy’s troubles than a principal cause of them. 

There may be a bright side here for Greece. If a failure to integrate helps explain recent woes, then perhaps that also means that Greece has more capacity to grow rapidly in future as it goes through the integration others enjoyed previously. Assuming, that is, that Greeks themselves remain committed to a club that has yielded them paltry benefits relative to what might have been expected.” 

The original FT article can be found here.

Should Greece Default Now?

"Now contemplate the alternative. Greece defaults on all its foreign debt. It establishes a new currency that would immediately devalue. To lock in the competitive gain – to turn it into a real devaluation – would require a central bank with a credible inflation target and sufficiently deregulated labour and product markets. This is not a soft option, and would require a lot more structural reforms than Athens has so far undertaken. While such a scenario would freak out foreign investors when it happened, they could be relied upon to forget it quickly, and come back quickly. After all, the probability of a default is lowest right after you have defaulted. At that point, a reformed Greece should be very attractive to foreign investors, not just financial investors. I am not advocating exit. Greek voters and foreign investors should however know that Greece is now in a position where there is a choice".

I emphasized the last sentence in bold because that, to me, is the key. Four years after the first rescue loan for Greece, the EU is still acting on the premise that 'there is no alternative'; that 'if the Euro fails, the EU will fail'. A much more convincing scenario is that, if this premise is blind-foldedly pursued, the Euro may very well fail in the longer term and with it the EU.

If the EU were to take off its blind-folds and act as a fair arbiter, it would be the EU - and not a financial journalist - who would advise Greece that the country now has an alternative. That the Greek government should comprehensively inform the Greek population about these alternatives (continue on the present course or follow Münchau's suggestions) and that the Greek government should possibly put this to a national referendum.

The word 'default' has such a bad taste to it. In reality, default is a legal event which occurs when a borrower can no longer fulfill his financial obligations. Corporations can, in such a situation, declare bankruptcy because there are bankruptcy laws for corporations. Since there are no bankruptcy laws for countries, the legal event of default is the only honest alternative. Default is not a unilateral debt repudiation (that term justifiably has a bad taste to it). Instead, default simply says 'we would like to but, sorry, we can't pay our debts'. If creditors continue to make loans to an insolvent corporation, that is, in most countries, a criminal offense. Regrettably, there are no laws which make new loans to insolvent countries a criminal offense.

When I started this blog 3 years ago and for the first couple of years, I was an adamant supporter that Greece could and should make it with the Euro. Nearly 28% unemployment and nearly 60% youth unemployment after 4 years of adjustment prove me wrong. Yes, Greece is now financially stable with both domestic and external accounts in balance (or rather: in surplus). But how long will Greece remain politically and socially stable with these kinds of unemployment ratios?

I cannot judge how quickly Greece's employment situation would improve if the country switched to a default/exit course but I am certain about the following: with the Euro, the Greek employment situation will not return to more or less satisfactory levels for a very long time.

If default were to become a serious point of (confidential!) discussions, its timing would also be of significant importance. Greece is having a run on international capital markets these days and there is a good chance that Greece could raise another few billion Euros there before the end of the year. And Greece still has about 8 BEUR to draw under the rescue program. Possibly by the end of the year, when Greece would have exploited all possible sources of funding, the time might be ripe to put a lid on it and call it quits.

Malicious tongues might suggest that this could be used as a political ploy: set the timing in such a way that it yields maximum benefit at next year's election. Well, actually, why not if it is good for the country?

Saturday, April 12, 2014

Not All Germans Are Blind-Folded About the Euro!

Hans-Olaf Henkel is Germany's most critical voice regarding the Euro as a "one-fits-all" currency. His judgement carries weight since, for many years, he has been the most prominent voice of German industry. Henkel had been a passionate supporter of the Euro in its early years. Since the crisis, he 'has seen the light' and became an opponent. Below is a very apt quote from this article in Die Welt.

"The Euro is far too strong for the economies of Southern Europe and France. Of course, Germany still benefits from the Euro so far. But what kind of a ludicrous system is that which allows Germany, as a result of a currency which is too cheap for the German economy, to export too easily when, at the same time, it requires German tax payers to carry the financial consequences of a currency which is too cheap for Germany but too expensive for the South?"

Five Explanations for Greece's Bond Yield

This article explains superbly the reasons for the success of the latest Greek bond issue. Five reasons are given and the conclusion is:

"None of these reasons, individually or collectively, are particularly good reasons to buy Greek bonds at 4.95%. It has always been very easy to lose a lot of money buying junk-rated sovereign debt at low single-digit yields; that hasn’t changed. But if you’re a bond investor, there’s a surprisingly large number of ways that you could end up making money after buying Greek debt at these yields. Which in turn explains why Greece found it so easy to sell €3 billion in bonds".

Greece Stands No Chance if it Stays on the Euro?

"Simply put, Greece doesn't stand a chance if it stays on the euro with no control over its monetary policy. Greece needs a cheaper currency to help compete with its neighbors so it can grow organically, much like it was able to do when it was on the drachma. It cannot do that if its monetary policy is being conducted in Frankfurt and its currency remains so expensive relative to the U.S. dollar and especially to the Turkish lira, its major economic rival in pretty much everything from tourism to olive production".

Full article is here.

Friday, April 11, 2014

"I would ask Mrs. Merkel to bring investments to Greece!"

SpiegelOnline wrote about Chancellor Merkel's upcoming visit to Athens. They asked some Greeks what they would wish of Merkel. One of the respondents, a 20-year old economics student by the name of Christos Nasmis, answered:

"I would ask Mrs. Merkel to bring investments to Greece!"

Whoever and wherever you are, Christos Nasmis --- POWER TO YOU!!!

Greece --- Exports Down, Imports Up?

I hope that there is something wrong in this Google-translation: the article would suggest a very disturbing trend in Greece's trade, as follows:

* February is the fifth consecutive month that exports recorded a decrease on y-t-y comparison. The last time there was an increase in exports was recorded last September.

* February is the first month since last September where imports increased (this despite a significant reduction of oil imports). Excluding oil, imports inreased by a phenomenal 16,4%! 

Exports down, imports up? That would indeed be the wrong trend!

Greece Trusts Anonymous Capital Markets More Than Its Governmental Partners!

Financings can be differentiated by two different types: those financings where the borrower knows the lender and those where the borrower does not.

Where the borrower knows the lender (such as in the case of loans; like the bail-out loans), the borrower has someone to negotiate with. In case of trouble, the borrower can sit down with the lender to cure the problems; to cure defaults before they happen; to renegotiate the terms of the financing.

Where the borrower does not know the lender (such as in the case of capital market instruments; like bonds), the borrower does formally not know the lender. There is noone to negotiate with in case of trouble. A bond is a tradeable capital markets instrument which has an independent life of its own. That life is governed by the terms lined out in the bond prospectus. If those terms, for whatever reason, are not complied with, the bond goes into default and triggers all sorts of consequences such as cross-default. Even if one large bondholder were willing to renegotiate terms, he could not do so on his own.

I am surprised that this key difference between bond financing and loan financing has not at all been discussed in the case of Greece. In good times, bonds are a wonderful instrument: the borrower can raise large amounts of money in a rather simple way; there are no instalments of principal until the bullet maturity; one only has to pay interest annually during the life of the bond. Instead of a tough credit analysis, the borrower works out with the arranger of the bond a structure for which the arranger feels that there is 'investors' appetite'. They work out a 'story' which will 'sell'. The arranger has no credit risk responsibility other than the documentary responsibility (that the facts presented in the bond prospect are correct and, typically, one of the largest sections in a bond prospect is where the arranger spells out what he is NOT responsible for). The credit risk responsibility lies with the purchaser of the bond.

In bad times, investors' appetite goes out the window; bond prices go South and bonds cannot be refinanced upon maturity. In the worst case, it can lead to 'sudden stop' and NOONE can control that!

Hardly any country can 'repay' its bonds upon maturity these days. Virtually every country must refinance its bonds upon maturity. As long as there is investors' appetite, anonymous capital markets are a wonderful business partner. When investors' appetite goes out the window, capital markets are brutal because they can remain anonymous.

No investor of sound body and mind would buy the bond of a borrower who already has unsustainable debt, out of fear that, upon maturity in 5 years from now, the borrower might not be able to refinance. Unless...

Unless, of course, the investor has reason to believe that the implied support of a third party stands behind the bond. In the case of Greece, that third party is the EU. The most wonderful opportunities for investors are those where the real risk is much lower than the perceived risk. From the investors' standpoint, the perceived risk is that Greece might not be able to refinance in 5 years from now whereas the real risk, in the investors' estimation, is that of the Eurozone in toto. The investors get a return based on the perceived risk but only carry the real risk.

Greece has now opted to trust anonymous capital markets more than governmental partners (cynics could argue that Greece has opted to trust governmental partners that they will bail-out anonymous capital markets in case of need). If Greece were a stand-alone country with it own currency, a return to capital markets so early into the expected recovery would have to be considered as a sensational feat. It would indeed have reflected 'trust in the country's ability to exit the crisis' (Finance Minister Stournaras).

Trust is an elementary part of all financings. The only trouble is: one can only trust people whereas with anonymous capital markets there is noone on whom to bestow the trust. Greece has opted, at a cost of roughly 90 MEUR in excess interest expense annually, to trust anonymity.

PS: in reality, Greece has, of course, not totally trusted anonymity. Instead, it has trusted EU partners to bail-out anonymity in case it becomes necessary. The 3% interest premium goes to investors' P+L statements; it will be paid by Greek tax payers and, in the final analysis, by Eurozone tax payers.

Greece Has Issued the First Eurobonds!

Greece has successfully raised 3 BEUR in capital markets via the sale of a 5-year bond. Finance Minister Stournaras is quoted in the Ekathimerini as saying: "The international markets have expressed in the clearest possible manner their trust in the Greek economy, their trust in Greece’s future. They have shown trust in the country’s ability to exit the crisis, and sooner than many had expected."

Let me rephrase that a bit as follows:

"The international markets have expressed in the clearest possible manner their trust in the continuation of the Eurozone's bail-out policies. They have shown trust in the EU's continued ability to force tax payers to bail out banks and one wonders why it took capital markets so long to figure that out!"

PS: the headline was 'borrowed' from my reader Lennard.