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Wednesday, March 4, 2015

Piraeus, MIG and Cyprus - Here We Go Again?

I had quite a bit of fun last year delving into the mysterious dealings of Piraeus Bank. What I could not understand was that such mysterious dealings would not catch the attention of Central Bankers and/or banking supervisors. Piraeus had taken a 3,4 BEUR profit on the purchase of the Greek branches of Cypriot banks which catapulted its equity. Either those were book profits to be written off over time or they were real profits in which case one should ask why someone sold branches at 3,4 BEUR below value. It's either or, you can't have both.

Thanks to the media website ThePressProject, the subject is coming to the surface again. Hopefully, it will not die away as it has died away in the past. As a matter of fact, this should be a wonderful gift to the new government whichhas committed to look into all untoward major financial deals. Good luck!

Greece - The East Or The West?

This is an interesting article which would undoubtedly trigger a lot of debate if it were in English (it is in German). The article reminds me of the historical debate in the Greek parliament where Konstantinos Karamanlis fought with Andreas Papandreou over the question of whether Greece belonged to the East or the West. Karamanlis emphatically argued that Greece belonged to the West. Papandreou deadpanned him by saying: "Greece belongs neither to the East nor the West. Greece belongs to the Greeks!" I mean, how can one top that?

In the North-Eastern corner of Europe, I never had any doubts that the Finns felt that they belonged to the West. In the South-Eastern corner of Europe, I often wondered whether Greek mentality was not closer to the mystic (and Orthodox) East than the rational West. To me, it was (and is) always very noticeable that Greece is a society which has not experienced some of the major European currents such as the Reformation, the Counter-Reformation, the Rennaisance, the Enlightenment, the Industrial Revolution, etc. Perhaps that is what makes Greece such a pleasant place to visit for rational Westerners...

The author makes the issue even more interesting because he recognizes today the same faultlines through Europe which had existed at the outbreak of WW2 over 100 years ago. I envy historians for understanding such long-term societal trends!

Monday, March 2, 2015

Keynesians - Stop Talking! Start Working!

I will make a note not to read articles by Prof. Paul Krugman on Fridays because they have the potential of ruining my weekend... Well, not quite, but it is certainly a test to my blood pressure when I read articles like "What Greece Won" which was published in the NYT last Friday. 

I just wish all those Keynesians like Krugman & Co. would – instead of spending their time explaining who won/lost at each stage of the negotiations – read up on Keynes’ “The economic consequences of peace”, particularly the chapter on “Germany’s capacity to pay”. I don’t remember that things like GDP, fiscal and monetary policy, primary surplus, etc. were even mentioned there. Instead, Keynes went painstakingly, industry by industry, through Germany’s economy and calculated how much Germany could produce and what it needed to produce that. I remember the cute observation that, if one wanted Germany to maximize steel production/exports, it would not be a smart idea to cut off Germany’s import capacity for those imports which it needed for steel production.

I do not tire of using the analogy that debt is the ‘derivative’ and the real economy is the ‘underlying’, and that one cannot solve the problem of the ‘underlying’ by playing around with the ‘derivative’. To me, it is high time that the learned people of Greece and elsewhere start getting busy with the ‘underlying’. If they don’t know where to start, they could start with McKinsey’s “Greece Ten Years Ahead” report of 2011. It went through industry by industry and suggested over 100 steps about how 500.000 new jobs could be created over ten years and how quite a few billions could be added to Greece’s GDP. I think Varoufakis & Co. would benefit greatly if they spent some time with down-to-earth, common sense Mid-Western Americans like Warren Buffett. Buffett would in all likelihood focus their attention swiftly on the essentials. Or he would sell his shares in Greece, Inc.

And, by the way, if Varoufakis & Co. did the above, they would quickly discover that Greece’s economic value creation capacity is far from justifying the living standards of the past and if they wanted to keep the living standards, they would rapidly have to do something about the economic value creation capacity. McKinsey recommended one set of measures. If SYRIZA doesn't like them, they should develop alternative sets of measures. But only discussing negotiation strategies and hitting the headlines of the world's media with ideas as to how to improve the world will not do anything for the economic value creation capacity of Greece!

Wednesday, February 25, 2015

D-Day - Cancelled Or Postponed?

Monday and Tuesday, particularly Tuesday, of this week were extraordinary for me. I had expected Monday to be the day where countless drafts of lists would be leaked to Twitter & Co. and for Tuesday I expected a High Noon type of showdown with the definite result that there wouldn't be a definite result and that further lists and phone conferences would be scheduled for the rest of the week.

For a while it looked to me, judging from tweets, that Tsipras & Co. had outsmarted the Eurogroup. They were going to raise 7,3 BEUR in new taxes from oil smugglers, tax cheats and oligarchs which would allow them to finance all of their campaign promises. I was wondering whether the Eurogroup would have the nerve to say: "First the revenues and then the expenses", and I wasn't so sure.

And then - nothing happened! Monday was a very slow day for Twitter & Co. and Tuesday felt like a bank holiday. The only debate seemed to be about the question whether or not the list had arrived in time. And then, Tuesday evening, word got out that the list had indeed arrived in time, that the phone conference among the Eurogroup had taken place and that they had approved the extension. That was it! No more, no less. Sometime later, the letter of the Greek Finance Minister together with the list was published but it was kind of a non-event - here is the list for anyone who cares, so to speak. No one seemed to care much. Statements by the IMF and the ECB appeared showing between the lines that they really didn't trust the list, but no one seemed to care.

It seemed to me like some Superior Force had called the quarreling children to order and told them: "I've had enough of your fighting! Now stop quarreling and be nice to each other!" And they stopped quarreling and they were nice to each other.

Suddenly, there are totally new perspectives. Tsipras will turn into a Tony Blair. He will slowly discard his radical left and substitute for it with new voters from the center. Like Tony Blair, Tsipras will go for a Third Way! In fact, that truly is the great opportunity which presents itself to Greece now. In fact, it's the opportunity of a lifetime. In fact, there is hope and confidence in the future!

There was one question throughout the last weeks which I have never heard discussed. We have heard from the Eurogroup & Co. that they really 'wanted to keep Greece in the Eurozone' but that they 'might not have a choice but to kick Greece out of the Eurozone'. We have heard noises from the Greek side that they don't wish to get kicked out of the Eurozone. But the one question which I didn't see discussed anywhere is: What would be best for Greece? Staying in the Eurozone or returning to a local currency?

Returning to the Drachma is always discussed in the context of what it would do to Greece's international competitiveness, to its trade and current account balances and to private wealth of Greeks. However, the predominent themes which have come out of Greece in the last couple of months were: 'stop austerity'; 'cease to follow orders', 'regain self-determination'.

A return to the Drachma would give Greeks all the things which seem to matter to them: it would be total financial self-determination; there would be no impediment to fulfilling campaign promises; the humanitarian crisis could be resolved relatively quickly.

In a nutshell: Greece could again print its own currency and become fiscally irresponsible. Prof. Paul Krugman would applaud because he encourages fiscal and monetary irresponsibility. Like Milton Freeman travelled to Chile in the mid-1970s to advise the government on fiscal and monetary responsibility, Krugman could visit Athens to advise Tsipras & Co. on fiscal and monetary irresponsibility.

What about pressure to implement reforms? Well, why implement reforms if Greece has lived happily for ages without reforms? If the external accounts get out of balance, just devalue from time to time and everything is fine again. What about inflation? Ok, we've learned to deal with that!

I was obviously a little satirical above but I truly believe that the question whether the Euro or a local currency is best for Greece should be discussed without prejudices during the next four months. Greeks' passion for the Euro strikes me a little bit like a nun's passion to preserve her virginity for heaven. She can and will be very proud of herself if and when she ever gets to heaven but just think of all the fun she has missed and how many sacrifices she has made in the meantime!

Not to mention the possibility that there might not be a heaven!

Sunday, February 22, 2015

Greece's Current Account: January - December 2014

Below are the figures provided by the Bank of Greece regarding the development of Greece's current account in 2014 relative to the previous year. Also, the last quarter of 2014 is compared to the last quarter of the previous year (in BEUR).


2014 2013
2014 2013
Revenue from abroad

Exports 23,6 22,5
6,1 5,7

Services (e. g. tourism) 31,1 28,0
5,9 5,4

Other income 3,4 3,4
0,8 0,8

Current transfers 6,0 7,7
0,9 1,4

---- ----
---- ----

Total revenue from abroad 64,1 61,6
13,7 13,3

Expenses abroad

Imports 41,6 39,8
10,5 10,0

Services (e. g. tourism) 11,3 11,0
2,9 2,7

Other expense (e. g. interest) 6,3 6,5
1,5 1,3

Current transfers 3,2 3,2
0,9 0,6

---- ----
---- ----

Total expenses abroad 62,4 60,5
15,8 14,6

Current account balance 1,7 1,1
-2,1 -1,3

Trade balance -18,0 -17,3
-4,4 -4,3
Services balance 19,8 17,0
3,0 2,7
Other balance -2,9 -3,1
-0,7 -0,5
Current transfer balance 2,8 4,5
0,0 0,8

---- ----
---- ----
Current account balance 1,7 1,1
-2,1 -1,3

1)  The surplus improved by 600 MEUR to 1,7 BEUR (+52%) which is remarkable. The improvement came as a result of foreign revenues' growing faster (+4,0%) than expenses abroad (+3,1%).
2) Towards the end of the year, the development became negative. The previous year had shown a deficit of 1,3 BEUR in the 4th quarter which deficit increased to 2,1 BEUR in the 4th quarter of 2014.
3) The most critical observation is that imports have started to grow again. It will be recalled that Greece's massive current account improvement since 2010 was almost exclusively due to a cut in imports, caused by the compression of domestic demand (exports increased only very moderately). 2014 was clearly a year where the downward trend in the Greeke economy seemed to have stopped. In fact, several statistics indicated that Greeks were gradually returning to spending money.

Conclusion: as Greeks spend more money, imports go up because the domestic economy cannot provide the products and services which Greek consumers desire in a sufficient amount, or not at all. There is no better argument to support structural reforms than this! The Greek economy will only begin to see the light at the end of the tunnel when increased consumer spending stimulates the domestic economy instead of the economies of other countries.

Saturday, February 21, 2015

Greece versus Eurogroup: "This Thing Ain't Over Till It's Over!"

I used to think that a successful negotiation is one where BOTH sides can walk away declaring themselves as winners and that the worst thing would be for one side to declare the other side as losers. Now it seems that both sides in the recent negotiations opted for the worst thing.

Finance Minister Schäuble made the rather cynical comment in his press conference that 'he was looking forward to seeing how the Greek government would sell the agreement to its supporters' and Finance Minister Varoufakis had the good grace of calling the Eurogroup 'mostly good lawyers trying to fix macro-economic variables they don't understand'.

The key next step is the list of reforms which the Greek government must submit by next Monday and which has to be reviewed by the IMF for approval. Naive people might expect that all discussions of learned people would now focus on the question of what appropriate and effective reforms should be on that list. Meaningful reforms which would also be seen by Greeks as meaningful. Instead, all the learned people seem to discuss only one subject: who was the winner in the negotiations and why?

The Greeks have demonstrated that they first want to win a battle before they focus on solutions. To simply agree on something without a battle does not seem to be the Greek way. The EU (particularly the Germans) has demonstrated that defending the bridge is the most important thing even though it might be a bridge to nowhere.

Let's remember what Yogi Berra said: "This thing ain't over till it's over!"

Thursday, February 19, 2015

Greek Negotiating Strategy a Phenomenal Failure?

Stephan Schulmeister is to Austria what Prof. Paul Krugman is to the rest of the world: the representative on Earth of God John Maynard Keynes. Schulmeister has been an outspoken supporter of SYRIZA, not necessarily for its party program but as the catalyst for a change in Europe's social and economic model of the last decades. When Alexis Tsipras visited Vienna recently, Schulmeister had organzied a demonstration in front of the Austrian Chancellory where they held out in heavy rain!

Schulmeister just gave this very interesting interview to Die Zeit Online (in German). What really caught my attention was the following sentence:

"The Greek negotiating strategy has failed phenomenally, and part of that is psychology. It appears like Mr. Varoufakis has a very strong ego and as an economist he is a newcomer to politics. Intellectuals who move into politics frequently make fatal mistakes because they think they are so smart. Regrettably: The prize for that is often paid by millions of people. That is what the Christian and Social Democratic politicians of Europe must not allow to happen!"

Hear, hear... that's all I can say about this!

Alexis Tsipras: A 'New Greece' Within 6 Months?

A reader referred me to this article ("Not all Greek") by Edward Hadas of Reuters. Here is a key excerpt:

"Europeans talk of structural reforms, but Greece is not merely a malfunctioning welfare state like France and Italy. Its relative poverty stems from a much deeper weakness - a shortage of the habits and practices needed to run sophisticated industrial complexes and complex educational and healthcare systems, or at least to run them well".

I don't remember how often I have voiced my critique that all these seemingly endless discussions/negotiations of Greece's debt are literally a waste of time and effort because they address only the 'derivative' of the problem. The 'underlying' is what Edward Hadas describes in his article: the real economy, the quality of institutions, the know-how in all areas, etc. etc. ONE CANNOT SOLVE THE PROBLEM OF THE 'UNDERLYING' BY ONLY PLAYING AROUND WITH THE 'DERIVATIVE'!!!

How does one change the 'habits and practices' necessary for social and economic development? Some of them can certainly be changed through legislation and executive action. For example, it may well be that SYRIZA scares the tax cheaters and smugglers so much that they will end up paying taxes voluntarily. But there are certain 'habits and practices' which cannot be changed through legislation because they require, among others, a change in value structures.

Greece desperately needs an accelerated transfer of know-how in all areas ranging from technical know-how to general know-how such as good corporate governance. I think the EU Task Force for Greece has been an outstanding platform to accelerate such know-how transfer (I am not sure, though, that it has really been used to its fullest advantage).

The other very important source of accelerated know-how transfer is my pet subject of foreign investments. Some people associate foreign investments with privatizations of state-owned utilities, investments in financial assets like bank or corporate shares, etc. These are certainly foreign investments in terms of bringing money to the economy. Whether they also bring know-how, growth, new employment, etc. to the economy can be quite a different matter. But one thing is for certain: as soon as the Greek economy would experience headwinds, such investors would leave again in a hurry.

But could we imagine that a very serious family-owned company like MIELE decided to concentrate all its production for Greece, South Eastern Europe and the Near/Middle East in Greece? Anyone who is familiar with the MIELE corporate culture knows how much that would mean in terms of know-how transfer. Technical know-how, corporate governance know-how, employee relations know-how, etc. And, of course: it would also bring a lot of money and generate a lot of employment!

Only if and when SYRIZA starts talking about these kinds of things will I begin to believe that they will create a 'new Greece'. Not quite in only 6 months like Alexis Tsipras has announced but probably within a few years and certainly within a generation!

Berlin, Why Do You Have a Problem?

The Greek application letter for renewal of the bail-out program includes the following sentence: "The Greek authorities are now applying for the extension of the Master Financial Assistance Facility Agreement for a period of six months from its termination".

The Master Financial Assistance Facility Agreement (MFAFA) is the umbrella agreement which governs EVERYTHING. For example, the Memorandum of Understanding (MoU) is an integral part of the MFAFA). When the MFAFA is renewed, EVERYTHING is renewed.

It seems to me that all the Eurogroup would have to say is: "We hereby accept your application for a 6-month renewal of the Master Financial Assistance Facility Agreement". Full stop. Whatever else is said in the application letter is for political consumption and/or for future negotiation but it has no legal value.

Now, by implementing new legislation to reverse certain reforms which the MFAFA had called for and which Greece had already implemented, Greece is de facto violating the MFAFA. Strictly speaking, if Greece means what it says (i. e. renewing the MFAFA), it would have to say at the same time that the new legislation would not be implemented. But these are two separate things: one is the renewal of the MFAFA and the other one are the possible violations of the MFAFA.

It will be most interesting to see on what grounds Germany & Co. will reject the application for renewal of the MFAFA.

Wednesday, February 18, 2015

Greece - Germany: A Clash of Cultures?

As I followed the news about the Brussels negotiations (Sorry! They are not 'negotiations'. At this point, we are only talking about 'explorations of common ground', 'discussions' and 'transformations'), some personal memories came to mind.

It was around 2006/07. My job was based in Munich working for an Austrian bank. German-Greek relations seemed to be just perfect. The crisis had not yet hit. I had found a Greek (from Crete) PhD candidate to give me Greek lessons. Eva was her name. One time we got talking about Greece and Germany. Out of the blue, she said something like: "I have come to know several European countries through my studies. There are no two cultures further apart than the Greek and the German culture!" I was perplexed? Why? Her answer was: Because! She explained that these differences would not come to the surface when the sun was shining but as soon as the first clouds would come up, the differences would explode.

Backtrack to the late 1970s. I was working in Munich then, too; that time for an American bank. I was in the socalled Multinational Banking Department responsible, as global relationship manager, for multinationals in Southern Germany. One of my multinational customers was based in Munich and had several large operations in Greece. Some readers might guess correctly as to who that was. As relationship manager, I was responsible for all relationships which my multinational bank had with this multinational customer throughout the world, and in Greece we were their largest foreign bank. So it was only natural that, one day, the Treasurer of the Munich HQ invited me to come along on a 2-day trip to visit their Greek operations which we were financing. It was a great 2 days of good business discussions and even better - and unforgettable - social events in the evenings.

On the flight back to Munich I had an aisle seat. Young and ambitious as I was, I didn't waste any time with drinks but, instead, started hand-writing my reports about the various meetings (PCs did not exist at the time). As I was fully concentrated on my work, I had a strange feeling in my back. I turned around and saw a rather heavy-set Greek sitting on the other side of the aisle. He smiled at me cynically and said: "Are you calculating how much your vacation in Greece cost you?"

I never quite figured out why that little sentence hurt me so much at the time; so much that I can still remember the feeling today. It felt like having been discovered at one of the worst human traits. At the same time, my culture didn't consider conscientious work (even if it had been keeping track of vacation expenses) as a bad human trait. It was the sheer human arrogance of the man; the displayed feeling of superiority in lifestyle, suggesting that only the dumb and simple-minded would do the kind of thing which I was doing. It was a bit like Zorba's making fun of the Englishman for reading so many books. Except, Zorba did it with charme whereas this heavy-set and saturated colossos of a man had no charme at all.

Let's turn to personal life. In a bi-cultural marriage, major differences of opinion (often referred to as 'fights') can erupt over the smallest things. The worst experiences for me were situations where very good intentions on my part (at least good intentions according to my culture) were considered to be mean things on the part of my wife (according to her Greek culture). Obviously, my culture required me to justify the good intentions which I had, only to be rebutted terribly. Thankfully, we have a son who can be very laid-back and rational. He would then say to me: "You are making a mistake! You are trying to respond rationally to a totally emotional reaction". Yes, I agreed, but...

I have now described a few situations of which I was reminded as I followed the Brussels exchanges in the last few days. Both sides make good cases which can be defended on a rational basis. The Greek Finance Minister is obviously a highly intelligent and eloquent person and his European counterparts are not dumb, either. They may both be right but, as one of my bosses once taught me, "The graveyards of the world are full of people who were right!" Even if they reach an agreement before everything explodes, they will not be able to bridge their cultural differences given the damage to each of their cultures which has taken place. In marriage terms, I guess that is referred to as "irreconcilable differences".

The Austrian solution to this kind of a problem would be rather pragmatic. One would get all the players involved together in a beautiful Greek island resort and fill them up with Ouzos until they all agree that they will be best friends forever.