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Wednesday, January 1, 2020

2010's: Greece's Toxic Decade

I have been writing in this blog since mid-2011. During this time, I have intensively observed the Greek crisis. When observing such a development step-by-step, when a crisis develops in incremental steps, one can lose sight of the overall development because one gets used to the incremental steps.

On the Website Macropolis, Yiannis Mouzakis summarizes all the incremental steps in one single article: "Learning the lessons of Greece's toxic decade". As the founder of MacroPolis, Nick Malkoutzis, commented on Twitter: "Less of a leisurely trip down memory lane, more of a hair-raising ride on the ghost train".

This is a brilliant article about an absolutely incredible decade of Greece. When reading this article, one wonders how it was possible that Greece returned to a more or less normal condition. If it hadn't been so painful for many people, if it hadn't affected the lives of so many people in a negative way, one might be tempted to conclude that 'It was a helluva ride!"

One might also be tempted to conclude that any society/nation which has gone through such painful upheavals would have learned lessons from that experience and come out of it stronger and more prudent for that reason. Mouzakis cautions about that in his closing paragraph:

"During every single significant event that defined this decade, from the economic collapse to major diplomatic and social issues, Greece’s leaders preferred to release poison into society to help their short-term political goals. It appears that Greeks have yet to flush these toxins out of their system. It is one of the main reasons that we should approach the new decade, which carries more promise for Greece than the last 10 years, with caution."

Sunday, December 8, 2019

Financial Investors And Others

"London road shows prove investor interest", titles the Ekathimerini. "Foreign portfolios view Greek assets as serious investments", the article continues. This is certainly good news for the Greek stock market. To what extent it is also good news for the real Greek economy remains to be seen.

I have argued for a long time that financial investors should not be the primary target as Greece strives to attract foreign capital. Financial investors have only one interest: risk-adjusted yield. A relatively small economy with free international capital flows can very quickly become victim of financial investors. Their money is 'hot money'. It comes quickly but it can also leave very quickly. And when it leaves quickly, it typically leaves chaos behind.

The primary target of Greece's attempt to attract foreign capital should be investors who can transfer technology and know-how; investors who are builders and not speculators; investors who have a long-term strategic vision and not a cash-out mentality. Cosco would be a prototype of such an investor.

I am not sure that road shows in London or elsewhere are the best strategy for the Greek government when it comes to attracting the right kind of foreign investment. Instead, the Greek government should analyze which sectors of the economy hold the best potential for development. Then it should analyze which foreign companies are not only leaders in that sector but also are prepared to take a long-term strategic vision. Again, Cosco would be a good example.

And then the Greek government, instead of arranging road shows in London or elsewhere, should call on the headquarters of the Cosco's of the world, present to their CEOs and take it from there.

Investments in the stock market do not necessarily create jobs. A new plant for, say, pharmaceutical products certainly would.

Tuesday, October 15, 2019

Greek State Budget Out of Control!

The Ministry of Finance has reported disturbing developments in the Greek State Budget: since the beginning of this year, monthly results are clearly in excess of the targets. Below are the data for the last 4 months (in MEUR).


June: +1.954
July: +2.565
August: +3.178
September: +3.012

Given the history of Greece's fiscal excesses, one is likely not to be surprised that, once again, there are excesses. One would only wonder what type of excess it is. An excess over spending limits? An excess over deficit limits?

Surprise, surprise! The above figures are excesses of primary surpluses relative to their targets. Put differently: the creditors had imposed stiff primary surplus targets and Greece is over-performing by far. And this despite the fact that election presents were distributed this year!

This could literally get out of hand going forward. As the economy picks up, tax revenues will increase and surpluses will grow further. The Greek state will soon be swimming in cash.

Lucky Mitsotakis!

Friday, October 11, 2019

Borrow To Improve Your Credit Risk!

On Wednesday this week, Greece raised 487,5 MEUR in short-term debt (13 weeks) at an overall yield of minus 0,02%. A week before, Greece had raised 1,5 BEUR in ten-year money at a yield of 1,5%. What has caused this dramatic increase in Greece's creditworthiness?

The Greek state currently does not need to borrow to finance budget deficits. There is a significant primary surplus, large enough to pay interest on debt which means that the overall budget will at least be in balance, possibly even positive.

Neither does the Greek state need to borrow in order to refinance maturing debt. The amount of debt which matures in the next few years is minimal. Apart from the fact that the Greek state is sitting on a ton of cash in the first place (allegedly upwards of 25 BEUR).

So what is the investors' risk by making new loans to Greece? Virtually none as long as maturities stay within the next 10 years. During this time, Greece has very little debt maturing and the interest expense is very low, too. Given this situation and considering the high cash reserves, the risk of another external payments crisis in the next few years is virtually zero.

So why does the Greek state borrow?

There is an old saying that "banks like to lend money to borrowers who don't need it". Well, there is some truth to it in the case of Greece. As pointed out above, Greece currently does not need money. Greece could use money to voluntarily prepay more expensive debt with less expensive debt where loan agreements permit that or to increase its cash reserves. Even if cash reserves yield no interest income at this time, as long as the debt incurred to build up cash reserves is zero, there is no harm in doing that. Put differently, Greece can increase, at zero cost, cash reserves which, in turn, motivate investors to lend more money to Greece because Greece doesn't need the money and has enough reserves to pay the loans back.

And the moral of the story?

THE HIGHER GREECE'S ZERO-COST DEBT, THE BETTER THE COUNTRY'S PERCEIVED CREDIT RISK AND THE HIGHER INVESTORS' MOTIVATION TO LEND MONEY, PROVIDED THAT THE MONEY IS USED TO BUILD UP RESERVES WHICH, IN TURN, FURTHER IMPROVE THE PERCEIVED CREDIT RISK.

We didn't learn that at university...

Thursday, September 26, 2019

Lucky Mitsotakis

According to the State Budget Execution Bulletin, the Greek state (not to be confused with the wider grouping of the Greek general government) registered a primary surplus of 2.906 MEUR for the period January-August 2019 (8 months). The budget estimate for the period had been a negative 272 MEUR. Thus, the Greek state overperformed to the tune of 3.178 MEUR (that's over 3 BEUR!).

Given that the Greek state had annual interest expenses between 5-6 BEUR in recent years, it looks very likely that the state will be able to pay all interest expense out of its own revenues in 2019. In other words, an overall budget surplus.

At the same time, the Greek state has accumulated cash reserves to the tune of 25-30 BEUR out of the last tranche of the latest program and from new borrowings. Since Greece does not have major debt maturities in the next few years, these cash reserves guarantee that Greece will not have a sovereign debt problem for a number of years.

This is an extremely solid financial situation! Fanatic supporters of the new Prime Minister might be tempted the credit Kyriakos Mitsotakis with this result. Well, not even a magician could have achieved such results in less than 3 months.

I could go on and on explaining why SYRIZA was a terrible government for Greece but I have to say this: no other government than a Tsipras-led government could have accomplished that Greece today is viewed as a stable (politically and economically) member of the Eurozone and of the EU. Tsipras accomplished that by performing an incredible somersault. Essentially, he agreed to every screw that the EU put upon him. Perhaps it helped that he started enjoying being viewed as the darling of international elites, which undoubtedly he has become. Unwittingly, he made it possible for his successor to embark on a growth strategy for Greece.

If any government other than a Tsipras-led government had attempted to do the same thing as Tsipras has done, Tsipras would have mobilized the masses on the streets and the result would have been terrible for Greece.

Thus, Tsipras has become sort of a tragic figure. He has done everything no one else could have accomplished and yet, someone else will get the praise for it. And that someone else is Kyriakos Mitsotakis. Lucky Mitsotakis, one could call him.

It is not often that a new political leader inherits a situation where most of the dirty and painful work has been done by his predecessor. The situation is a bit comparable to Germany in 2005 when chancellor Gerhard Schröder was voted out of office for having legislated too many tough reforms (Agenda 2010). Angela Merkel succeeded him as chancellor and, for several years, she could collect the praise for results of reforms undertaken by her predecessor who paid for that with his career.

One should be so lucky as Mitsotakis! He inherited a state budget which is operationally cash-positive and huge cash reserves. Mitsotakis will not have to spend any of his time negotiating new rescue loans for the simple reason that he doesn't need any new cash. Since 2010, Greek governments had to spend much of their time negotiating rescue loans, thus leaving less time for more productive things like making growth plans for the future.

Mitsotakis now has plenty of time to focus on growth plans and growth measures for the future. He was lucky to inherit a perfect trampoline. He will be judged by how high he can jump with it.

Saturday, August 31, 2019

Manipulating Adults In The Room

The official trailer of Kostas Gavras' new movie "Adults in the Room" is out (the movie itself will be released on September 28). The movie is based on the book with the same title by Yanis Varoufakis.

There is one statement by Varoufakis in the trailer which displays the gigantic manipulation of Greek public opinion which was his trademark throughout:

"The rescue plan was to save the German and French banks. Their colossal debt was transferred upon the Greek people."

Yes, the rescue plan was to save German, French and very many other banks. But the colossal debt of Greece was not transferred upon the Greek people. That colossal debt had already been with the Greek people. What happened was that the risk from that colossal debt, previously carried by German, French and very many other banks, was transferred from those banks upon the tax payers of the lending countries.



ADDENDUM per 02.09.2019

The question has been raised in the comments in which countries those banks which had purchased Greek bonds were located. The graph below provides some clarification:



ADDENDUM per 02.09.2019

Below is a review of the above-referenced movie:

Venice Film Review: "Adults in the Room"

Sunday, August 18, 2019

Champions Of Default

When I started this blog back in June of 2011, we were in the midst of what I would call a "hysteria about default". From the top EU echelons down, the impression was broadcast that a sovereign default was the end of the world and had to be avoided at all cost. In fact, it was exactly the fear of Greece's default which lead to the unfortunate first financing package for Greece in May 2010.

Having been through two sovereign defaults during my banking career, I failed to understand the hysteria. It was a relief to hear the Chief Economist of Citibank say that the major problem was "that the Europeans did not understand that a sovereign default was quite a normal thing" and that there had been dozens of sovereign defaults in prior decades. That assured me that I was not totally wrong with my opinion.

Against the above background, I am now quite pleased to finally have statistical evidence about the frequency of sovereign defaults. The graph below shows sovereign defaults since the year 1800. Greece is not alone with 7 defaults; my home country Austria is right up there with Greece, also with 7 defaults. Spain, Russia, Germany and Portugal follow right behind.

But most important is the recent past. Since 1975, there have been almost 50 sovereign defaults. Each sovereign default was handled 'the normal way': existing creditors restructured their maturities by extending them and lowering the interest rate; official lenders provided the Fresh Money; and the IMF put together a program which was the basis for the agreement of all creditors.

Only Greece was different. Here, the EU elites felt that they didn't need to learn from professionals with previous experience. Instead, they assured themselves that the EU was different and required a different solution. The end result was that, today, European tax payers carry the risk which was previously carried by private creditors. Great showing!