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Thursday, May 21, 2015

One Country Is Truly "Repaying" Sovereign Debt --- Greece!

Even though one continually hears comments like "Greece will never be able to repay its debt", it ought to be common knowledge by now that sovereigns hardly ever repay their debt in nominal terms. There may be exceptions here or there (like the US which actually reduced its debt during the late Clinton years owing to extraordinary budget surpluses) but my own country, Austria, is more typical: Austria has increased its debt in nominal terms uninterruptedly for 51 years by now!

Sovereign debt gets 'refinanced'. Actually, it is more than that: it gets refinanced and increased to the extent of budget deficits and/or major other expenses which do not run through the budget (like bank bail-out's).

There is now one notable exception to the above rule and that is --- Greece! From year-end 2014 until March 31, 2015, i. e. during only 3 months, Greece has nominally reduced its debt from 324 BEUR to 313 BEUR. That is a nominal reduction of 11 BEUR! (details can be found on page 26 of this report by the Ministry of Finance).

Reducing sovereign debt in nominal terms in the midst of a depression and more or less financial chaos comes close to a miracle. The funds for that certainly didn't come out of the government's operations bcause the primary surplus was not even enough to pay interest. So they must have come from somewhere else.

Some of it is probably explained by the ECB's extending loans to Greek banks which, in turn, lent money to the state (via buying T-bills or whatever else) but that can only be part of the story.

No other figure than the above 11 BEUR explains better the unbelievable achievement which the Greek government has made in scraping up all funds available anywhere in the country. One day, when the Greek Finance Ministry again opens its doors to 'advisers' from the Institutions, we may find out how the Greek government accomplished this miracle. It will undoubtedly be a testament to 'Greek ingenuity'.

I am reminded of a conversation with the CEO of a large, publicly traded American corporation. His P+L revealed that sales had gone down and profits had gone up. I asked him what I should make of that. His answer:

"Well, it certainly is a process which cannot go on forever!"

Reforms, Not Stimulus? Or Knife To The Throats?

Below are two articles which present a good contrast of views:

Reform not stimulus is way out for Greece, by Konstantine Gatsios and Dimitrios Ioannou (Bloomberg)
Defiant Greeks force Europe to negotiating table as time-bomb ticks, by Ambrose Evans-Pritchard (The Telegraph)

The difference between the two, in my opinion, is that Ambrose Evans-Pritchard (AEP) points out what the problem is with Europe's negotiating tactic whereas Gatsios & Ioannou (G+I) explain what the problem of Greece is. The latter question is not addressed by AEP.

"Equally telling is that during the five years since the crisis began, Greek imports have exceeded exports by almost 60 percent. Although Greeks are certainly buying fewer foreign goods than in 2007, it is clear that insufficient 'effective demand' is not the root problem here. What has been lacking is 'effective supply' -- the ability of the Greek economy to produce enough competitively priced goods to sell and grow", state G+I and they hit the nail on its head with that statement.

I have emphasized this ad nauseum in the past: the Greek economy is far from being able to provide the products & services which its residents desire so that Greek residents purchase those products & services from other economies. For this to work in the longer term, the Greek economy would have to provide products & servcies to other economies in order to make the books balance. The latter not being the case, the books don't balance and the Greek economy will always require funds flow from abroad in order to be able to satisfy the desires of its residents. Anyone who truly wants to change this situation for the better needs to focus on getting the Greek economy to provide more products & services which its residents (or foreigners) desire. To the extent that this is accomplished, there will be more jobs, more wage/income taxes, more social contributions - in short, more revenue to the state.

Now critics will call me wrong because, for quite some time now, the Greek economy has registered current account surpluses, i. e. proving that it is not even balancing its books but even achieving surpluses. My answer to this is: Look at the unemployment rate and the exodus of Greeks to other economies!"

Sustainable employment can only be increased if there is an increase in the provision of products & services. So more domestic demand will quickly solve that problem? No, because in the absence of sufficient domestic supply, the money will go into foreign supply (imports). As G+I so aptly phrase it: "A policy of Greek fiscal stimulus would have the perverse effect of creating jobs in Germany, China and other exporting countries that would simply sell their wares to Greece."

And what does AEP have to say about this. Nothing, really. Except that if "the creditors could have found common ground with Syriza at any time had they wished to negotiate." So it's all about finding common ground between creditors and borrowers? Perhaps, particularly when one is stubbornly intent on curing the symptoms instead of attacking the source of the problem. The debt is the 'derivative' whereas the real economy is the 'underlying'. One cannot ever fix the 'underlying' by playing around with the 'derivative'. Certainly not in the long run! But we all know what happens in the long run... 

ADDENDUM
A very 'progressive' German blogger, Jens Berger, has once argued that Greece within the Eurozone should be no different than the German state of Mecklenburg-Vorpommern (M-V) within the German union. To illustrate: M-V is one of the poorer German states with totally insufficent economic value creation on its own, thereby living on transfers from central government agencies. Jens Berger says, correctly, that no one in its right mind would argue that M-V should leave the German union.

True, but M-V has an adjustment valve which the Eurozone has only in theory: its residents only have to hop on a train and, within a couple of hours, they are in an economy where jobs and incomes are plentiful. And --- they are still in Germany! M-V has registered a phenomenal exodus of residents since German unification and, despite all the transfers, it still has one of the highest unemployment rates in Germany.

Wednesday, May 20, 2015

Does SYRIZA Reflect The Character Of All Greeks?

FinMin Yanis Varoufakis is quoted in Die Zeit. When asked if FinMin Wolfgang Schäuble is making mistakes in his analysis of Greece, Varoufakis answered: "Yes, his is. He is equating the previous Greek governments with the Greek people as though they had reflected the character of all Greeks".

Makes me wonder whether the implied conclusion is that SYRIZA is reflecting the character of all Greeks.

Tuesday, May 19, 2015

A Quick-And-Dirty Solution Really Such A Bad Idea?

Gross government debt declined from 324 BEUR at year-end 2014 to 313 BEUR at March 31, 2015. That's a decline of about 11 BEUR.

That, actually, was never the idea. The idea was to, first, reach a primary surplus and, secondly, increase that surplus so that eventually all interest could be paid. There never was the idea that Greece would nominally reduce its debt in the foreseeable future (so far, Greece has never even had a primary surplus sufficient to pay all interest).

Now it turns out that Greece has not only paid all interest but, on top of it, reduced debt nominally by 11 BEUR. No wonder that liquidity has to be scraped up from all corners.

Given the fact that the official negotiations do not seem to lead anywhere, it might be an idea - instead of letting Greece default - to go for a "quick-and-dirty solution", the kind of solution which the IMF has recently rejected. Such a quick-and-dirty solution could be as follows:

1) Lend Greece 11 BEUR to replenish the unplanned nominal debt reduction;
2) Suspend all debt service (principal and interest) on official debt until the end of the current legislative period (private debt would have to be serviced);
3) Freeze ECB funding at current levels;
4) Prohibit any future borrowings by the state during the time of the suspension.

No other conditions (such as reforms) attached.

In short, Greece would be put into a situation where it could do whatever it pleased as long as it didn't take up new debt. The government would have sufficient time to show the world that they have far better ideas as to how to turn Greece around than anyone else.

And if they couldn't show that, they ought to be history.

Perhaps The Fiscal Situation Is Not So Tight, After All!

With all the discussion about Greece's running out of money, I have looked at this year's budget statistics and expected disaster. After all, Greeks allegedly had stopped paying taxes quite some time ago. Surprise, surprise --- I did not find disaster. Instead, I found what one could almost call generally good news (relatively speaking, of course).

First, one has to clarify what one is looking at. The numbers which really matter are the "General Government (consolidated)". Those are the numbers which the Institutions (formerly Troika) are looking at for compliance purposes. The General Government consolidates the "State Budget", the "Extrabudgetary Central Government", the "Local Governments" and the "Social Security Funds". The State Budget is obviously the largest part of the total in terms of revenues/expenses (followed by Social Security Funds).

The Ministry of Finance makes two monthly publications: the "State Budget Execution" and the "General Government Monthly Bulletin". For an outsider, it is next to impossible to understand the consolidating/reconciling items between the various government sectors, so it is best to simply look at the General Government (consolidated) and also at the State Budget (in oder to get a better understanding for the General Government (consolidated)).

Did the General Government run out of money in the 1st quarter of 2015? Nope, by far it didn't. Instead, it recorded a primary surplus of 1,2 BEUR. However, relative to the previous year there was a substantial decline from 2,4 BEUR. Whether or not this is a deterioration or whether it is perhaps due to extraordinary items in the earlier period cannot be said.

It stands out, however, that the primary surplus of the State Budget nearly doubled since a year ago (from 835 MEUR to 1.636 MEUR). It was the significant underperformance in the other 3 sectors (particularly Social Security Funds) which caused the overall decline.

Two items really matter when looking at such figures: the comparision with the same period of the previous year and the comparison with budget. Since this level of detail is not provided for the General Government (consolidated), I will turn to the State Budget for January-March 2015.

The State Budget recorded a primary surplus of 1.732 MEUR. This is better than both, the 1.541 MEUR of the previous year and the 1.613 MEUR of the budget. Everything wonderful? Not quite.

We have all read that Greeks allegedly stopped paying taxes. The numbers do show a tax revenue problem but it is not scary because ordinary tax revenues were at just about the same level as the previous year. However, according to budget they should have been 587 MEUR higher. When considering that Greece had non-budgeted tax revenues in the first quarter (tax amnesty), it is clear that there is an issue of tax revenues. Luckily, that could be covered up by EU funds which were 679 MEUR above budget. 

The expense side is eye-popping! Not only was ordinary expenditure (excluding interest) 516 MEUR below the previous year but even 1.343 MEUR below budget. So did Greece become a fanatic saver? Possibly a bit of a saver but clearly not a fanatic one: there are categories (like the military) where one could conclude that less money was indeed spent than planned. But: a little over 700 MEUR of 1st quarter expenditures are not shown in these figures because their payment was delayed (increase in arrears).

So what is the bottom line of all of this? My first caveat is that "one should not believe any statistic which one has not fudged oneself" and I did not fudge these numbers. However, one can indeed conclude that the fiscal situation is by far not as tight as one might have feared. If Greece were freed of debt service and if ceteris paribus, the government's revenues seem to well cover its expenses (other than debt service). And that almost sounds like an invitation to default... 

General Government Monthly Bulletin March 2015

The Forgotten Greek Bail-Out

The standard argument of the European hawks is that they have shown extraodinary solidarity with Greece by lending 240 BEUR (or more) as rescue loans. And the standard response by the doves is that this was not a bail-out of Greece but, instead, a bail-out of banks in France, Germany & Co. The latter are more correct than the former but even if only 30-40 BEUR of the rescue loans stayed in Greece, it is still 30-40 BEUR more than zero (not counting the 40 BEUR which served to recapitalize Greek banks).

What is conveniently overlooked is that not the EZ governments are the ones which showed the extraordinary solidarity but, instead, the ECB. My understanding is that the ECB currently has close to 120 BEUR in the 'Greek fire'. Whatever the ECB lent to Greek banks was used by the banks for something. Perhaps some of it was used for making loans which otherwise could not have been made (like loans to the government). But the chunk of it was used for replacing deposits which were withdrawn from Greek banks.

Since December of 2014, Greek banks have lost about 30 BEUR in deposits. But more importantly: at the outset of the crisis, bank deposits were close to 260 BEUR and now they stand around 140 BEUR. When using my calculator, I come to the conclusion that about 120 BEUR of deposits disappeared, i. e. were withdrawn.

Now it could well be that some of these deposits had been held by foreigners in view of higher Greek interest rates and that a good portion of them was withdrawn in order to pay taxes or general living expenses. But I would wager that by far the largest portion was withdrawn to find safer havens, be those foreign bank accounts, foreign securities or the mattresses at home.

ECB loans, conceptually, represent tax payers' money. The only difference is that tax payers do not have to put up the money to fund those loans. Instead, the ECB lends printed money. Even if the ECB were to lose 120 BEUR in Greece, it still wouldn't automatically translate into costs for tax payers because, contrary to a 'normal' bank, the ECB can remain fully operational with a negative net worth. Tax payers are only called upon if the ECB were to require a recapitalization.

But let's now look at the other side of the balance sheet. Let's assume that only half of the 120 BEUR of ECB funding, i. e. 'only' 60 BEUR, were used by Greek depositors to transfer them to safe havens (personally, I would guess the figure is closer to 100 BEUR). That would mean that Greek depositors could 'rescue' 60 BEUR of their savings (or more) during a time when their country was going to pieces. Or to phrase it a bit more provocatively: European tax payers sent - via the ECB - 120 BEUR to Greece so that Greeks could transfer 60 BEUR (or more) into safe havens. Those Greeks may turn out to be very happy campers in the near future while the European tax payers may become very sad.

Monday, May 18, 2015

Troika-Inspired Reforms Did Not Help Greek Exports?

Below is my response (via Twitter) to FinMin Varoufakis' argument that dismal Greek exports are evidence that Troika-inspired reforms didn't work. 

"Somewhere I read today that you were arguing against Troika-inspired reforms because despite huge drops in wages and costs, export growth has been flat, allegedly proving that reforms don't work. FactCheckEU has confirmed the accuracy of your statements. Regrettably, your conclusion - if it is as inferred above - is wrong!

If price were the primary determinant of exports, then Switzerland - with one of the most overvalued currencies - would have to cease exporting. Instead, Switzerland's exports, on a relative basis, are higher than Germany's. Exports may indeed be a function of price when an economy has an export capacity and an export culture/administration. If France or Italy could devalue against the Euro by, say, 20%, they would become formidable competitors of Germany in no time.

The first thing you would have to do is to dismantle the entire public export promotion agency and replace it with something new. Argument: total failure! When I see Austrian supermarket shelves full of produce from EU countries and from other countries very far away, I know it is not a function of the quality or availability or price of Greek produce because I know that Greek produce is better and very competitively priced. It is exclusively a failure of bringing this produce to foreign markets. The way a private Greek export consulter has explained this to me is: the public export promotion agency, apparently quite large, is primarily interested in itself; in its political influence and in its relations with the public sector. Whether or not Greek exports are increased as a result of their activities is of secondary importance to them. 

Gobal Greece - An Effort To Promote Exports 

Austria, a smaller country than Greece but a larger economy, has over 100 trade representative offices throughout the world (typically housed in foreign embassies/consulates) supporting about 6.000 exporters. These rep's are managed just like a corporation would manage its sales force: there are literally monthly activity/results reports which are controlled/supervised centrally. These people get paid to promote Austrian exports! Also, it seems that there isn't a month where an Austrian trade delegation doesn't visit a foreign country (or foreign countries).

The next thing you would have to do is to clip the wings of the apparently very important import lobby and strengthen the export lobby, instead.

But more important than anything else: you have to analyze where the Greek economy has competitive advantages for exports and work out development plans so that investments are made in these industries. If you have not much to export, no price will solve that problem. To build up a significant export sector, particularly when one starts from little and from no particular export culture, takes huge effort and a long time. While Greece has no choice, in my opinion, but to embark on that journey, there is also a parallel strategy which can work very quickly: substitute imports with domestic production wherever possible.

The Euro has devalued phenomenally against third currencies in recent years and Greece has devalued within the Eurozone. Relative to that, Greece's export performance since 2008 has been absolutely dismal. As I said, this is not proof that reforms are not working but, on the contrary, it is proof that something is very rotten in Greece's export efforts and needs to be reformed urgently!"

Sunday, May 17, 2015

Thank You, Venezuela!

In a press conference after receiving the new Venezuelan ambassador to Greece, the Greek Minister of Productive Reconstruction, Environment and Energy "expressed his appreciation of the pioneering role of the Venezuelan government in the anti-imperialist struggle, not only in Latin America, but for the entire world”.

Well, then, onward you move, comrades!

An Example Of Brain Drain

“You hear so many unbelievable stories. I have tried before to deal with government officials, not of one party but of all parties, and I have not seen results. And I honestly believe that there are not a lot of people in Greece who are thinking about Greece. They are thinking about themselves and feel that if they’re OK, then Greece will be OK. That’s not how it works. You need to take care of the country first. The private sector does not have time to waste. Every minute counts. I decided that all my efforts would be to help Greek entrepreneurs.”

Such are the words of a Greek who emigrated to the US 40 years ago. Less than a year ago, he motivated another Greek, a PhD aged 34, to move to the US with his start-up company which managed to become one of 25 finalists for awards in creative innovation. That Greek is a former academic and research assistant at the International Hellenic University in Thessaloniki.

Details are in this article from the Ekathimerini.

82 New Proposals For Greece

Tomorrow, Monday, the Hellenic Federation of Enterprises (SEV) will present a package of 82 policy proposals for the country to return to growth and will present them at Monday’s general meeting, attended by Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, while insisting that the country’s place in the eurozone is non-negotiable. So the Ekathimerini reports.

The document is called "Together for Growth". That should be an interesting document to read because businessmen normally make proposals which work in the real economy even though they may not get the applause of leftist academics. Tomorrow, we should know whether the SEV is worth its salt.

Wednesday, May 13, 2015

Ghost Factories And Industrial Cemeteries In Greece

This article about Ghost Factories of Greece, by Yannis Behrakis and published by Reuters, really got my emotions going because it confirms an argument which I have been making for a very, very long time. My argument follows this logic:

* When Greece joined the EU in 1981, it became exposed to the EU's Four Freedoms: free movement of products, services, people and capital. I have always argued that those were two freedoms too many and/or too quick (products and capital).
* When a formerly rather closed and protected economy (and inefficient at that) becomes rapidly exposed to the free movement of products and capital, all hell can break loose in the domestic economy. It just so happens that imports are much cheaper (and perhaps even better) than domestic products and when capital moves in, there is money to pay for those imports.
* The Euro was not the cause of all of Greece's problems. It was, however, the turbo which really got the destructive mechanisms started by the EU's freedoms to full speed.

The 'infant industry concept' argues that an 'infant economy' needs to be gradually developed so that it can effectively compete with the rest of the world once it is ready for that. But sooner or later it will have to become ready.

Almost all ghost factories mentioned in the article became ghost factories well before the present crisis. In fact, many of them even before the Euro. When I was developing banking business in Southern Germany during the 1970s, I had several customers who operated production facilities in Greece and wanted our multinational bank to service their subsidiaries there. One I remember particularly well (a textile manufacturer) because his operation was in the Kilkis Industrial Park, North of Thessaloniki.

So, a couple of years ago, I went to see that Industrial Park and what I found was an Industrial Cemetery. I have had several Greeks explain to me all the high-quality production which Greece once had but no longer has. Allegedly, there was even a very reputable supplier of aircraft equipment in Thessaloniki at one time.

Well, those times are obviously gone. When attempting to bring them back, one has to bear in mind what the forces were which drove them away. Against those forces counter measures are in order.

Tuesday, May 12, 2015

A Rejection Of The "Blueprint For Greece"

I take the liberty of publishing below the reaction of my reader Lennard to an article which I had written a few days ago:


AT: Yanis Varoufakis
FM: Lennard
RE: Your proposal, A Blueprint for Greece


Thank you, but no thank you.

As a common business project it is not attractive to us. It lacks Purpose, Scope of Work, Master Schedule and Budget. Your track record and proposal indicate that you do not look for a business partner but a donor. That is not in our area of interest. Please feel free to seek others at your discretion. Your threats of damaging our business in case of non co-operation have been handed over to our corporate legal advisers.

As a marriage proposal it is not attractive. You have no dowry and are of doubtful virtue and honor. You are flirting with other men and have been unsuccessfully married several times before. I do not think you look for a life companion, lover and friend. You look for a provider. We would not be happy together; I shall not hold you to your proposal. Do not shoot yourself; it will hurt you more than anybody else.


Sincerely,

What A Difference A Few Words Make!

In an article about the FYROM conflict in the Ekathimerini, I came across the following quote: 

"Greek Foreign Ministry spokesman Constantinos Koutras called on FYROM authorities to focus on 'serious problems... that have to do with the functioning of rule of law... respect for the principle of good-neighborly relations, and the country’s democratic deficit... rather than looking for scapegoats and blaming others for the impasse in their Euro-Atlantic perspective.'” 

I had to chuckle. What if the EU re-phrased this comment as follows: 

"The Eurogroup called on Greek authorities to focus on 'serious problems... that have to do with the functioning of the Greek state... respect for good collegial relations in the Eurogroup... and the country's financial deficit... rather than looking for scapegoats and blaming others for the impasse in their common currency perspective.'"

Allende Needed 3 Years. SYRIZA Only 6 Months?

Below are a few quotes from different articles appearing in the Ekathimerini today: 

“Greece’s social security funds are experiencing a dramatic decline in revenues. These developments, combined with the drop in tax revenues, have led to a 51.6 percent drop in the general government’s primary budget result from the first quarter of 2014.”

“According to the data announced by the ministry, pension funds are in dire straits as the state has reduced its funding to them by 17.1 percent and their revenues have dropped by 12.1 percent on an annual basis, amounting to 8.02 billion euros against 9.15 billion a year earlier.”

“Expired state debts climbed to 4.43 billion euros at end-March from 4.01 billion at end-February, adding 418 million euros in just one month. Most of the expired debts burden healthcare organization EOPYY (1.39 billion euros) and hospitals (903 million euros). The obligations of the Civil Servants’ Pension Fund amounted to 382 million euros while those of local authorities reached 319 million.”

“Greece finds itself in a state of quarantine, as is anything related to the ‘Greek risk,’ due to the ongoing uncertainty and the danger of a serious liquidity accident. Foreign banks and stockbrokerages have either drastically cut or altogether stopped conducting transactions with their Greek peers over fears of the complications an accident or capital controls would generate.”

“Payments for a number of European Commission-subsidized projects in Greece have been severely delayed in recent months during the crucial period just before their completion, according to the Association of Greek Construction Companies (SATE).” 

"’State projects around the country are falling apart as they see work stop one after another due to the financial constraints of construction firms,’ a SATE statement warned on Monday.”

Salvatore Allende, the world's first democratically elected Marxist head of government, needed 3 years to run Chile's economy into the ground. Could it be that SYRIZA will manage to accomplish this in 6 months?