Tuesday, June 28, 2011
Sunday, June 26, 2011
Mr. Samaras is quoted by The Economist as “insisting on tax cuts to boost growth, and on an amnesty for illegal buildings that could then be taxed”. That, Sir, is not an economic plan to get the private sector going again. At best, it is a Reagan-like mantra hoping that voters will fall for it. For sure, you discredit the fine American institutions where you received your education when you say such, pardon me, silly things.
Tax cuts affect only those who are paying taxes. No current tax cheater will start paying taxes simply because they have been lowered. And illegal buildings don’t have to be “amnestized” in order to find them and have them taxed. Just open your eyes and you will see them all over Greek soil (and if that is not enough, use GoogleEarth to find all the illegal roof-top swimming pools!).
Sir, I take it that your party represents the conservative point of view. One would assume that such a party knows how business ticks. The economy will never grow significantly if there is no investment. Investment never takes place unless it finds an investor-friendly economic framework. Please explain to your fellow country men and women that wealthy Greeks have billions and billions of Euros in foreign bank accounts which are only there (and not in Greece) because Greece, with all her bureaucracy, cronyism and corruption, is scaring that money away. And if you seek a place in history, don’t waste your time playing petty politics but, instead, use your own brains and the best other brains you can find to develop a plan for an investor-friendly economy!
In the end, Argentina may have one more lesson to teach Greece: the danger of fatalism. “A lot of people were saying that Argentina would never recover, that the peso would never regain value, that this country was damned,” said Mr. Kerner, the analyst. “And it didn’t happen.”
Two of the most important differences: first, Argentina is an extremely wealthy country in terms of natural ressources (Argentine quote: "God replenishes over night what Argentines destroy during the day"); because of that, Argentina is a large exporter and achieves a significant trade surplus; but the most important difference is, secondly, that Argentina a decade ago could devalue and, thereby, get its economy going again quite rapidly. Greece today cannot devalue and even if she could, her economy would not get going again so rapidly because there is little substance in it (80% services). If Argentina had not devalued, the above mentioned fatalism would have become reality. If Greece does not find a similar solution rapidly, fatalism will become reality beyond doubt.
Greece cannot devalue as long as she holds on to the Euro. If Greece were to leave the Euro, outright default on her foreign debt would be the immediate consequence, a situation from which Argentina - despite all her progress - still suffers today.
Conclusion: Greece must rapidly find a way how she can achieve the economic effects of a devaluation (making imports more expensive and exports more competitive) without having to leave the Euro. Imports can be made more expensive simply by imposing special taxes on them (ranging all the way up to 100% on luxury goods). Such a law could be passed within days.
Exports could be made more competitive by subsidizing them. That would be futile. First, the money for such subsidies is lacking and, secondly, the export industry per se would not increase efficiency/productivity. Instead, Greece has to allow absolutely internationally competitive conditions in selected Free Trade Zones (low labor costs; tax incentives; etc.). This is where new manufacturing would have to be built up.
Finally, Greece has to find a way where capital flight abroad is stopped and where, instead, foreign capital of wealthy Greeks returns to the country for investment in manufacturing. Regarding the former, a new law restricting capital transfers abroad could be passed within days and regarding the latter, a new constitutional Foreign Investment Law would have to be passed and the EU should guarantee compliance with it.
The fact that Greece would have to additionally get her household in order (reigning-in government expenditure; hammering-down on tax evasion; etc.) is so obvious that it does not require special mentioning.
All of this new legislation has in common that it violates EU-treaties. Note, however, that treaties can be amended (if only temporarily). If the EU were not willing to temporarily amend treaties so that Greece has a realistic chance for a better future, then Greece might as well leave the EU.
An Economic Development Plan would give foreign creditors more confidence that they are financing a better future for Greece instead of throwing good money after bad. That should entice foreign creditors to be willing to voluntarily reschedule Greece's debt maturities in such a way that Greece has "air to breathe" for a number of years (but no haircut!).
Churchill coined the phrase "Who should do it but us? When should we do it but now?" Well, Greeks, go ahead and do it!
Friday, June 24, 2011
The steps taken by EU-elites so far can be summarized as follows: “We – EU/ECB/Central Banks – use Greece’s balance sheet and tax payers’ money to bail out our own banks and we call that “Financial Help for Greece’”.
An economy which is down and out does not need that kind of financial help as much as it needs an Economic Development Plan (not unsimilar to the then Marshall Plan).
Contrary to the assertions by EU-elites, it is not the sovereign debt which is Greece’s greatest problem. Her greatest problem is the banking sector which mirrors how much money flowed into Greece since the Euro and how that money was spent (excessive imports and massive capital flight in the last 2 years).
Greece’s gross foreign debt increased between 2001-2010 from 121 billion EUR to 410 billion EUR. That is on average 30 billion EUR which flowed into the Greek economy annually. Less than half of that was used by the state. Of the total foreign debt, “only” 190 billion EUR relate to the state; the banking sector accounts for 202 billion EUR.
Those 410 billion EUR of foreign savings will have to remain in Greece for a long time and every year an additional 20-25 billion EUR will be needed to finance the economy (this is already assuming that there will be no debt installments, only modest interest payments and no capital flight). Why will Greece need so much Fresh Money? Because Greece needs growth and domestic savings do not suffice by far to finance that growth.
A return to the Drachmae would overall be the worst evil of all. Thus, Greece should hold on to the Euro but simulate a situation as though she had returned to the Drachmae. That, of course, will violate certain EU-freedoms (free movement of goods and capital) but there is no other way to make it work. It is an emergency and emergencies require emergency legislation.
Assuming that the Drachmae would immediately devalue by 30-40%, one has to take measures so that imports become 30-40% more expensive overall. That means special taxes on imports ranging from 100% on luxury goods to 0% on top-priority goods.
To make exports cheaper, one would have to introduce wage/price controls but such controls have never worked anywhere on a sustained basis. The alternative is to establish Free Trade Zones where internationally competitive conditions are put in place (China is still being ruled by Communism but in parts of the Chinese economy pure capitalism reigns). Over the years, the conditions in the FTZ will, if they work successfully, rub off on the rest of the economy.
New production must be started up in these FTZ and foreign capital investment must be attracted for that. How should that work in the present situation?
One would produce those products which are presently being imported but which could just as well be produced in Greece if the economic framework were „right“. The foreign investor must be offered very attractive, internationally competitive conditions. A new constitutional Foreign Investment Law must assure the foreign investor that these conditions will remain in place. And the potential for foreign investment would be the enormous funds which wealthy Greeks hold in foreign bank accounts. Why should a wealthy Greek prefer earning 2% in Switzerland when he could earn a multiple thereof in Greece?
In a way, the foreign investor finds an economic Nirwana: there is already a market for the products which he will produce and he can produce them at competitive conditions. The EU should guarantee the political (not the economic!) risk of such foreign investments.
Last but not least, official capital flight (via bank accounts) must be stopped by imposing restrictions on capital transfers abroad.
To develop such an Economic Development Plan, one will need the best brains not only of Greece but also from Europe. The much simpler challenge is to solve the foreign debt problem. For that, one needs a few hundred people in a conference hall who agree on something.
Greece should offer her creditors to prepay the entire 410 billion EUR (no haircut!). In the absence of the necessary cash, Greece should propose to pay in a different form, such as: 20-year bonds for 50% of that debt; 10-year bonds for 30% of that debt and 5-year bonds for 20% of that debt. During the first 5 years, 2/3 of the interest would be capitalized to preserve cash. And the required Fresh Money would be in a Senior Position.
Banks would have to write-down their Greek loans to their value in the secondary market. New EU-legislation should allow the banks to stretch those write-downs over 5 years.
Should the Economic Development Plan fail, then those bonds will become rather worthless. If not, then those bonds would regain value (even 100% could not be totally ruled out if Greece, after several years, regains confidence in capital markets).
Should the Economic Development Plan work, then the banks could dissolve their loan loss reserves and they would have windfall profits. The governments should tax those windfall profits at 100% and pass that money on to Greece as a “present”. A present for having managed to become a value-generating member of the EU and in the process contributing to the saving of the European Project. That would be the incentive for Greece to bear the painful burden of the restructuring of her economy.
The most important thing is that all measures maintain the character of being „voluntary“ and „mutually consented“. No smart lawyer should be able to construe an Event of Default.
And, of course, domestic savings would have to be frozen during those negotiations in order to avoid a run on the banking system.
Let me suggest a "4th way". Even though all facts suggest that Greece can never repay all of her debt, I would warn against a forgiving of half that debt at this time. Firstly, Greece is a member of the EU and forgiving a member of the EU half of its debts is a different kind of precedent than doing the same thing with a "3rd world country". Secondly, perhaps there is a 1% chance that Greece can eventually repay all of her debt (see below).
The same effect is accomplished when Greece issues new bonds for half of her debt with a 20-year maturity and with capitalization of interest at maturity. A similar mechanism could be applied to the other half except that here the bonds should only be for 10 years (say 30%) and 5 years (say 20%) and 2/3 of the interest could be capitalized during the first 5 years.
Fresh money, of course, would have to always be in a senior position.
Why do I see a 1% chance that Greece might eventually be able to repay (rather: "voluntarily refinance") her entire debt?
Dream the following. Dream that Greeks grow up and become a "normal people" who act responsibly, correctly and honestly; that normal Greeks will manage to build up a manufacturing sector where previously unemployed now have jobs (and pay taxes), where profitable companies pay taxes and where owners pay taxes on dividends.
The Greeks must in sum be among the richest people in Europe. They own hundreds of billion EUR in liquid assets but those assets are in the wrong place (offshore). If those offshore liquid assets return only partially to Greece (because Greece and Greeks have become "normal"), one could - in that dream - imagine a boom. If for no other reason because the Greek economy has so much to catch up.
And if that were to occur, European tax payers in 10/20 years down the road would justifyable be upset that one has forgiven such a prospering country half of its debt!
Thursday, June 23, 2011
Dear Mr. Samaras,
if your position is that Greece needs more than a sovereign cost cutting program, I would fully agree with you. I hope that that, and only that, is your position!
The money which has been sent to Greece so far (to the government as well as to the private sector) has been used to finance 4 purposes: budget deficit (including debt service); reduction of risk on the part of foreign lenders to the private sector; imports and capital flight. By far the largest item was imports followed by capital flight.
Greece MUST reduce imports (and substitute with domestic production) and MUST stop the official capital flight via bank accounts. In short: special taxes on imports and restrictions of capital transfers abroad.
Additionally, Greece must attract some of the money which wealthy Greeks presently hold offshore. Part of that money would quickly return to Greece if the foreign investor found an attractive and competitive business framework. A Foreign Investment Law must be passed as a constitutional law to assure the investor of everything that he wants assurance for and the EU should guarantee the politicial risk (not the economic risk) of such investments.
One cannot convert the entire corrupt and crony-driven Greek economy to a market-based social economy in a short time but one can do it with parts of the economy. For that purpose, Greece should establish Free Trade Zones where the foreign investor is offered the attractive and competitive business framework. Over the years, and if those FTZ work successfully, they will rub off on the rest of the economy.
If this is handled well, it could well lead to a reboot of the private sector where Greeks find new jobs (and pay taxes); where companies operate profitably (and pay taxes) and where owners pay taxes on dividends received.
I have experienced first-hand in Chile in the late 1970s/early 1980s how that can indeed be accomplished. Without that, Greece, the Greek economy and the Greek people will not have perspective for the future for many years to come. There will be a brain-drain to other countries and – above all – I fear that Greeks will intuitively cancel the Social Contract and that social peace will fall apart!
Seit dem Euro sind 288 Mrd. EUR nach Griechenland als Kredite geflossen (netto). Derzeit hat der Staat 195 Mrd. EUR Auslandsschulden, der Privatsektor jedoch 202 Mrd. EUR. Anders ausgedrückt, der Privatsektor hat mehr Geld bekommen/gebraucht/verbraucht als der Staat!
Das Wachstum der griechischen Wirtschaft seit dem Euro war schuldenfinanziert. Kein Wunder, dass da ein Ingenieursbüro viele Aufträge hatte. Seitdem keine Kredite mehr an die Privatwirtschaft fließen, liegt sie darnieder. Soll das überraschen?
Die Privatwirtschaft hat den Großteil dieser Kredite "verbraucht" statt zu "investieren". Hätte sie investiert, dann könnte sie heute zuschauen, wie es dem Staat schlecht geht. Genauso, wie die deutsche Privatwirtschaft derzeit boomt während der deutsche Staat laufend neue Schulden machen muss, um sein Defizit zu finanzieren (und um fällig werdende Schulden zu tilgen und Zinsen zu zahlen).
Wenn man die griechische Privatwirtschaft nicht auf Vordermann bringt, dann haben die Griechen wirklich ein großes Tal der Tränen vor sich!
Wednesday, June 22, 2011
I work 40 hours a week, I pay 30% of my salary in tax each month, my company pays another 30% of my salary for pensions, healthcare, and so on, I work hard until I turn 65, maybe 67, I have five weeks off each year for vacation, I do not cheat the government by evading tax and lining my own pocket. Now, the Greek people want me to pay for them because they have not been paying their dues? No way. When the Greek people are mature enough to understand that they are a nation, that everyone has to contribute to the financing of that nation, then I will pay.
Many people look at things how they are and ask "why?" We dream of things how they could and should be and ask "why not?"
"We have diagnosed our situation. Over 20% of Chileans live in extreme poverty. The reason for that is that Chile, as a developing country, has grown its economy by only 2% annually over the last 30 years. If we continue growing at that rate, we will need another 50-100 years before we reach a per-capita income which a civilized country must have. We are, instead, planning to grow the economy by 8% per year or more. That way, we will reach this objective in 10-20 years. In order to accomplish that we will need the savings of other countries to finance that growth because we do not have enough savings ourselves. In order to get those savings of other countries, the state must keep its household in perfect order (in order to get loans) and the economy must become attractive for foreign investors (so that they bring their capital to Chile).
The state will no longer subsidize state-owned companies. If they cannot survive on their own, they have lost their economic right for existence. If they go bankrupt, the assets of the companies will not disappear. A new investor will come and buy those assets at a price at which he can operate profitably. The state will not spend more money than it has income.
For the potential foreign investors we will pass a Foreign Investment Law which will be a constitutional law so that the foreign investors are assured of the conditions which we offer to them. We will offer them our excellent human capital and a market-based economic framework which will be second to one in the world.
This will be an extreme challenge for our society. We aim at no less than converting a planned economy with crony networks into a successful market-driven economy which can sustain and increase the standard of living of all Chileans, and we hope to see the first positive results within the next 5 years. Until then, all Chileans will be confronted with enormous readjustment pains. The unemployment rate will go over 20% temporarily. But this is not really a cost. It is an investment in the country's future and in the future of our children. We will change from a left-side traffic on the road to a right-side traffic in a short time. There will be many accidents along the way. But once we have managed to settle with the new traffic direction, we will be able to look forward to stable traffic in the right direction.
In all aspects we will be driven by the following assumption: we can only be successful, if we are competitive in the world. We have to understand our competitive advantages (a well-educated human capital; natural resources like copper, agricultural products, etc.) and we have to recognize our competitive disadvantages (remote location; low domestic wealth; etc.). We will leverage up on our competitive advantages and we will try to minimize the effects of our competitive disadvantages". End of message.
Within 5 years, the formerly planned and inefficient economy became the "darling of foreign investors and foreign banks". During those 5 years, the adjustment pains were so hard that one wonders whether a democracy (which Chile was not) could have survived that.
The Chicago-Boys, despite their intellectual brilliance, were short of practical experience. They observed how the savings of other countries entered Chile in enormous amounts but that they were not only spent on investment but, instead, very much on consumption. The Chicago-Boys ignored that because they believed - erroneously - in the extreme free-market theory: if banks make poor lending decisions (because borrowers make poor decisions as to how to spend the money), then the losses are for the private parties. They had to learn that, in reality, when push comes to shove, the profits are for the private parties and the losses for the tax payers. From that standpoint, the Chicago-Boys failed and Chile got into severe economic problems in the early 1980s.
However, Chile learned from that experience. The Chicago-Boys were replaced by common-sense politicians with practical experience. They managed to keep the good things which the Chicago-Boys had left behind and to part ways with the extreme belief in the free market. That way, the country failed at the first attempt to make a turn-around but they were able to turn this experience into the base for a second attempt and this second attempt worked. Today, Chile is one of the most solid economies in Latin America.
Greece has learned - at great cost - all the lessons of what can go wrong when easily-flowing cheap money is spent on the wrong purposes. From that standpoint, Greece is far ahead of the situation the Chicago-Boys of Chile were in when they first started. Also, Greece has enormous private wealth (which Chile did not have) but that private wealth is still outside the country.
If Greece learns from past mistakes and gets some of her private wealth back into the country, there is no reason why Greeks should not look forward to an economic development which Chile had. Remember that today's power horse Brazil had to reschedule debts about 15 years ago.
There is one basic truth, however, and no one should hide that from the Greeks: when an unemployed hits a jackpot and decides to spend all that money on consumption, he may live wonderfully for 10 years. When the money is spent, he has to return to the standard of living of 10 years ago. Even worse for the Greeks because they didn't hit a jackpot but, instead, they took up debt which is still there.
None of the above will work if the people cannot rally around that new objective and are not willing to pay the necessary price for it. To accomplish that, one needs to make tabula rasa with leadership. Chile had the questionable "advantage" of having an authoritarian regime which, in the economic arena, banked on the right strategy and gave the people who had to execute it unwavering support. Greece has a democratic leadership which has lost the confidence of the people. If the present Greek leadership does not want to run the risk that, eventually, Greece will end up with the same political system which Chile had in the late 1970s and 1980s, they should make room for leaders who are not associated with the wrong's of the past but who can project the vision of a better Greece in the future! That would be the greatest contribution which any government has ever made for its society!
Ritschl: No, there is no basis for it.
SPIEGEL ONLINE: Most Germans would likely disagree.
Ritschl: That may be, but during the 20th century, Germany was responsible for what were the biggest national bankruptcies in recent history. It is only thanks to the United States, which sacrificed vast amounts of money after both World War I and World War II, that Germany is financially stable today and holds the status of Europe's headmaster. That fact, unfortunately, often seems to be forgotten.
SPIEGEL ONLINE: What happened back then exactly?
Ritschl: From 1924 to 1929, the Weimar Republic lived on credit and even borrowed the money it needed for its World War I reparations payments from America. This credit pyramid collapsed during the economic crisis of 1931. The money was gone, the damage to the United States enormous, the effect on the global economy devastating.
SPIEGEL ONLINE: The situation after World War II was similar.
Ritschl: But right afterwards, America immediately took steps to ensure there wouldn't be a repeat of high reparations demands made on Germany. With only a few exceptions, all such demands were put on the backburner until Germany's future reunification. For Germany, that was a life-saving gesture, and it was the actual financial basis of the Wirtschaftswunder, or economic miracle (that began in the 1950s). But it also meant that the victims of the German occupation in Europe also had to forgo reparations, including the Greeks.
SPIEGEL ONLINE: In the current crisis, Greece was initially pledged €110 billion from the euro-zone and the International Monetary Fund. Now a further rescue package of similar dimensions has become necessary. How big were Germany's previous defaults?
Ritschl: Measured in each case against the economic performance of the USA, the German debt default in the 1930s alone was as significant as the costs of the 2008 financial crisis. Compared to that default, today's Greek payment problems are actually insignificant.
SPIEGEL ONLINE: If there was a list of the worst global bankruptcies in history, where would Germany rank?
Ritschl: Germany is king when it comes to debt. Calculated based on the amount of losses compared to economic performance, Germany was the biggest debt transgressor of the 20th century.
SPIEGEL ONLINE: Greece can't compare?
Ritschl: No, the country has played a minor role. It is only the contagion danger for other euro-zone countries that is the problem.
SPIEGEL ONLINE: The Germany of today is considered the embodiment of stability. How many times has Germany become insolvent in the past?
Ritschl: That depends on how you do the math. During the past century alone, though, at least three times. After the first default during the 1930s, the US gave Germany a "haircut" in 1953, reducing its debt problem to practically nothing. Germany has been in a very good position ever since, even as other Europeans were forced to endure the burdens of World War II and the consequences of the German occupation. Germany even had a period of non-payment in 1990.
SPIEGEL ONLINE: Really? A default?
Ritschl: Yes, then-Chancellor Helmut Kohl refused at the time to implement changes to the London Agreement on German External Debts of 1953. Under the terms of the agreement, in the event of a reunification, the issue of German reparations payments from World War II would be newly regulated. The only demand made was that a small remaining sum be paid, but we're talking about minimal sums here. With the exception of compensation paid out to forced laborers, Germany did not pay any reparations after 1990 -- and neither did it pay off the loans and occupation costs it pressed out of the countries it had occupied during World War II. Not to the Greeks, either.
SPIEGEL ONLINE: Unlike in 1953, the current debate in Germany over the rescue of Greece is concerned not so much with a "haircut", but rather an extension of the maturities of government bonds, i.e. a "soft debt restructuring." Can one therefore even speak of an impending bankruptcy?
Ritschl: Absolutely. Even if a country is not 100 percent out of money, it could still be broke. Just like in the case of Germany in the 1950s, it is illusory to think that Greeks would ever pay off their debts alone. Those who are unable to do that are considered to be flat broke. It is now necessary to determine how high the failure rate of government bonds is, and how much money the country's creditors must sacrifice. It's above all a matter of finding the paymaster.
SPIEGEL ONLINE: The biggest paymaster would surely be Germany.
Ritschl: That's what it looks like, but we were also extremely reckless -- and our export industry has thrived on orders. The anti-Greek sentiment that is widespread in many German media outlets is highly dangerous. And we are sitting in a glass house: Germany's resurgence has only been possible through waiving extensive debt payments and stopping reparations to its World War II victims.
SPIEGEL ONLINE: You're saying that Germany should back down?
Ritschl: In the 20th century, Germany started two world wars, the second of which was conducted as a war of annihilation and extermination, and subsequently its enemies waived its reparations payments completely or to a considerable extent. No one in Greece has forgotten that Germany owes its economic prosperity to the grace of other nations.
SPIEGEL ONLINE: What do you mean by that?
Ritschl: The Greeks are very well aware of the antagonistic articles in the German media. If the mood in the country turns, old claims for reparations could be raised, from other European nations as well. And if Germany ever had to honor them, we would all be taken the cleaners. Compared with that, we can be grateful that Greece is being indulgently reorganized at our expense. If we follow public opinion here with its cheap propaganda and not wanting to pay, then eventually the old bills will be presented again.
SPIEGEL ONLINE: Looking at history, what would be the best solution for Greece -- and for Germany?
Ritschl: The German bankruptcies in the last century show that the sensible thing to do now would be to have a real reduction of the debt. Anyone who has lent money to Greece would then have to give up a considerable part of what they were owed. Some banks would not be able to cope with that, so there would have to be new aid programs. For Germany, this could be expensive, but we will have to pay either way. At least Greece would then have the chance to start over.
Interview conducted by Yasmin El-Sharif