Tuesday, October 25, 2011

EU: "We don't know where we are going but the faster we drive the sooner we will get there!"

Wherever one looks today, the focus of brainpower is on solutions to the debt problem (not only of Greece’s debt). Put differently, all brainpower is applied to financial engineering.

I have seen no brainpower being applied to a Business Plan for Greece. Certainly no brainpower of politicians, governments, Central Bankers or EU-elites. Yes, there have been a few private initiatives (like the McKinsey Report) but they have been successfully ignored.

In today’s world one can raise billions from private investors just on the basis of a good Business Plan. If a corporation gets into financial trouble and needs help from banks, the first thing the banks will ask for is a Business Plan which promises a viable future for the corporation.

I have read the entire draft of the latest Troika Report. I saw many interesting things in it but what I didn’t see was a Business Plan for Greece. Essentially, what I saw was a restructuring plan for a country’s budget: how to reduce expenditures and raise revenues. Well, in the grand scheme of things that’s the job for bean-counters; the job for leaders is to make a plan.

What would be a Business Plan for Greece? Well, everybody is invited to come up with proposals. The Ekathimerini published a letter which an 11-year old allegedly sent to the Prime Minister. He proposed that the government should build a factory that converts solar energy, wind power and waterpower to electrical energy, and with that Greece could pay all her debts and live happily ever hereafter. Well, maybe nice, maybe cute, but: it is a Plan! Start with that and come up with better plans!

My own idea of a Business Plan for Greece would be a plan which shows how the Greek economy can employ the maximum number of Greeks in a productive manner (optimization of human capital) and how it can utilize the country’s economic potential or competitive advantages to the fullest extent; this over a period of a couple of decades.

In the normal world, first comes the plan and the financing comes afterwards. If the plan is convincing, there will be no financing problem. Alas, what we are witnessing today is that everyone is debating the financing without really knowing what the plan is. This is like saying “I don’t know where I am going but the faster I drive, the sooner I will get there”.

Economic plans can work and may not work; one never knows ahead of time. The European Recovery Plan after WWII (ERP or Marshall Plan) was a plan which worked and recovered a totally destroyed Central Europe. West Germany’s plan for unification with East Germany did not work. If you look at the former communist East European economies, most of them had economic plans and several of those plans worked very well. And if Greeks read the “Doing Business 2012” report of the World Bank/IFC (a report which analyses regulations which enhance business activity and those which constrain it), they can read that the plan which their favorite neighbors to the North put together some years ago is working well: FYROM jumped from position 34 to 24, and is now ahead of countries like Taiwan, Switzerland, Belgium, France, Austria, etc. Greece remained almost unchanged at position 100, behind countries like Guatemala, Vietnam, Yemen, etc.

Coming to think of it, perhaps a plan to create regulations which enhance business activity and reduce those which constrain it would already be a pretty good Business Plan for Greece!

One subsidiary objective of a plan is always to make it impossible for lenders to say “no”. Comments have been made that, say, Germany follows the hidden agenda of driving Greece into default. Well, maybe yes, maybe no. None of us can say that for sure. But one thing seems certain: if the Greek government came up with a long-term Business Plan which is so convincing that no thinking person could object, then I would like to see that European country which stands up and says: “No, we don’t support this plan. We prefer to drive Greece into default”.

If a country does not have such a plan, it has nothing to bring to the negotiating table when the issue is to restructure its debt. If it has such a plan, it can drive the negotiations. The restructuring of its debt ceases to be an “objective per se” and it becomes a “means towards an objective”.

Regarding that restructuring, we are seeing the most interesting things going on. Third parties (EU, ECB, etc.) have made themselves the owners of a problem which concerned, 3 years ago, only Greece and her creditors. The two principal parties involved (Greece and her creditors) have sort of delegated ownership of their bilateral problem to the third party. I think one probably would have to do a lot of research in the annals of financial history to see where this has happened before to such an extreme extent. Third parties will take decisions which will principally affect Greece and her creditors. Personally, I think a lot of lawyers will earn a lot of money in the next years taking some of the possible consequences of such a procedure apart.

The normal way would be for Greece to make a restructuring proposal to her creditors. The driving question must be: how much interest can Greece be reasonably expected to pay annually? (For 2011, the Troika projects an interest expense of about 15% of total budget expenses). Since Germany seems to have become the role model for everything good these days, Greece should look to the role model. Germany spends about 12% of her budget expenses on interest. Why should Greece not take that number and commit to spending 12% of her total budget expenses on interest during the next 20 years or so. If budget expenses go down, the nominal interest expense goes down. Vice versa if budget expenses go up.

So, the Greek government should commission its financial engineers to work different scenarios where no principal is being repaid for the next 20 years and where interest expenses don’t exceed the 12% limit. The principal axiom must be: the amount of debt which cannot be serviced with interest in these scenarios has to be rescheduled out even further and interest must be capitalized on that amount. One such scenario could be: 50% of the debt for 30-40 years with interest being capitalized. The other 50% with principal payments after 20 years but interest payments from the start within the 12% cap (if it makes creditors happy, one could even provide for some token principal payments before the end of the 20 years).

At this point, the government has 2 things to bring to the negotiating table: (a) a Business Plan to which no thinking person can object and (b) a rescheduling proposal which sounds reasonable. What will be the reaction of the creditors?

Well, at first they are likely to laugh about “Greek dreams”. This is the point where the Greek government requests the EU to take measures to stop the creditors from laughing, i. e. to make them go along with this proposal. Whatever “incentives” the creditors require to go along with this proposal voluntarily is then a matter of negotiation between the EU and those creditors.

There are, of course, zillions of things that are not thought through in the above but let me list a few which come to my mind immediately and suggest some answers from the Greek standpoint.

This will be an event of default! – Maybe yes, maybe no. If yes, we will negotiate measures to cure the default.

A default will trigger all sorts of things (e. g. CDS’)! – Maybe yes, maybe no. If yes, that is really a problem outside Greece. We have enough problems in Greece, so understand, please, that we cannot worry about problems outside Greece as well.

The banks won’t be able to handle the write-down’s of Greek bonds! – Probably not. That is an issue to be handled between the banks and their governments. The Greek government will handle this issue with Greek banks.

The Euro will fall apart! – Maybe yes, maybe no. If yes, certainly not because of Greece because we have a long-term Business Plan which will make Greece a value-generating and competitive economy over the next 20 years.

Greece can never repay all of the debt which is now being rescheduled! – Maybe yes, maybe no. But if our long-term Business Plan is successful, we can certainly pay back more later than it would appear today.

This is not in the interest of the financial stability of the Eurozone. Greece has to act according to that interest! – No. Greece will suffer pains one way or another for quite some time. The implementation of our Business Plan will not be milk & honey. So we don’t have all that much to lose while you have everything to lose. If you support our proposals, we both have the chance to come out less harmed 20 years from now.

The answer to most economic problems is growth. I have been involved in many debt restructurings over the years. Without belittling the technical challenges of a restructuring, the far greater challenge is to work out plans for growth. If the borrower grows economically, his debt becomes more manageable over time!


  1. Good points, but, correct me if I'm wrong, it's usually (or rather, ALWAYS) the duty of the borrower to come up with a business plan, and if he expects the bank to do his homework for him, he'll never get a credit, ain't that so?

    1. You are definitely right! No bank will every assume responsibility for putting together a business plan for the borrower. If for no other reason than that it might get sued afterwards for damages if the plan didn't work. The most banks will do is to bring the borrower in touch with the right consultants who can help him but even there banks are very careful not to get into any liability issue.