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Thursday, May 31, 2012

Greeks - be nice to the EU!

Having spent the 1980s in Chile/Argentina as a banker with direct involvement in the then debt rescheduling negotiatons, I have criticized from the very beginning that EU-elites adamantly refused to seek advice from those who could provide it, namely the then decision-makers in Latin American debt reschedulings.

When I first listened to Andres Velasco's speech at the recent INET-Conference in Berlin, I was most impressed by what he said. But then, I always was most impressed by Chileans!

Prof. Velasco has now published an article which outlines, based on Argentina's experience, very accurately what could be in store for Greece. I have lived in Argentina when inflation was around 25-30% per month (!) for a sustained period. When bank deposits had to be frozen.

Greeks, believe me, you ain't seen nothing yet when it comes to what may still be in store for you. Be nice to the EU because that could be the only thing which saves you from sheer agony which would otherwise grip a hold of Greece for at least a couple of years.

Wednesday, May 30, 2012

Alexis Tsipras does it again!

Alexis Tsipras lives up to his role of being a trendsetter: this coming Friday, he and SYRIZA will announce their Economic Manifesto, i. e. what economic policies they would follow if elected. For that innovation in the ongoing electoral campaign, Mr. Tsipras and SYRIZA are to be congratulated!

The other good news is that with Friday as the announcement date, Mr. Tsipras has another 2 days left to make changes to his plans. Capital.gr published a preview of the Economic Manifesto which will be made on Friday. Should no changes be made to this, then Greeks will have the unique opportunity to vote Greece into disaster (or not, if they don't vote for SYRIZA).

One great emphasis of the Manifesto is for the state to regain control over strategic economic sectors. To hold on to state ownership of those companies which were intended to be privatized is called a non-negotiable goal.

Another target for nationalizaton are the banks because "this is absolutely necessary and indispensible to a government of the Left because these public banks will serve as a tool for developing, manufacturing and a social financing policy to meet social needs".

One doesn't need to read further on in the Economic Manifesto. The above already describes very clearly the vision which Mr. Tsipras has for Greece, namely, a country/economy where the state plays the predominant role.

If the "state" where the class of philosophers of Plato's Republic, I might feel differently but in today's world the state means parties and politicians. There is absolutely no way to keep the interest of parties and politicians out of banks and companies when the state has control over them.

To be sure: nationalization of banks can be an adequate measure when it is only for a limited time. When banks have to be recapitalized by the state, it is only logical that existing shareholders would see their equity wiped out. Equity capital is risk capital. But the state should own banks only for the time it takes for finding a new buyer. Hopefully, the state will recuperate its investment on the sale and perhaps even make a profit.

Greece has absolute no track record of being able to run a public sector efficiently. Why this would change under Mr. Tsipras is not being explained. Therefore, any vision which rests on the premise of more state control of the economy rather than less must be destined for disaster.

Incidentally, I haven't read anything about reforms in the preview but, then, there are still 2 days left for Mr. Tsipras and SYRIZA to ponder whether anything should be reformed in Greece.

Portugal - a role model for Greece?

I am not familiar with the situation in Portugal but after I had listened to this interview, I certainly wondered why Greek political leadership couldn't talk like the President of Portugal does. It had all the right soundbites like: "Portugal has a tradition of keeping its commitments"; "We must exercise strict austerity but, at the same time, we take initiatives for growth"; "We want to attract foreign investment"; etc.

So let me be skeptical and assume that this is all talk whereas the action is quite different. Even so, if the talk is "right", it makes a world of difference regarding the options one has for actions!

"The problem is NOT Greece!"

This statement is being heard more and more often inside and outside of Greece, and every time I hear it, it tests my patience. A successful demagogue starts with themes which people would like to imagine as truths, then he declares them as truths and, before he knows it, he has many enthusiastic followers.

There is not just one problem; there are many problems in the world! The Eurozone has a big problem (in which Greece is caught up) and that must be solved at the level of EU-elites. France has big problems (overexpanded public sector; diminishing competitiveness) and they must be solved by the French government. Germany has big problems (a demography working against its future; unemployment in the East) and they must be solved by the German government.

And in the same vein, Greece has its own problems which can only be solved by the Greek government. The only thing is: the Greek problems are of a gigantic magnitude as the task is basically to reform the entire country from A-Z.

How is Greece doing at solving its own problems? Well, I am now witnessing the second Greek election campaign in my lifetime and, so far, I haven't heard anything about party proposals how to solve Greece's own problems. More than 99% of Greeks seem to be discussing a Memorandum which far less than 1% of Greeks have read. Frankly, one could get the impression that Greece's only problem is the Memorandum.

What ever happened to modernizing public administration and increasing efficiency in the public sector? To liberalizing the professions? To attracting foreign capital and know-how through privatizations? Etc.

Not much, at least not much as far as I can determine. Those seem to be someone else's problems. The Greek problem is the Memorandum...

I close with a quote from the Greek Default Watch blog: “This lack of ownership (of problems) risks becoming the greatest casualty of this crisis. Greece has changed from being a fat kid that was going on a diet to a fat kid that wants to sue the candy company. In the end, the fat kid may get a check – but will he get any thinner?”

Monday, May 28, 2012

A new political order?

Pavlos Eleftheriadis published this most interesting article in the Financial Times. He identifies 3 facts which have caused the paralysis of Greek political life today: the cultivation of hatred, the rise of majoritarianism and the demise of the press. For me, the cultivation of hatred was the most interesting one!

Until recently, I associated the 1940s in Greece with the terror of the Nazis. It was the Nazis who had brought destruction and pain over Greek society and to this day Greeks invoke the brutalities of the Nazis. Yes, there had also been a Civil War but that was a domestic event.

Earlier this month I read the book Eleni and was captivated by it. The worst of armed conflict is when people kill their own compatriots. From that standpoint, Eleni joins the ranks of books like Gone with the Wind, For Whom the Bell Tolls or Doktor Shivago. Eleni is, of course, a one-sided presentation of that period. I am still looking for a book which presents the other side.

Since then, I have become fascinated by the subject of the Greek Civil War. Interestingly, in English or German there isn't so much written about it. However, there are a couple of very good videos on Youtube. The more I learned about it and how it divided Greek society, the more I had to think about a dark chapter in Austria's history.

Austrians had been brave enough to sever all ties with the Nazi regime even before Hitler killed himself - the Second Repulic was declared before the official end of WWII. The first government was a government of all parties, including the Communists. Their mission was clear: Austria had been "the first victim of National Socialism"; the country had been raped by the Nazis. It was now high time that all political forces would return the "Austrian Nation" to prosperity. And it worked!

On the surface, this seemed quite convincing. At the Moscow Conference in 1943, the Allies had declared Austria to have been "the first victim of National Socialism". The Second Republic claimed that it could not be held responsible for a period (1938-45) where no Austrian government existed.

The sad fact, however, is that many, many Austrians had been - as some observers described it - "better Nazis than the Germans". Austria had had its own Civil War in 1934, albeit it a minor one. From then on, it had become a political battle between the Left and the Right. When the Nazis arrived, they first drove the Left into the concentration camps but not too long after that patriotic members of the Right were driven into concentration camps as well. And from the concentration camps they could observe how people who had lost their bearing followed a pied piper enthusiastically. When even the greatest political opponents find themselves together in concentration camps, that helps to come to senses and to understand the benefits of working together instead of working against each other.

The Second Republic threw all those political divisions under the carpet and, on balance, it worked very well for Austria. But Austrian society never realized that the entire concept of an "Austrian Nation" was based on the cover-up of having been "the first victim of National Socialism". What was/is the result of that? To this very day, old divisions immediately come up when a sensitive issue is touched upon. As an Austrian commentator once wrote: "The thought-provoking thing is that Kurt Waldheim was not elected President despite the fact that he had been a Nazi. Instead, he was elected because he had been a Nazi". When the political debate gets very heated, one can even today hear accusations like "you are the ones who shot at us in 1934!"

What does all this have to do with Greece? Well, in the last few weeks I have become aware of the extremely deep divisions in Greek society caused in the 1940s, beginning with the Nazi occupation and brought to explosion during the Civil War. And, following the Civil War, there were winners and losers, albeit not always the same. However, the winners always treated the losers of the time rather harshly. Perhaps there is even to this day a sentiment that not all accounts have yet been settled fairly.

The real amazing thing to me is that Geeks don't talk about that period. Even in small villages where some villagers had killed others, people in later years wanted to forget this for the sake of peace. There is only one problem with this: deep divisions in a society, deep human conflicts can never be forgotten entirely. Instead, one has to come to terms with one's past, bridge the emotional and political divides and work on a new and common national identity.

Sunday, May 27, 2012

Prof. Yanis Varoufakis vs. Kantoos Economics

Below is a very interesting exchange of views: an article by Prof. Yanis Varoufakis and a comment on it by Kantoos Economics.

Prof. Varoufakis on "Fiscal Waterboarding versus Eurobonds"
Comment by Kantoos Economics

Both authors are very sophisticated economists (which is evidenced by the fact that they can disagree but still respect one another...).

The bottom-line of this sophisticated exchange is the question: how can the debt service burden (i. e. the interest expense) be lowered for the deficit countries? The underlying asumption is that the current interest expense is far to high for countries living through enormous adjustment periods.

First of all: this assumption is correct! In "normal" times, interest rates should be market rates in order to optimize the allocation of financial resources. Restructuring times are not normal times. During restructuring times, the guiding principle must be to do everything which makes it possible for normal times return again. Available resources must be predominantly used to making the return of normal times possible and not for the payment of market rates.

To accomplish this, Prof. Varoufakis recommends ECB-bonds. Others recommend Eurobonds. Both are fairly complex structures which may or may not accomplish the objective. This is why I would like to make the following comments.

First, the easiest way to lower a country's interest expense is to simply lower the interest rate. That could be accomplished with the stroke of a pen.

And, secondly, lowering the interest rate does not necessarily mean that lenders are "giving something away". Typical in any financial restructuring are "success triggers": a lender might forgive some of his loans in exchange for shares of the borrower. If the restructuring is successful, the shares will gain value and the bank can recover some of its loss. Or, the total interest rate is divided into two portions: "cash interest" and "capitalized interest". Only cash interest flows through the budget. Suppose the lenders want an interest rate of 4%. Fine with Greece, provided that only 1% thereof is the cash portion and the rest is capitalized for, say, 20 years.

Will all these obligations which are being postponed into the future every get paid 100%? Probably not, but that is besides the point. The point is that existing Greek debt currently trades between 10-20% of nominal value and if that percentage were to increase to, say, 50% or even more because of successful restructuring policies, it would already be a major success.

The best option would be to have a low cash interest rate and even cap the amount of interest expense at a certain percentage of government expenditures.

Approximately two-thirds of Greece's sovereign debt is in the hands of the Troika/ECB at this point. To approve something like the above would require a telecon among a handful of people. If they agreed, then the remaining private creditors would have no alternative but to agree also.

Saturday, May 26, 2012

Christine Lagarde's bombshell

Wow! That was a bombshell which Mme. Lagarde dropped on Greece! In the past, I have often wondered how a French woman would ever make it to become CEO of one of America's largest law firms. I guess we all know by now - that lady is tough!

One shouldn't have been too surprised because only recently did Mme. Lagarde drop a similar bombshell in an interview with CBS where she said that "it is not certain that Greece will avert bankruptcy and a forced exit from the EU and its common currency, the euro." The lady does not mince words for sure!

There is no question that Mme. Lagarde violated every rule in the book of diplomatic conduct. There is no question that many Greeks now feel (justifyably) insulted. This hurts even more when one considers that no one in a position like that of Mme. Lagarde's would make such comments inadvertently.

But let's look at the facts.

I have always argued that it seems, at least to me, that there are at least two different kinds of Greece's and two different kinds of Greeks. On one hand, I know the correct and decent Greeks of high personal character; hard-working and clean-living; open-hearted and extremely friendly and hospitable; perhaps even a bit simple-minded when it comes to dealing with others. I would call them "the nice ones". And on the other hand, I know those whom I would call "the clever ones" (of course they are also nice...). Petros Markaris wrote an article where he identified even four kinds of Greeks.

Including Greece where we now spend about half the year, I have lived in 8 countries and travelled the world. I know of no other country where the "clever ones" have taken the "nice ones" so much for a ride (and so easily!) as in Greek society. The only country which might come close is Argentina.

Argentina, like Greece, has always had an elite which had many interests but doing something for the well-being of Argentines was never one of them. Similar to the Greek elite, the Argentine elite treated their country as a kind of "home base" where they would reap the benefits which allowed them to play big shots in New York, London or Paris. The amount of wealth in the hands of the Argentine elite is unimaginable. So is the amount of poverty in parts of Argentina.

Argentina has had Peron, and here is a difference with Greece. Peron did not agitate all Argentines against foreigners. Instead, he agitated those Argentines whom he called "descamisados" (people without shirts) against those who owned mansions in Bariloche and Punta del Este, in New York, Paris or London. His wife Evita added a very special blend to this agitation which lasts to this day.

Alexis Tsipras could make himself very popular with foreigners (and with Mme. Lagarde) if he, too, started to say "the time is up; it's payday!" Not to the surplus countries but to his own compatriots who were the "clever ones" and who have amassed fortunes which few tax payers in surplus countries can imagine. And, frankly, I think that he would make himself even more popular with Greeks, the "nice ones", who - I would like to think - are still in the majority.

This is no call for a revolution. Instead, it is a call for a reckoning day.

"Nothing is as inevitable as a mistake whose time has come!"

The above is "Tussman’s Law" and it is taken from "Murphy’s Law".

Have Eurobonds become inevitable? It is beginning to look that way. How the EU can agree to Eurobonds when such bonds are clearly in violation of the EU Charter (and would require treaty changes!) escapes my imagination but the EU has so far not been overly concerned about treaties, constitutions and the like.

The principal idea of Eurobonds is to lower the interest burden for the weaker countries. I would definitely agree that the interest burden for a country like Greece must be lowered. The complicated way to achieve this is to issue Eurobonds. The easy way would be to lower the interest rate on existing debt.

Would Eurobonds lower the interest burden for Greece? I doubt it very much! Even the strongest supporters of Eurobonds agree that they couldn't be issued without limitation. Most of them say that Eurobonds should be issued up to the Maastricht-limit on sovereign debt (60%). The remaining debt would remain in the form of regular sovereign bonds of Greece.

The objective is to reduce Greece's sovereign debt to 120% of GDP by 2020, and many doubt that this can be achieved. Let's assume, though, that Greece's foreign debt is reduced to 120% and split up into two portions: 60% in Eurobonds and the other 60% regular bonds. What would happen?

The interest on the 60% Eurobonds would decline and the interest on the 60% regular bonds would increase. It would probably increase enormously because investors would now have the first 60% of debt in a senior position to them. Would you buy such a bond unless you had the chance of some outrageously high returns?

Eurobonds, by definition, provide general-purpose financing. It is exactly this type of financing which must be avoided in financial crises. One should always know what the proceeds of a loan are used for but in times of crises that is mandatory.

A much more interesting alternative would be the issuance of "project bonds". Here the proceeds of the financing are limited to a special purpose, typically a special investment project which is expected to generate certain returns. Good investment projects are exactly what the Periphery needs now. That is an appropriate application of funds with acceptable risk. For that purpose, Eurozone countries should be prepared to be jointly and severally liable.

Friday, May 25, 2012

EU - force the Greeks to stay in the Eurozone!

To force Greece to exit the Eurozone is legally absolutely impossible. To force the country to stay in the Eurozone is a much smarter strategy!

One irrefutable fact about financial crises is: serious reforms are never made as long as money flows and liquidity is around. Only when the flow of money stops do the responsible executives/politicians begin to act. Why? Because then they have no choice but to act.

A point which has not nearly received the amount of attention which it would deserve is that, so far, the money flow into Greece has not at all stopped since the beginning of the crisis. On the contrary, from 2010-11, roughly 100 BEUR net flowed into the country from abroad. What use was it put to? About 65 BEUR was used to pay off Greek depositors who withdrew cash from their banks and the rest to finance the current account deficit.

The more Greece (or rather: certain Greek politicians) threaten to repudiate agreements entered into by the previous government, the more the country becomes dependent on foreign lenders. As long as things go reasonably well and consensually, foreign lenders will never cut off the country's funding. If things were to become antagonistic, foreign lenders would have all the reasons in the world to cut off their funding.

Obviously, no one would cut off Greece's foreign funding entirely. That would cause total disaster in a member country of the EU. However, one can make the new disbursements very selective and only for very specific purposes. For example: for the import of essential goods (but not for consumption goods); for other payments which are deemed important for the economy; for those government expenditures which are deemed appropriate.

Put differently, Greece would get a "foreign commissioner" through the backdoor if it were to become antagonistic. That's why only keeping Greece in the Eurozone can lead to the kind of reforms which are necessary.

"Incest" - the game all (financial) elites can play!

"A lot of people have been talking about how really what is most essential is not just policy but politics. And, you know, frankly, it’s actually quite easy and quite fun and quite convivial in a group like this of like-minded people over a glass of wine to talk about different policy options and all feel very smart. What is very hard is to go out and get the political mandate to implement those policies. That is really the ultimate challenge!" --- Chrystia Freeland at the recent INET Conference in Berlin. 

Or, using an expression from the dictionary of common sense: "Words are easy, action speaks!"

I love to remember my years in international banking. A lot of get-togethers with like-minded people and highly sophisticated discussions over a glass of wine. And, of course, with a focus on the "big picture". Lesser minds could focus on petty questions like "what are you going to use the money which we lend you for?"

Never before could I read so many interesting articles in financial media as in the last couple of years. What a thrill to be able to challenge one's brain cells all the time. Will the Eurozone survive? Will Greece go bankrupt? Now in retirement, I could easily turn reading the financial media into a full-time job. On the other hand, the 27-year old Marcus Tullius Cicero might have asked "Cui bono?" --- But that was just a small thinker.

It seems that the more prominent the authors/speakers are, the more wisdom is derived from every word they breathe. How can one not be captured by Mohamed El-Erian when he says "it is really important to understand that Europe is going to have to make those decisions". Or when George Soros warns that "the Euro crisis could destroy the EU".

My great luck in professional life was that, after about 20 years in international banking, a pure concidence steered me into dealing with middle-market companies and middle-market entrepreneurs, particularly in the last 10 years of my career. I now dealt with the type of people who did not understand what (financial) elites were talking about. But they understood a lot about employing people for the purpose of generating value from which value all of them would benefit (and the economy around them as well).

I found it fascinating to watch some of the presentations at the recent INET Conference in Berlin. It reminded me of the early years in my career when I once asked a member of the Country Risk Committee what that committee was all about. Fortunately, he was a kind executive. Instead of firing me for asking stupid questions, he said something like: "You know, this is a group of very intelligent people who spend a couple of hours discussing very important issues in a sophisticated way". When he saw that I was puzzled, he gave me the following example.

"Look", he said, "the Chairman of the committee has spent some years in Lebanon before that country erupted. One day, Switzerland's country limit was up for the annual review. The Chairman asked 'how can a country with different languages and different ethnic origins remain stable?' We were up in arms and said to him 'Leo, this is Switzerland! Civil unrest can never happen there!'. And Leo answered 'that's what they said about Beirut before the war, too'. Now you know what the Country Risk Committee does".

With due respect to (financial) elites, the value they are presently adding to the real economy is not quite apparent to me. Their destructive influence, on the other hand, is!

George Soros - a serious man?

George Soros recently made the following statement:

“The Germans have to decide if they want the euro or not,” Soros said. “If they do, then they have to make the transfers. If not, they should leave [the currency zone].”

As an Austrian, I have no particular desire to defend Germans or Germany. And it would certainly be presumptuous of me to state that Mr. Soros is totally wrong.

The above is a good slogan. Like all good slogans, it sounds very good. Like many good slogans, it makes no sense. If someone says something which makes no sense, he is totally wrong. But that I can't say because then I would be saying that Mr. Soros is totally wrong and that would be presumptuous on my part.

Wanting the Euro means for surplus countries having to make transfer payments? Come again, Mr. Soros? Wanting surpluses (not the Euro!) means having to make transfers!

A surplus country (current account surplus) by definition must be an exporter of capital. That has absolutely nothing to do with the Euro. All the Euro does (perhaps) is to make it easier for Germany to incur surpluses. But Germany still has the free choice whether or not to export capital. If it didn't want to export capital, it would have to reduce its surpluses. Having the cake and eating it won't work!

The inexcusable mistake of Mr. Soros is that he suggests that national surpluses/deficits in external accounts can go on forever. They can't, because a country's current account deficit is nothing other than the transfer of wealth from it to the rest of the world. Mathematics would suggest that, at some point, all wealth is gone. Mr. Soros, of course, understands this very well. By intentionally ignoring it and replacing it with good slogans only suggests that he is pursuing ulterior motives.

Perhaps Mr. Soros' views are colored by the experiences of the US. The US have so much domestic wealth and so many domestic investment opportunities that the country will be able to run external deficits for a long, long time to come. Forever perhaps? No way! And if you don't believe that, please read Warren Buffett's beautiful tale about this.

The problem of the Eurozone is that the balances of product and capital flows have come out of whack. An economic policy for the EZ would be a policy which brings those balances more or less back in line again.

Greeks and Greece - a love-hate-relationship?

My wife was moved to tears about a TV discussion she watched this morning. I should add that my wife had left her Greek village at age 18 to study in Munich, then married - God forbid! - a non-Greek and never returned to Greece to live here permanently.

The TV discussion was about - what else? - what's wrong with Greece. One of the participants explained that he had been a guest-worker in Germany. That he had worked hard there and was respected for it. That he felt proud about this. That he could make enough money to support his family and provide a better future for his children. That he had very good medical and other social services in Germany. Etc., etc.

And now he was back in Greece and only saw a big mess all around him. What a country this was!

My wife's conclusion from this TV discussion was very "Greek": she exclaimed how right this man was and how everything was so terrible here but that this man was also a very typical Greek because he loved his country, the best and most beautiful country in the world and he returned to it!

All clear?

Thursday, May 24, 2012

Greece's hand of poker

Alexis Tsipras started it all!

He started arguing that, regardless what happened, Greece could never get kicked out of the Eurozone and --- he is absolutely right! He then argued that Greece should declare the Memorandum null and void, and with that he got himself into trouble.

Mr. Tsipras needs good advisors! Advisors who explain to him what clever statements and what dumb statements are, and what the difference is between the two. When he announced that salary and pension cuts should be reversed and a minimum wage of 1.300 EUR should be implemented, even Daniel Cohn-Bendit, someone who - one might surmise - might have sympathies for Mr. Tsipras, told him publicly that he was nuts.

One simply does not declare an inter-governmental agreement which is only months old null and void. While to do this is not against international law, it is poor form and doesn't generate sympathies outside Greece. Greece is in no position today to risk international sympathies through poor form! (I am sorry having to say that Mr. Tsipras is not the only one proposing poor form here. He is joined by some very serious Greek opinion leaders).

Greece's only trump card is to be able to say: "We may go down but we will make sure that you go down with us!" While it was fine for Prince Kamal Khan to shout that at James Bond as he steered his plane to the ground, it is no way to run a country!

I read a cute line in a letter to the Ekahimerini recently. A reader, Agatha Venetis, after pointing out some of the the things which she thought were wrong in Greece, wrote: "You don't need to be an economics or finance expert to see why no one will invest in Greece unless everything changes except the currency".

Greece's public and private sectors must be reformed from A-Z. Whoever doesn't list this point as his greatest priority has no business in running for high office. This is not a matter of ideology! It is a matter of fairness, justice and solidarity in a society. A society which is based on preferential treatment and cronyism is neither fair nor just, and it will lack solidarity.

Reforms are part of the Memorandum and whoever rejects the Memorandum outright also rejects reforms. If this is meant seriously, the bluff should be called (regardless of the cost).

If one agrees on the principle of reforms but still sees certain parts of the Memorandum which no longer fit the times, then no one will object to having a reasonable negotiation about that. As Mr. Venizelos said so correctly recently: "The EU is a field of continuous negotiations. Those who don't know this talk about re-negotiation".

And now I offer a little advice to Mr. Tsipras how a dumb statement can be transformed into a smart one.

Wednesday, May 23, 2012

Greece's current account Jan-Mar 2012

The table below shows the development of Greece's current account in the period January-March 2012 relative to the same period the year before (in BEUR):





2011 2012
Revenue from abroad


Exports 4,3 4,9

Services (e. g. tourism) 4,6 4,7

Other income 0,8 0,8

Current transfers 2,5 2,5


---- ----

Total revenue from abroad 12,2 12,9




Expenses abroad


Imports 11,9 10,8

Services (e. g. tourism) 3,6 3,2

Other expense (e. g. interest) 2,6 2,6

Current transfers 1,3 1,2


---- ----

Total expenses abroad 19,4 17,8








Net foreign deficit (current account) -7,2 -4,9




The improvement continues: the current account deficit declined 35% (!) during this period! Imports declined 10% whereas exports increased 14%!

The discouraging fact is that - as before - after 3 or 4 years of crisis and so-called austerity measures, Greece as a country is still spending 1.379 Euros abroad for every 1.000 Euros earned abroad. That is a 38% excess of spending over income. This is much worse when only considering the trade account where Greece is importing 2.205 Euros for every 1.000 Euros which it is exporting!

Had Greece followed Mr. Tsipras' recommendation not to pay interest to foreigners, the current account deficit would have been reduced to about half of the above amount, still about 2,6 BEUR. If Mr. Tsipras intends to stop paying interest, he should first explain where he will get those 2,6 BEUR from in the next 3 months.

Eleni

I may indeed be the last person in the world who has a connection with Greece (Greek wife) and who has only now read the book "Eleni" by Nicholas Gage. What a page-turner! Had I only read this book before! A couple of weeks ago, we spent a few days in the area of Ioannina. Had I known about Eleni then, I would have definitely visited the village of Lia where the action took place.

Why do I mention this here? Because I found the following beautiful phrase in this book, spoken by - I believe it was - Eleni's father:

"Any fool can throw a stone into the sea, but once he does, a hundred wise men can't pull it out!"

Perhaps some readers will understand why I am quoting this here.

Alexis Tsipras - promoter of positive reforms!

Alexis Tsipras (SYRIZA) and Gregor Gysi (DIE LINKE) introduced the following 6-point program as “Alternatives to Austerity and Bank Bail-out’s”:

1. Immediate stop of the “memorandum policies” and new negotiation of debt.
2. Elimination of sovereign debt financing’s dependence on capital markets.
3. Strict regulation of financial markets and adequate taxation.
4. Continuation of Greece as member of a reformed Eurozone.
5. Infrastructure and growth projects in lieu of austerity.
6. Holding profiteers of crisis responsible.

Ideological leftist should be forgiven for not knowing how to effectively negotiate with financial counterparties or creditors. Thus, they don’t know that presenting the above points in the above order will be perceived as blackmail and can only lead to an immediate break-up of negotiations. However, since there is a lot of substance to the above proposals, I will restructure them in such a way that they would not only serve as a basis for negotiation but would also hold some promise of success.


Preamble
Greece has become a country which is totally dependent on foreign funding to sustain its living standard. We have prepared long-term economic plans which will turn this situation around: Greece will become – over the period of one generation – a country whose economy generates enough value on its own to sustain a living standard fitting a member of the EU.

Our plans aim at – briefly speaking – making Greece an excellent place to do business for individuals and corporations with an efficient public administration.

[Presentation of details of the long-term economic plans. N.b.: they have to be so good that no thinking person can object!]

As these plans demonstrate, Greece will reach – within the next 15-20 years – a situation where the state can sustain a reasonable level of sovereign debt and where the economy is no longer dependent on foreign funding. We are certain that the debt which exists today and which trades at 10-20% of nominal value today will trade at well over 50% of nominal value in 15-20 years from now. Any new debt which we will take up from now on will be in a senior position to existing debt (excluding any debt taken up for the payment of existing debt) and it will be paid in full.

In view of the aforementioned, we make the following proposals/requests to the EU:

1. Continuation of Greece as a member of the Eurozone
Greece has benefited significantly from being a member of the EU and the Eurozone. To resign membership is not a reasonable option because it would have dramatic consequences for Greece and for the EU.

We recognize that we cannot reap benefits from membership without, at the same time, fulfilling our obligations. One of our principal obligations, to which we explicitly commit here, is to exercise responsible financial management.

2. “Memorandum policies” and debt
We recognize that the Greek state and economy must be reformed from A-Z. We commit to the reforms which have been negotiated so far and we propose new ones (see long-term economic plans).

At the same time, Greece as well as the Troika have learned that some of the agreed-upon austerity measures have not produced the desired results. It is, therefore, in the interest of both sides to amend some of those measures. Specifically, we will put much more focus on eliminating government waste and imprudent allocation of resources than foreseen in the Memorandum. The additional savings which we expect to generate through these measures will be used to help those who have suffered most from austerity measures so far (primarily the unemployed).

For further increases of our revenue base see the item “Holding profiteers of crisis responsible” below.

Contrary to the belief of many, we are not opposed to privatizations. Instead, we are fully aware that Greece must have capital from abroad for its own development and we think foreign investment is a key aspect of Greece’s turn-around. Similarly, we think of foreign investment as an excellent way to acquire know-how from abroad. Having stated this, we oppose ideological privatizations for the sake of short-term financial gains. We will pursue privatizations with value-oriented investors who commit to be long-term partners for and with Greece. Short-term financial investors will be considered as asset strippers and have no place in these endeavors.

Regarding the existing debt, we believe it is not our decision whether private creditors are bailed out by the EU (through lending us money which we use to repay private creditors) or not. However, during the period of economic restructuring, the impact of whatever the EU decides must be neutral as regards Greece's cash flow. Put differently, if we are expected to repay existing/maturing debt, we need to be given exactly the same amount as new loans. Greece cannot use its own resources to repay existing debt in the near term.

Regarding the interest on debt, we request our creditors to differentiate between "cash interest" and "capitalized interest" (together they make up the interest rate on our debt). We are primarily concerned with cash interest because that flows through our budget and restricts our room for maneuver. We request that the interest to be paid in cash be reduced to 1% for the next 5 years and renegotiated thereafter. The difference between the 1% and the interest rate which our creditors require should be capitalized and payable at an agreed upon future date.

In short, Greece insists on limiting the increase in its sovereign debt to the amount of the agreed upon budget deficit (after paying 1% interest on existing debt). Put differently, Greece is requesting continued financing for the budget deficit (including 1% interest on existing debt).

3. Holding profiteers of crisis responsible
It is critical to point out that a large portion of the Greek people have not benefited unduly from the “Euro-rush” of the last decade. Regrettably, it is now that portion of the Greek people which suffers unduly from the repair of mistakes caused by others. This we plan to amend.

Beneficiaries of the “Euro-rush” could accumulate very significant holdings of real estate, financial assets (most of which are now outside of Greece) and other luxuries. We plan to increase taxes on these items (with reasonable deductibles to protect those sectors of society where additional taxes would reduce consumption expenditures). We will heavily tax capital flight to reduce it and we will seek special treaties with other countries to receive taxes on foreign financial assets held by Greeks.

4. Infrastructure and growth projects
Our long-term economic plan includes a multitude of very viable investment projects. We plan to make maximum use of all EU structural and regional funds but these will not be sufficient. We also need private foreign investment but recognize that private foreign investors might be worried about Greece’s future. Thus, we request the EU to consider providing guarantees to private investors for the political risk of Greece.

5. Elimination of sovereign debt financings' dependence of capital markets
We consider this to be a top priority but recognize that this must be dealt with at the level of the EU. Greece will be prepared to act in a supportive fashion of any measures to promote these goals.

6. Strict regulation of financial markets and adequate taxation
We strongly believe that more regulation of financial markets and taxation of banking transactions of a speculative nature are necessary. We view this as an issue which must be dealt with at the level of the EU. Greece will be prepared to act in a supportive fashion of any measures to promote these goals.

END OF PRESENTATION

Monday, May 21, 2012

When the EU threatens, stay cool!

For some time now, Greeks have felt deprived of their sovereignty by the EU. There are countless examples which could support such a feeling. Greeks went up in arms about that. While such an emotional reaction is understandable, it is far more effective to stay cool.

In early 2000, the conservative People's Party of Austria (ÖVP) entered into a coalition with the Freedom Party (FPÖ) to form a government. At that time, Austria was already one of then 15 EU members. The EU did not like the new government because the FPÖ was lead by a man named Jörg Haider (who did not become a member of the government). Wikipedia describes this (accurately) as follows:

In an attempt to pressure Schüssel's democratically elected government into submission, the heads of the governments of the other 14 EU members decided to cease cooperation with the Austrian government, as it was felt in many countries that the cordon sanitaire against coalitions with parties considered as right-wing extremists, which had mostly held in Western Europe since 1945, had been breached. Because nothing in the legal framework of the European Union supported an official measure, informal (and officially non-existent) "sanctions" were imposed by mutual consent. For several months, other national leaders (most of all France's president Jacques Chirac, Germany's chancellor Gerhard Schröder, and leading Belgian politicians) ostracized the members of the Schüssel government, refusing basic social interaction and keeping unavoidable contacts to the legally required minimum. (However, the very same European Union politicians had not even considered such measures against Italy earlier in 1994, or afterwards in 2001, when the highly controversial Silvio Berlusconi established his governments with right-wing Alleanza Nazionale and the outspokenly anti-European Lega Nord.)

EU-law did not provide a way out of the impasse which followed because the "sanctions" imposed on Austria were not founded in the EU-Charter. The Austrian Chancellor would attend EU-conferences where he was not greeted by handshake and isolated during discussions.

Fortunately, Austria had a Chancellor one of whose major strengths was to stay cool under pressure. Not only did he react to all of this matter-of-factly but he even came up with a solution out of this diplomatic impasse: he suggested that the EU should send a Group of Wisemen to Austria to issue a report on the situation in Austria. In that report, the wisemen concluded that Austria was a democracy and that it had a state of law. This allowed the EU to withdraw sanctions against Austria which sanctions were not founded in the EU-Charter. Careful as the EU is, they stated that they would continue "to monitor the situation in Austria carefully".

From then on, the new government had become a government which no longer had anything to lose, domestically or internationally. This encouraged the government to embark on implementing a series of important reforms (above all a pension reform) which triggered a brief "Golden Age" for the Austrian economy. The German Chancellor Gerhard Schröder had been one of the fiercest critics of the new Austrian government. A few years later when the German economy was in deep trouble for lack of reforms, he could read a coverstory in Der Spiegel which was titled "Are Austrians perhaps the better Germans?"

And the moral of the story for Greece? Play the game which the EU wants you to play on the outside and pursue your own agenda. But you have got to have an agenda!!!

Has Greece reached the point of no return?

A point of no return is defined as the point beyond which there is no longer a possibility to return. Has Greece reached this point? I am afraid to say - yes, Greece probably has.

Processes have been set in motion on the political as well as the financial side which are unlikly to be reversed again. The government of Mr. Papademos may have been a stable and solid one, albeit without full democratic legitimacy, but once the course of new elections was chosen, there is now no alternative but to live with the consequences of this election (and of further elections). The likelihood of Greece's having a stable government backed by a majority of the voters is slim.

Mr. Tsipras seems to have set off the spark for a new movement. He seems to be a skillful populist. He seems to be putting into words what many Greeks, particularly the ones suffering hard from austerity measures, feel strongly. The likelihood of that movement getting larger is greater than the possibility of it's getting smaller.

On the financial side, a non-stoppable sequence is unfolding: no new disbursements before implementation of new measures; no implementation of new measures without a functioning government; no functioning government without the necessary majorities. That is a wonderful scenario for everyone to claim afterwards that "it wasn't my fault".

How does one feel about this when one has argued from the beginning that the Greek movie could end well if only everybody involved acted like leaders? Not good; not good at all! I note a curious evolution of my views.

I was not in Greece from March-August 2011. During this time, the basis for my opinions was my observation of the incompetence of EU-elites. I became literally a champion of the "Greek cause": if Europe's core only provided "real help" for Greece in the sense of steering private sector investments there (instead of sending money there to bail out banks), Greece would jump on that offer and immediately embark on prudent new policies. Instead of making the borrower weak one would have made him strong.

I returned to Greece in September and stayed until December 2011. I expected to find an attitude of determination to fix one's problems with the help of others. Unfortunately, and to this date, I have not seen any proposal by any Greek of political, public, financial or academic life for an economic plan which would present a positive future perspective for Greece. The best economic minds of Greece seem to focus on what's wrong with the Eurozone instead of coming up with proposals how to correct what's wrong with Greece. At one point, a wrote an appeal to Greek brainpower.

I have now been back to Greece since early April. I witnessed an election campaign where I could not figure out what any party would do if elected. I witnessed how Greek parliamentarians tried to pull a fast one on their Prime Minister by attempting to pass over 90 amendments almost in undercover fashion. I witnessed how parties not only approved new financing for themselves but also disowned banks which had a senior collateral claim against the proceeds of such financing. Laws were approved with retroactive effectiveness and a collective action clause was triggered without necessity. Small private investors in Greece were more or less disowned while, at the same time, certain foreign speculators were paid in full for fear that they might cause trouble (which they would have).

All in all, to me the principal issue is no longer whether or not Greece stays in the Eurozone (even though I would still vehemently argue that Greece should stay). The principal issue is now how Greece can get through the enormous chaos which it will face in the next months, with or without the Euro. The country which invented democracy may find out what France discovered in 1959: in the face of a threat of total chaos, democracy is ill equipped to deal with the situation.

France had a Charles de Gaulle. Where is the Charles de Gaulle of Greece?

Saturday, May 19, 2012

Is Greece perhaps similar to AIG?

I remember when the AIG problem hit the surface (over-exposed to sub-prime risks because of credit default swaps written). The US government had no choice but to bail-out AIG: maturities were coming up quickly and a bankruptcy of the world's largest insurer would have had unforeseeable consequences.

So the US government put up the first tens of billion dollars so that AIG could pay off CDS' to firms like Goldman, Deutsche, etc. And then there were more tens of billion dollars and more...

Those CDS' were written by a small London office of AIG. It took some time until they could calculate what the total potential risk for the US government would be. Fortunately, it was "only" in the 3-digit billion USD figures.

I remember thinking at the time "What if the potential risk is not 'only' in the 3-digit billion USD figures but, perhaps, 10 times as much?". That could have literally bankrupted the USofA!

EU institutions (particularly the ECB) have now entered open-ended risks with Greece (and the other deficit countries) without a ceiling in place. If they continue without a ceiling, the risk dimensions will sooner or later become unmanageable. If they put a ceiling in place now, a good portion of the annual GDP of the surplus countries evaporates.

Greece will be the first country where the EU will have to chose between one and the other.


Addendum
Imagine the US government, in an effort to raise new revenues for its budget, were to write MLDS' (Mars-landing-default-swaps) with the following structure: until year-end 2019, investors can buy for a fixed fee of 10 cents on the dollar assurance that the US will land a man on Mars before year-end 2020. If the US succeeds with that, investors lose their invested fees. If not, investors collect 100 cents from the US government.

How high do you think might be the total MLDS' outstanding at year-end 2019? What do you think might happen to the US government by year-end 2020 if they don't land a man on Mars?

Friday, May 18, 2012

All this talk about Grexit!

I am surprised how common it has become to talk about “Greece leaving the EZ” or “Greece being kicked out of the EZ” or even “Germany leaving the EZ”. As far as I know, it is legally impossible for any country to leave the EZ, much less being kicked out of it. The procedure is that a country would first have to leave (or be kicked out of) the EU and subsequently it would be out of the EZ. And then it would have to re-apply for EU-membership, if it wanted that. I would imagine that a country could probably leave the EU anytime it wants to but to kick a country out of the EU would definitely require a process, a process which will definitely take longer than 24 hours.

Suppose Greece repudiates all its debt and Greece is cut off from all new funding (including funding from the ECB). That would not mean that Greece would have to leave the EZ (among others because it couldn’t; see above). It just would mean that Greece would be a bankrupt country in the EU and probably could not pay salaries or pensions. It is not illegal within the EU to go bankrupt.

To not be able to pay salaries or pensions is, of course, a nightmare for any government but it is not a reason to lose one’s nerves right away. First, a government can delay a lot of other payments before it has to delay the payment of salaries or pensions. Also, the Greek government could pay salaries or pensions with post-dated checks and thereby create something like a secondary market for Euros. And so forth. There are no limits to creativity when one is out of cash.

The most important aspect, in my opinion, is that the EU could probably not get away with just sitting-by and watching how a member country can’t pay salaries or pensions. If one were to bet that the EU would blink first, I would consider that as a good bet.

None of that, of course, is a solution for the longer term. The solution for the longer term, in my opinion, can only be something which incentivates the economy to create new jobs; new jobs whose holders can afford a decent living while still paying tolerable income taxes; where the employers can pay tolerable corporate taxes and the owners can pay tolerable taxes on dividends. Some believe that austerity, austerity and austerity will achieve this. I would suggest that reforms, reforms and reforms will achieve that (and with reforms, austerity makes sense).

Wednesday, May 16, 2012

Propose ideas for growth!

Today's Ekathimerini published the following, very interesting letter to the editor.

In a lot of comments and articles I read that austerity without a perspective on growth will not work and that Mrs. Merkel therefore should correct her position. What is wrong with that equation is that Mrs. Merkel has never said there should be austerity without growth. There are just different ways and opinions on how growth should be created.

Basically we have two main trends in the moment. Growth created by debts or growth created by liberalization and deregulation. Mrs. Merkel clearly belongs to the second group and I think in large part she is right. Since the EU was founded in 1981 and the Eurozone in 2001 we have witnessed a dramatic increase in debts in almost all member states of the EU.

Since several people revert to Keynes, I would like to bring up the thesis that the last 30 years have been nothing else but a badly managed and uncontrolled version of Keynes’ concepts. Growth created by debts and subsidies controlled by EU states. So instead of calling now for Keynes we have to realize that we may have reached already the end of Keynes.

The EU (and that means all member states and not just Germany) has failed to set up an effective control system and continually stands still, rewarded with generously granted subsidies.

Let’s take agriculture as an example. A lot of EU subsidies are spent on agriculture all over Europe. Subsidies were obviously calculated and granted without being double-checked so that a lot of farmers (and controllers) could make a nice living on that without the urge to increase competiveness. Instead of investing in new machines, methods and distribution concepts, the money was spent on lifestyle. This could only happen because there was no control and money was granted year after year without pressure or decrease. If a product needs to get subsidies for several years and there is no chance that it will ever be competitive, subsidies need to be stopped.

If we take a look at the public debts in Europe and the comments around, one could imagine that all those debts were created by the banks themselves and that everyone else is a poor victim of an international money conspiracy aimed at enslaving the people.

That is nonsense since most of the debts have been manifested in state expenses like salaries for public workers, military, useless infrastructure projects, Olympic Games etc. This has allowed people to build houses, buy cars, consumer electronics, travel etc. And this goes not only for Greece but also for Germany, France etc. Germany has 2 trillion Euro of debts but useless 6-lane highways in East Germany that lead to perfectly renovated historical cities where no one lives anymore since there are no jobs around.

Therefore the basic conclusion is that right now any debt-driven growth program will create nothing else but more debts since we will feed more money into a dysfunctional system that led us into the current crisis in the first place.

Before we should make more debts, create a ‘Marshall plan’ for growth or even talk about ‘euro bonds’, all EU countries have to agree on and implement an investment-friendly, deregulated and liberal policy framework.

Furthermore EU bodies must have the right to access and control all financial data of member states. If a member state fails the targets or does not implement EU Regulations, EU bodies must have the right to control, correct and limit state expenses. That means states will lose sovereignty towards the EU.

On top of that, EU subsidies must be effectively controlled and the mindset of the receivers must be changed towards competitiveness and innovation.

I still haven’t seen any solid program concept or idea from any of the big Greek parties on how sustainable growth could be created in Greece. It is your politicians and elites that have to detect areas of growth, tear down all of the red tape and ask the EU for funding and assistance. If you are able to name just one successful example that was based on the initiative of Greek politicians, I will dance naked on the Acropolis.

Sebastian Schroeder
Patra

Go after the "Drachma Gang"!

Over the last year, I have built up an "email-relationship" with a Greek official who - based on his position - must have very good insights into the reality of Greek political and business life. As mutual trust built up, this correspondence has become increasingly straight-forward as time went by. The below quotes of his emails confirm that.

January 4
"Over and above economics, the important thing for Europe to realise is that it is only our politicians to blame for the impression that they have of Greeks! We are very much willing to work and be productive, provided that the country has a leader that will give the example. Our only chance, therefore, to get rid of this rotten political network is to rely on the Memorandum commands for structural reforms. This explains why the political system is very much reluctant to implement these reforms!"

May 5
"If you read Greek History you will find out that populism has repeatedly ruined the country (1897, 1922, 1944 – 1949....... etc etc).

It seems we are heading for a fall this time, too, because the political system refuses the necessary reforms knowing that the reforms will bring about good results. The good results in their turn will mean that the political system will lose control and this is the last thing they want. Conclusion: “Aprés moi le déluge” as Louis XIV put it! They prefer to take the country down to the drain than surrender its control and lose all their privileges! Mind you that they all agree on these tactics irrespective of what party they belong to. They are all made of the same sort of garbage.

By the way: I always believed that structural reforms are absolutely necessary. I always thought that the politicians will eventually see the country’s benefit and proceed with implementing them. But I never would have thought that they would rather lead the country to disaster than lose their privileges!"

May 16
"You are probably not aware of the so called “drachma gang”! It is a complex of interests composed of politicians, trade unionists, TV channel and newspaper owners and contractors of public works that absorb all EU funds pumped for infrastructure works in the country. All these are hoping for a return to the drachma so that they can import their Euros to buy the entire economy back for peanuts!

If you add to all these the estimated €300 billion gambling for Greece’s default in the international markets you can see why you together with most people think that the Euro supporters are a minority.

Yet, this is not the case. It is simply that the combination of useless or bribed politicians together with the deliberate misinformation of the Greeks makes things look as you think they are. But remember that empty tin cans (a common Greek expression for the useless) usually make a lot of noise...

One thing that you and everyone that cares about Greece could do to help matters is to inform the European public of the situation in Greece. This would help immensely!"

Two things have surprised me about this. First, that there might indeed by such a "drachma gang" in Greece and, secondly, that someone in an official position would be so courageous as to write about the subject in such open terms. 

Monday, May 14, 2012

Consequences of a Greek Euro-exit

This analysis by Yiannis Mouzakis is the best analysis of the consequences of an Euro-exit for Greece that I have read as yet. I think it is a bit extreme because it assumes that neither EU nor ECB would provide funding for Greece after an exit from the Eurozone. Personally, I cannot envisage that European institutions would allow Greece to literally fall off the cliff. But even if Greece is not allowed to fall off the cliff, the consequences would still be dramatic enough!

My suggestion: translate this into Greek and distribute it to every household (and voter!).

The amazing decline in Greek bank deposits

According to the Bank of Greece ("Aggregated Balance Sheet of MFIs excluding Bank of Greece"), deposits in the Greek banking system (not counting deposits from the central government) amounted to 170 BEUR per March 31, 2012. At year-end 2009, the peak before the crisis, they had stood at 242 BEUR. That's a decline of 72 BEUR during 27 months, or 2,7 BEUR per month.

To put it bluntly: that decline is not chicken-feed! If the above rate continues, Greek banks will be totally out of deposits in another 63 months (some time in 2017).

But the real amazing thing is that there still are 170 BEUR in bank deposits! Greece has been in trouble for over 2 years by now but since the beginning of this year it has really been like flirting with disaster most of the time. The Euro-exit is officially being discussed as a possiblity. Greeks are publicly debating the pro's/con's of a Euro-exit. One would have thought that in such a climate, everyone would rush to the bank to withdraw Euro bank notes while they can still be withdrawn (and saved them under the blanket at home).

Obviously, the risk is not quite as big as it would normally be because the ECB has so far stood ready to provide all funding which Greek banks have needed. They will most likely continue to do that but will that continue to make Greek savers feel safe?

If a real run on deposits would start some time soon, I would not be surprised!

Wolfgang Muenchau is incomplete!

Wolfgang Muenchau (who writes for FT, FTD and Der Spiegel) has written an article titled “Default now or default later?” In it, he outlines 4 alternatives which he sees. None of them is perfect but the least bad one is for Greece to wait until it has achieved a primary surplus and then default (sometime in 2013). Muenchau is receiving accolades for this.

Muenchau recently attended the INET-Conference in Berlin but he probably did not stick around to hear the conference’s last speaker, Prof. Andres Velasco, former Finance Minister of Chile. One of Prof. Velasco’s themes was that economists, journalists, etc. do not have to come up with brilliant new ideas for the solution of the EZ’s financial challenges. It would suffice if they only learned from past experiences which others have had (like Latin’s).

Muenchau writes like he has never been involved in a debt restructuring. He suggests a country’s default means the exclusion from any further financing. Therefore, a country should not default before it has a primary surplus. Furthermore, he tacitly suggests that a country’s external payments problems can be solved by only solving its sovereign debt.

Greece, for one, has more or less been excluded from capital markets for at least the last 2 years (with the exception of occasional short-term tenders). Put differently, Greece has been financed by official institutions (Troika, ECB) since then. Official institutions can always finance if there is the political will to do so; before or after a default.

If all countries which ever had to restructure their debt had waited for a primary surplus before initiating the process, much of the world’s sovereign debt would be in default today. A primary deficit is no hindrance for a restructuring, it is part of the package and it is called Fresh Money Requirement!

Furthermore, to only consider sovereign debt when restructuring a country’s debt is incomplete! It is the entire foreign debt which must be restructured, i. e. the foreign debt of the state, the banking sector and other sectors of the economy (if one wants to restructure the domestic portion of sovereign debt as well, fine, but that is not mandatory). Above all, the trade credit lines for the banking sector must be confirmed so that the country can handle its foreign trade.

The question of interest
The first point which must be recognized is that the only thing which matters for the budget is the cash interest which is paid. Any interest which is capitalized to be paid in cash later does not burden the budget. It is ridiculous to think that a country with external payment problems should pay cash interest at more or less market rates. Why? Because, by definition, a primary deficit means that the country needs to borrow money to pay interest. That may be acceptable during “normal” times but it is absolutely ridiculous during a sovereign restructuring. It would be like attempting to get water from a dried-out well. One first has to dump the water in it!

Thus, it is less the nominal interest rate which matters but primarily the amount of it which is payable in cash (the rest being capitalized). Should that be zero? In extreme situations it could be for a limited period of time. For example, one could honor Greece for its austerity so far by, say, capitalizing all interest for a year or two.

Whichever way one handles the restructuring, there is no limit to creativity under one condition: it all needs to be handled consensually!

To make unilateral declarations of what one will do (or will not do under any circumstances), such as declaring a moratorium, is amateurish. Argentina thought it could do that over a decade ago because that country is rich in natural resources and typically has trade surpluses. They repudiated part of their foreign debt. Well, they still do not, over 10 years later, have normal access to capital markets!

Why would lenders agree to a capitalization of interest, a restructuring of maturities way into the future and even the making available of Fresh Money? Because they really don’t have much of a better alternative (except cutting Greece off from all funding). Will all that restructured debt and interest ever be paid? Probably not. Sovereign debt only rarely gets “repaid”; it always gets “refinanced”. Will foreign creditors ever get 100% of their claims? Probably not. But even if they only get 10% of it, it is still better than agreeing to a 100% haircut. Apart from the fact that a haircut on sovereign debt for a country of the First World is probably the worst thing one can do.

Some may now say “yes, but you describe a consensual restructuring; we are talking about a default”. True and false. There is only one reason why sovereign debt gets restructured and that is because otherwise there would be a default. If technical default occurs during an ongoing, constructive and consensual process of debt restructuring, it is quite acceptable.

Sunday, May 13, 2012

Trying to understand SYRIZA

As a foreigner, I have found this analysis very helpful in trying to understand the recent success of Alexis Tsipras and his SYRIZA movement. Since my own article on Alexis Tsipras provoked some fairly violent reactions, I want to expand by using two examples.

How to avoid having to make a loan
Suppose you are a banker and you have a loan request from a very, very VIP who, if you turn him down, could make your life quite miserable. On the other hand, you can't approve the loan because there are 10 obvious reasons why you can't. So what do you do?

You certainly make an offer to the VIP. You start by pointing out all the positive things about his loan request. That will make him feel good. You then tell him that you will be very happy to make the loan and that there are only 10 things which he needs to do until he gets the money. And that means for him to change exactly those 10 reasons why you couldn't make the loan in the first place. He probably won't change those 10 things and so he won't get the money. But it is not you who have turned him down; he has turned himself down. He can't raise hell against you for having turned him down, he can only raise hell against himself.

Austria’s experience with Joerg Haider
Joerg Haider was on the right what Alexis Tsipras now seems to be on the left: a populist politician with an unbelievable feeling for the pulse of voters and the ability to put their feelings into powerful words.

The establishment reacted to Haider by essentially excluding him from the civilized world, which helped him increase his support from originally 4% to a peak of 33% in an opinion poll years later. Haider made it on the cover of many, many papers and magazines (including TIME or Newsweek; I don't remember which). In actual fact, he was just a provincial governor in a very small country. All of this could have been avoided if he had been "included" in the process instead of being excluded.

Those who think Tsipras would be dangerous for Greece should stop excluding him from the process. That will only make him stronger. Instead of scaring voters of him, the alternative approach on the part of the "serious" electorate could be: "We think Mr. Tsipras is a very bright and talented man. He has very many good ideas which we also support. This is why we want to work with him and accept his good ideas and he will undoubtedly want to work with us and accept some of our ideas".

If they keep excluding Tsipras, he will very likely become Prime Minister at the next election.

Saturday, May 12, 2012

Cheers for Alexis Tsipras! And more...

The readers of this blog know that my thinking is driven by common sense and by market-oriented considerations. Some might put me into the category of "liberal" or "neoliberal". Others might categorize me as conservative. In view of this, some readers may now be perplexed when I embark on what could be considered as a campaign for Alexis Tsipras.

First, Alexis Tsipras strikes me like a youthful, energetic and, above all, charismatic individual. The type of natural leader who can easily get people to follow him. Those are the traits which any leader who is hopeful of pulling Greece out of the present mess must have. I do not see those traits with any other Greek politician at this time.

Second, Alexis Tsipras undoubtely would take things into his hands. In his dealings with foreign creditors, he would call the shots (or at least leave the impression that he is doing that). I have said from the outset that the political leadership of a country in external payment difficulties must take the initiative, must call the shots with foreign creditors (or at least leave the impression that it is doing that). As soon as that leadership leaves the impression of following orders from foreigners, they have lost the support of their people. From this perspective, Alexis Tsipras would likely hold on to the support of the Greek people.

Third, Alexis Tsipras wants to annul the election law giving the largest party 50 extra seats. That may be a smart idea; I don't know. But it is certainly smart to raise the issue and to propose that a consensus for a new election law should be found.

Fourth, Alexis Tsipras wants the Blackrock report on banks to be released to the public. That might be a smart idea. It all depends what that report is all about. If it contains confidential information about banks, then it cannot be revealed to the public but it could be revealed to selected political leaders on the condition that they sign confidentiality agreements. The public should never get the impression that the government is holding back relevant information from elected leaders who happen not to belong to government.

Fifth, Alexis Tsipras wants to establish an international committee to audit the public debt. This is an excellent idea. Greece has built up so much public debt in the last decades that Greeks justifiably want to know what happened to the proceeds of that debt. Furthermore, that committee should also look into the application of all EU grants since Greece joined the EU.

Caveat: there may be other positive ideas of Alexis Tsipras which are not mentioned here because I am not aware of them.

Having said all this, I think what Mr. Tsipras needs more than anything else is good advisors with respect to dealings with foreign creditors (or with foreigners in general). Mr. Papademos had excellent advisors (Lazard as financial advisors; Cleary Gottlieb as legal advisors). I could only recommend to Mr. Tsipras to continue with these advisors. My guess is that these advisors would advise Mr. Tsipras as follows:

First, read up on the story of Ikarus. You have admirably assumed a role where you can determine the future of Greece. Be confident and strong with others but don’t be presumptuous! When you intended, shortly after the election, to declare to all Finance Ministers that the Memorandum was null and void; when you expected to have a meeting with the new French President who is not even officially in office yet --- that was presumptuous!

Second, do not ever use expressions like "declaring a moratorium" or "disavowing debt", etc. There is absolutely nothing to be gained from using such threats. A moratorium will happen by itself should Greece no longer get financing, and everyone knows that. Should that happen, you want to be able to say that you tried everything in the world to avoid it up until the last minute, but it couldn't be avoided. In short, don’t do anything which carries the risk of making Greece an outcast!

Third, do not threaten a Greek Euro-exit. The other 16 Finance Ministers might immediately take up your offer.

Fourth, do not overrate your bargaining position. As important as Greece is, it still only amounts to a small part of the EU. Instead, understand how other people view Greece these days. Very many Europeans are fed up with Greece by now. They consider the Greek system "rotten" and Greece as an unbearable burden for a solidarity union. To use the words of the CEO of a major European multinational: "This country of phantom pensioners and rich tax evaders, a state without a functioning administration has no place in the EU". Please bear in mind that these people are not entirely wrong. Show them that you understand their views.

Fifth, bear in mind that, while it is correct that much of the emergency loans so far was used to pay off foreign creditors, Greece still received about 100 BEUR in new funding from abroad (net) in the last couple of years (Troika and ECB). Had the Europeans not done that, Greece would have turned into chaos a long time ago. You should express appreciation of that!

Sixth, don’t brag to Europeans that “the Greek people have spoken”. That might prompt the people of other European countries to speak as well.

Seventh, stop saying that the Memorandum is the cause of the enormous adjustment pains which Greeks have to go through because it isn't true. Greeks have to go through these adjustment pains because the living standard of the last years was financed by debt and that debt is no longer flowing. Instead, focus on the fact that the enormous but unavoidable adjustment pains have so far been unfairly distributed and that you will change that.

Eigth, explain to the Greek people that without reforms in all sectors of society, Greece will likely become something like the European equivalent of Cuba. Understand that you cannot mandate the economy to grow. Instead, you must arrange for incentives. The most important incentive is that Greece becomes an excellent place to do business.

Ninth, explain to the Greek people that you have one overriding goal: to put in place measures that the Greek economy creates new jobs. Jobs which are good enough to allow their holders a decent living while still paying tolerable income taxes. Jobs which create profits for the employers so that they can pay tolerable corporate taxes and so that their owners can pay tolerable taxes on dividends. And emphasize that you will forcefully stand in the way of anything which might endanger the reaching of this objective.

Tenth, parallel to the above steps, arrange for a new branding campaign describing the new Greece which you envision. Do not promise anything which cannot be supported by facts but create a vision which returns hope and perspectives to the Greek people so that they can motivate themselves to embark on a journey with you. Before we forget it, re-distributing money which isn’t there is not a vision!

Needless to say, I could agree with what the advisors are recommending to Alexis Tsipras. As a matter of fact, if he accepts such advice, I could even envisage recommending to vote for him.