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Saturday, April 26, 2014

A New River Flowing Through Greece?

My recent article about To Potami prompted long and interesting comments by an anonymous reader which I reproduce below (with thanks to the reader!): 

About "To Potami" ("The River"). It was "invented" out of nothing (apparently), as a "one man show”, less than one month ago. It has seen unprecedented media support by apparently opposing sides (more fiercly from ex-PASOK supporting media but a gentle boost from center-right media, too). Mind you, the people behind those media are the same that have been in cahoots for 30 years with PASOK. The same people that don't pay their fees for state TV frequencies, that are bankers, own football teams, oil and construction companies. The people that have been making the money with that establishment. The same media, up until a few months ago, were trying to resurrect PASOK or it's new masqueraded transformation called "The Olive Tree" (Elia). The "Elia" experiment was a last ditch effort by Venizelos to make forget the voters that he is PASOK. Alas, the euro-elections are closing and polls show that neither PASOK nor Elia seem to work.

And lo and behold! Instantly, "To Potami" appears, with one man who has worked for years for the same media magnates (and an ex-PASOK member in "his youth", as he says). One day BEFORE the foundation of his party, when nobody knew what his positions would be, newspapers already had polls out giving him no less than 7%!!! Everyday you could find 3 newspapers, with 10 page coverage of a party that nobody knew about! There are other parties that get born and die and nobody writes 5 lines and suddenly Theodorakis comes and 10 pages in all the ex-PASOK supporting newspapers. The TV channels (owned by the same people) even plan to invite him in the pre-electoral debate, although, in all past debates, the rule is that in the debate are invited parties that are already represented either in the national or european parliament. He is none of the two but they want to invite him. He is running all around Greece, when someone asks him "where does he find the money to found a party, finance publicity" etc, he replies "we have no money, we have small donations from friends and keep it simple". There is a joke about this actually because everywhere he repeats "I have been working since I was 16 years old". And someone from the crowd replies "I have been working since I was 16 years old and now I am a pensioner, but I still don't have money to make my own party".

You ask him where he stands politically, he replies "we want to govern, either with left or with right, and if people want to, why not, I could become the PM". Still to this day, his "founding program" is a vague collection of trivialities and generalizations that seem to be written in part by George Papandreou and in part by Tsipras.

You want a hypothesis? The Greek elite is watching Samaras' goverment trembling, as PASOK is in shambles and Samaras lately lost some MPs that wouldn't vote for goverment policy. Samaras is now down to 151 MPs and PASOK doesn't seem in position to be able to help New Democracy form a new goverment after the next elections. The next national elections, however, are close. More probably in autumn. Worst case, in April 2015 because Samaras will need 180 votes to elect president of the repubblic and only has 151. The same elite doesn't want Tsipras to take power alone. They see that PASOK can't be resurrected despite the "Elia" trick. So what do they do? They jettison PASOK and create "To Potami", which stays intentionally ambivalent. So that in ANY case, it may form a goverment with either ND and SYRIZA, so that the Greek elite can maintain its grasp on things.

How does it sound to you? Too conspiracy-like? Well, I don't know. How often do you have in Austria 10-page reviews for a party out of nothing, with no positions and headed by someone who only knows to smile well to cameras and attract women with a gaze to the infinite, while using theatrically studied gestures with his hands? By the way, in a poll, 75% of Potami's voters are women. Exactly because Theodorakis was always the kind of "glamour, smooth operator" type of TV journalist that appealed to feminine audiences.

To Potami aims to a) cut votes from SYRIZA, specially the more center-left voters that once voted PASOK, b) be vague enough to be able to cooperate with New Democracy without being called traitor of its positions, and c) if all goes south and SYRIZA wins the elections, to be needed by SYRIZA to form goverment and thus become the controlling factor and, as last resort, make the govermet fall if SYRIZA follows the "wrong way".

And consider that I am usually a liberal voter with a deep personal disgust towards Tsipras. But that doesn't stop me from trying to find a logical explanation behind miracles. Do you know that the founding conference of his party was transmitted LIVE through internet by the biggest center-left circulation newspaper and 2 more big portals (one of which center-right)? Things UNPRECEDENTED in Greek political history. About 3 hours live transmission on the first page of three of the biggest Greek portals. Do you know how many newly founded parties would beg for just 1 portal to do that? Do you know how much MONEY it costs to occupy for 3 hours such portals?

I doubt Theodorakis awaits for your advice. Judging from the powerful Greeks that promote him through their media on a daily basis like the best thing since sliced bread, I bet he has an entire army of professional image makers. But as I said, he has a precise role to play, so be patient with him and do not despair. His mission is not to start a blaze right now. His mission is to put out SYRIZA's fire.

Just so that you learn a bit of the inner facts, I managed to find the first page of one of the several newspapers that shamelessly promote Theodorakis. This newspaper was supporting PASOK. As PASOK started declining, it started supporting New Democracy more. Now it's supporting New Democracy and Potami, against PASOK. It's a top selling newspaper in Greece.

Title of the front page: "The River is washing them ashore! This "transmission" threatens to finish off PASOK! Venizelos a simple spectator. DIMAR (Democratic Left) inside the vortex. SYRIZA also wet! Internal polls give even double digit percentages!"

As the blog's title says, "8 pages of apotheosis for the River".

But take whatever you like. From Alafouzos' group (Kathimerini, SKAItv) to to Ethnos, to any other "establishment's" media group, they are boosting him like there is no tomorrow. SKAITV was one of the portals showing him live for hours. Don't expect to see Tsipras treated the same there.

Greeks always have the "lost vote" syndrome. They don't want to vote for a party that won't make it to the 3%. So this is why the media already gave Potami 7% before we even knew that it existed. Now they give it 10%. Give it another month, they will give it 20%.

And Theorodarkis plays for the villagers the story of the "poor, independent guy who tries to make a party against the bad Greek elite", etc.

The owner of the newspaper in the link was prosecuted for money laundering and tax evasion, after he was caught at the French-Swiss border with 4 mln euros in his trunk. Now he moved to Switzerland. He bought an estate with 2 residential complexes outside Zurich, in Kilchberg.

In Switzerland he can be certain he will have less legal trouble in the future, he has various murky cases haunting him. Like we say in Greece: "show me your friend and I will tell you who you are".

Put yourself in the shoes of a woman 18-45 for a minute. Be honest. Wouldn't you want to vote for him and as a bonus have him save you at the same time?

This is how Alexis Tsipras started, too. With the difference that Tsipras didn't have acting talent and wasn't trained to lean his head to one side and look at the camera at 3/4 profile, so you concentrate on 1 eye only, the other being lost in a semi-shade, which is the preferred studied look by Theodorakis and makes women melt.

Time For Apologizing to Angela Merkel?

Die Zeit is a renowned German newspaper known for its esteemed authors and its esteemed readership. Its political direction is centrist and social-liberal. Former Chancellor Helmut Schmidt (Social Democrat) is one of the publishers of Die Zeit.

This commentary by Mark Schieritz of Die Zeit is quite noteworthy. Schieritz had been a forceful critic of Merkel's socalled austerity agenda since 2010. In this article he asks: "Do I now have to apologize to Angela Merkel? Together with all the other critics of her austerity agenda who were obviously wrong?"

Schieritz does not give a yes-or-no answer to that question but it is quite surprising that he credits Merkel's austerity agenda for having accomplished something which could not have been accomplished otherwise, in his opinion.

Friday, April 25, 2014

From Pericles to Potami

In this NYT Op-Ed, Nikos Kostandaras draws the full circle of political conduct from Ancient Greece to the 21st century. "We are unique in that we consider any man who takes no part in public affairs not just uninvolved but useless", Kostandaras quotes Pericles and adds: "Since the founding of the modern Greek state nearly two centuries ago, Pericles’s exhortation has been remembered only in speeches on national holidays. Politics has been dominated by a professional caste whose credibility depended on keeping voters happy. This led to rising demands by interest groups at the expense of the whole society".

Yes, the sad state of Greek political affairs is well known. After all, it has been broadcast throughout the world in recent years with particular emphasis on the expression of a 'failed state'. Yes, Greek politics seem to be a mess but, no, Greece is not alone in this. Like so often, Greece is just so much more extreme than other countries but similar trends can be observed in many other countries. Notably my own country of Austria.

Like Greece, Austria's politics after WW2 were dominated by two large parties: the Conservatives and the Social Democrats; ÖVP and SPÖ. Or, as they are called: the Blacks and the Reds. In the early years, ÖVP/SPÖ garnered over 80% of the vote on a combined basis. They differed from ND/PASOK in 3 important ways. 

First, instead of competing with one another which wastes energy, they decided to team up and form grand coalitions, recognizing that it is a lot more fun to run a democracy with a two-third majority than without it. There was a common objective: always make sure that both parties share equally and fairly in the gravy of the state and a huge public sector. 

Secondly, ÖVP/SPÖ realized that there has to be gravy before it can be distributed; that one should nurture the cow if one wants to distribute milk. In short, they both had an interest in a strong private sector.

Thirdly, preferential treatment and corruption, which cannot be avoided in a system like that, never went to individual politicians privately. Instead, the beneficiaries were always the parties and whatever is good for parties is good for the country. So the reasoning went.

A system like the above cannot be replaced because that would require the beneficiaries of the system to amputate themselves. Fat chance of that ever happening! However, the system can be allowed to erode over time. That can be a very, very long time.

Austria's erosion process began over 25 years ago and was evidenced by the continous decline in the combined share of the vote of ÖVP/SPÖ. Voters still knew that, whoever they voted for, they would still get the same government after the election but they started 'sending signals'. A new right-wing party (FPÖ under Jörg Haider) moved from 5% in the mid-1980s to over 30% in the late 1990s, becoming temporarily the largest party in opinion polls. The power behind this new party was not so much its right-wing position but, instead, the fact that 'it declared war on the corrupt ÖVP/SPÖ dictatorship which pursued party politics at the expense of all Austrians'. That struck a theme with the voters. Still, the ÖVP/SPÖ survived that challenge which only goes to show how hard it is to remove a system which has been entrenched for decades.

"You can fool some of the people all of the time; all of the people some of the time; but you can't fool all of the people all of the time!" --- Any hope for significant political change must rest on this premise coined by Abraham Lincoln. A very interesting development took place in Austrian politics during 2013, and this may give some hope to Greeks.

In the September 2013 national election, ÖVP/SPÖ barely came over 50% of the vote while 2 parties which had not existed a year earlier scraped the 4% hurdle for parliament. One of them ("Frank", named after its founder, the Austro-Canadian billionaire Frank Stronach) focused on rhethoric and emotions and has meanwhile lost all of its support. For all practical purposes, it no longer exists (except for the seats in parliament which they can hold on to). The other party ("NEOS", standing for 'New Austria') garnered just over 4% at the elections but is now running in double-digits according to polls. NEOS focused on rational argument and serious conduct.

Even though I was very impressed by NEOS from the start (I voted for them), I am now overwhelmed to see how receptive a society which has been permeated by ÖVP/SPÖ party politics and interest groups for decades with entrenched infrastructures, how receptive so many Austrians are to rational argument and serious conduct. I am reminded of the many Greeks I have met, particularly from the younger generation, who also seemed to be receptive to rational argument and serious conduct.

"The economic crisis of the past four years is opening the way, after decades of stagnation, for radical change in Greek politics. New people — from business, sports, academia and various professions — are entering politics; new parties are pushing for a place in a field where for generations two parties and a handful of political dynasties controlled developments", writes Nikos Kostandaras. That, dear Greeks, is the prerequesite for the realistic hope for change!

There is no way of telling upfront which new party, which new politician will strike the right theme in order to set in motion an avalanche. Vanessa Andris, a Greek-American, wrote in the HuffingtonPost 3 years ago that "What Greece needs now is a new hero". One of my readers has been arguing for a long time that Greece needs its own Lech Walesa. Again, one can't tell upfront who is the right person and which is the right party but the more the alternatives which present themselves, the greater the likelihood that one of them will set off the avalanche.

One piece of advice for Mr. Theodorakis of To Potami: a nice TV persona and a vague idea of what one has in mind may be enough to start a small fire. But if he wants to start a blaze, he should take a copy from NEOS. In order to convert a small fire into a blaze, there has to be a grassroots, bottom-up organization of motivated people (many volunteers!). Soft facts may suffice to start the small fire. The blaze requires that soft facts are supported by hard facts such as specific policy positions, shared value structures and a clear vision of what kind of a country one would like to see in a generation from now.

Thursday, April 24, 2014

Self-Organization in Greece!

This is a most interesting story about self-organization and self-help in Thessaloniki: a company went bankrupt; all employees lost their jobs. Instead of whining about it, the workers decided to run the production on their own and they succeeded with it. The report is colored with romantic ideologies as to how companies will be run in the future but that is besides the point.

Unfortunately, the report does not explain how exactly this worked. Capitalism is called capitalism because one requires capital in order to acquire the material assets necessary for production --- buildings, machinery, equipment, raw materials and so forth. In this case, the workers apparently confiscated those assets but there is no explanation how they did this legally. Someone owned these assets before the confiscation: either the previous owner or the creditors or the bankruptcy court. Whoever owned those assets before, did they give them away to the workers without asking for compensation? If banks had liens on those assets for financing, did the banks simply release those liens? All the report makes reference to is that "the previous owner has not initiated any legal action". Apparently, there would be grounds for legal action.

The real positive aspect of this report is that it shows what self-organization and self-help can accomplish. These workers could just as well have remained inactive and spent their time on minimum income, lamenting in cafés about their misfortune. Instead, they accepted self-responsibility and acted accordingly. Perhaps outside the law, but still.

I, myself, am a great fan of co-operatives as a form of business organization. A co-operative is a group of members acting together to meet the common needs and aspirations of its members. Co-operatives are not about making profits for shareholders, but about creating value for their constituents. The members can be workers/employees but they can also include customers, suppliers and whomever. The more constituents of the enterprise are members of the co-operative, the better it will work.

The only thing is: to start off, a co-operative needs capital like anyone else in order to finance the expenses described above. Once the co-operative is up and running, it typically no longer needs capital from the outside. Since it doesn't pay out dividends, it can finance its expansion through retained profits. Put differently, the profits do not go to any shareholders but, instead, stay in the business in order to make the business grow. And it is ALL constituents who benefit from this growth.

Next time I am in Thessaloniki, I will try to find out how these people got their co-operative started.

An Exit From the Eurozone a Taboo For SYRIZA --- But Not For Society?

"You know I never said that an exit from the Eurozone is in and of itself the solution to all of our problems. It is however a prerequisite. The issue for Greece is not to leave the euro and to go to a national currency. The country needs deep changes to the state mechanisms, to the economy, deep changes at all levels. We all know the inequalities, the social harshness, the poverty, the general difficulties in the economy. Consider as well that the Memorandum camp also flies the flag of ‘reforms’. There have been major social changes and cuts in our country in recent years, but they are cuts that make things worse for society and the labour force. That is not by chance. The euro is an institutional framework, a framework of power which favours conservative changes - that is the changes in the social structure that favour capital".

A very interesting interview with Costas Lapavitsas, professor of Economics at the School of Oriental and African Studies (SOAS).

The New Game in Town --- Calculate Greece's Primary Surplus!

As a former banker, credible and understandable figures are everything to me. As a result, I was very much looking forward to Eurostat's announcement about Greece's primary surplus which they made on April 23. Alas, I am as smart as I was before. Great brains are now dissecting Eurostat's figures. When great brains do not agree on credible and understandable figures, it may mean that the figures are not credible and understandable. Below are three analyses:

Greek 2013 primary surplus confirmed at 1,5 BEUR by Eurostat, by MacroPolis
Greek statistics are back: primary deficit presented as suplus, with Eurostat's seal of approval, by Yanis Varoufakis
More Greek statistics? Troika confirms primary surplus, WSJ

To me, Varoufakis' analysis sounds convincing but who am I to judge Greek financial figures?

Tuesday, April 22, 2014

Restore The No-Bail-Out Clause!

This Op-Ed by Philippe Legrain (NYT) is very worth reading. One excerpt:

"The primary cause of the crisis was the reckless lending of German and French banks (both directly and through local banks) to Spanish and Irish homeowners, Portuguese consumers and the Greek government. But by insisting that Greek, Irish, Portuguese and Spanish taxpayers pay in full for those banks’ mistakes, Chancellor Angela Merkel’s government and its handmaidens in Brussels have systematically privileged the interests of German and French banks over those of euro zone citizens ... The bungled decision to bail out German and French banks by lending to an insolvent Greece in May 2010, rather than writing down its debts, scarred the euro zone. It violated the legal basis on which the euro was formed: that a government in difficulty should not be bailed out by its peers".

From the beginning of this blog, I have stated the above position over and over again, albeit not in such a one-sided fashion: reckless lenders can't do it alone; they also need reckless borrowers. However, the point is that bailing-out banks via Greece's balance sheet was either an irresponsible act or an incompetent act, or both.

Regrettably, there is one mental trap which, I believe, Phillippe Legrain is not avoiding: when lenders go bankrupt, it has absolutely no bearing on the loans of their borrowers. Those loans continue in place until they are either repaid, converted to equity, forgiven or whatever. When banks go bankrupt, it is their creditors who lose; their borrowers don't gain a thing. Greeks should know this the best because they continue to claim a loan which they (involuntarily) made to the Third Reich. The Third Reich went bankrupt but Greece has not forgiven the loan. Thus, strictly from a legal and contractual standpoint, Greece still has a claim. A loan taken down remains debt until it is repaid, converted to equity, forgiven or whatever.

According to the IMF, Greece received rescue loans of 247 BEUR from 2010-12, of which 206 BEUR went straight back to lenders and only 41 BEUR stayed in Greece to finance the deficit. The critical figure is the 41 BEUR, not the 206 BEUR. It is the 41 BEUR which drove Greece's austerity. Had it, instead, been 82 BEUR, twice as high, Greece would have had a much less painful adjustment. 

The textbook would have suggested that lenders figure out how much the borrower needs in order to make the necessary turn-around in the least painful way. That might have turned out to be 82 BEUR. But it was not the textbook which drove those decisions. Instead, it was politics. The question was: How high is the lowest possible amount which we need to give in order to avoid that Greece collapses entirely?

The textbook might also have suggested the following: GDP is the sum of the public and private sectors. If we are going to starve the public sector to death (because that is necessary) without damaging overall GDP too much, we have to make offsetting increases in the private sector. By-pass the public sector and extend financing to the private sector directly. Here, however, one would have had to consider what the former Chief-Economist of Deutsche Bank said in an interview: "The question is what kind of growth do we want? Do we want the private sector to grow because of loose monetary policy or because companies invest when they are not hindered by archaic economic and political structures?"

With one exception, Greece was/is in the same situation as many Latin American countries were in the 1980s when they faced 'sudden stop' in foreign loans: they could only stay in business if they complied with the IMF's medicine. The exception is that the Latin countries had a local currency which they could devalue and, thus, accelerate and/or inflate their way out of the crisis. I am not aware of any debt forgiveness in Latin America; only debt restructurings.

Legrain suggests that "in forder to get out of this mess, the Eurozone needs a change of policies and institutions. Banks need to be restructured and unbearable debts written down. More investment is needed, along with bold reforms to boost productivity". 'Writing down unbearable debts' sounds very civil and easy, but if lenders write down their loans it does absolutely nothing for the borrowers. The only thing which does something for the borrowers is if lenders forgive their loans.

Forgiveness of sovereign debt is an issue which has been treated far too lightly since 2010 because it is an issue which affects principle and precedent. Forgiveness of sovereign debt has historically been limited to impoverished countries of the Third World or to cases of one-time destructions. No one can predict the longer term finanical consequences of the precedent that sovereign debt of a First World country is easily forgiven. Not to mention the political consequences in the forgiving countries.

The much easier solution would be to bring interest rates to zero and to extend debt maturities way out into the future. To take Greece as an example: Greece's GDP is around 180 BEUR; 60% of that would be 108 BEUR. One could take the debt exceeding 108 BEUR and convert it into an interest-free loan with a bullet maturity in 50 years (or longer). In short, for the next 50 years, Greece's debt service would be limited to the Maastricht debt level. It would economically be equivalent to a haircut with limited duration. No investor of today would worry about Greece's debt sustainability in 50 years from now (or more). During this time, the debt would devalue in real terms. And let's be honest: if Greece couldn't make a recovery in the next 50 years (or more), then Greece would be, by the time the loan maturity comes up, one of those impoverished countries of the world where debt forgiveness is justified.

Still, Legrain's analysis is very valid, particularly the following conclusion which he draws:

"The 'no bailout' rule should also be restored. Elected national governments must have much greater flexibility to tax and spend as they please, constrained by markets’ willingness to lend to them and ultimately by the possibility of default. A mechanism for the orderly restructuring of sovereign debt should be established for that purpose".

Monday, April 21, 2014

And How Was Your Easter Lamb?

A Place in Paradise Reserved for Greeks!

Sit still; collect your thoughts; concentrate your mind and let the following embrace you:

My poor Greek translates this as follows: "When God distributed the Earth to every country, the Greeks ended up with nothing. The Greeks cried out to God 'Why didn't you give us anything'? And God replied: 'For you, I have reserved a place in paradise!'"

The Government in Athens Will Cease to Cooperate?

"Anyone familiar with basic math knows that Greece's debt is far too high. Something must happen. However, the EU-leaders are afraid to tell their tax payers face to face that the money is lost. Instead, they will lower the interest rates to zero and extend loan maturities until eternity. Everything points towards a third package for Greece. The Greek government has the budget under control in as much as they don't need fresh money for current expenses. This means that the EU will run out of leverage. The power has shifted. As soon as the last tranche is disbursed, the government in Athens will cease to cooperate".

Thomas Mayer, formerly Chief Economist of Deutsche Bank.

Thursday, April 17, 2014

Reviewing Horst Reichenbach's Prediction of 2011

I came across an article titled "Good news! Greece will grow again in 2014!" which I had posted on October 30, 2011, i. e. 2-1/2 years ago. At that time, I meant to be a bit sarcastic because the prospect of another 2 years or more of economic decline didn't really strike me all that positively. Today, I must admit that Horst Reichenbach, the Head of the EU Task Force who had made the above prediction, was right and that I was wrong when I expressed this warning at the time: "Or does anyone really believe that social peace can survive another 24 months the experiences of the last 24 months"?

Life is all about perceptions. What was a terrible perception 2-1/2 years ago (i. e. living another 2-1/2 with economic decline) is nowadays being turned into a positive perception (i. e. there may well be growth in the first digit after the zero this year). 

If foreign creditors remain happy as long as Greece has surpluses in the primary balance and in the current account, and if Greece can adjust to living with unemployment above 20% and one-third of its population in very dire straits, this thing can go on for a very long, long time.

The Economist --- 4.796 Words Too Many?

My computer counted 4.796 words in this Economist article titled "The Prodigal Son" which analyzes Greece's return to the markets (which The Economist considers a milestone). There is not one single word among the 4.796 words relating to key statistics of the Greek real economy. It is all financial talk.

Perhaps The Economist and others should re-read Keynes' book on "The Economic Consequences of the Peace" written after Keynes had resigned in frustration from the Versailles Conference. It is all about Germany's real economy and includes no financial talk.

Foreigners Transfer Money to Greece and Greeks Transfer it Abroad --- Strange!

"January-February 2014: Under portfolio investment, a net outflow of €2.7 billion was recorded, mainly as a result of a rise in residents’ investment in foreign Treasury bills and a decline in non-residents’ holdings of Greek government bonds and Treasury bills. This development was partly offset by an inflow for the purchase of Greek shares by non-residents, as well as by a decrease in residents’ holdings of foreign bonds. Under “other” investment, a net inflow of €2.7 billion was recorded, mainly due to non-residents’ increased holdings of Greek deposits and repos" - Press Release Bank of Greece.

This is a curious statement by the Bank of Greece because one could interpret it as meaning that, while Greeks are smart to put their money outside the country, foreigners are dumb and put it into Greece. 

Here is how portfolio investments work: suppose you have 10 TEUR on deposit with Eurobank. One day, you go to your local Eurobank branch, where you also have a portfolio account, and ask that they take your 10 TEUR from the deposit account, buy German bonds for 10 TEUR and put them in your portfolio account. You may think that your money is still with your local Eurobank branch but it isn't! Eurobank has, on your behalf, transferrred the money abroad to buy German bonds. If Eurobank goes bust and/or if Greece exits the Euro, it does not concern you. You still own German bonds denominated in Euros. They just happen to be held in a portfolio account at your local Eurobank branch and the assets in that account are your property and not the bank's.

Footnote: from 2011-2013, Greek residents did the above to the tune of more than 50 BEUR. They did not transfer money to any Swiss bank account. Instead, they simply moved money from a deposit account to a portfolio account at a Greek bank. This little trick made them immune against any bank bankruptcy or Grexit.

From January-February 2014, Greek residents moved 2,7 BEUR from their deposit to their portfolio accounts at Greek banks. Put differently, they transferred money abroad, possibly without knowing it. Foreigners did the reverse during this period: they transferred 2,7 BEUR to Greek banks. Perhaps that is a coincidence; perhaps something could be read into it.

My own experience has been that it is never smart to do the opposite of what those are doing who are 'in the know'. If I saw Greeks moving money outside the country, I would think twice before I moved money into Greece.

Wednesday, April 16, 2014

What Would Jesus Christ Have Done?

Greek author Nikos Dimou seems to literally enjoy testing Greek traditions for rational sense. In this article he wrote that "as Easter approaches, we will again spend money on bringing the (supposed) Holy Fire, receiving it with the honors afforded to a head of state". Jesus Christ would probably have helped the poor rather than pay for transport of the Holy Fire, Dimou added.

Well, I guess if one really wants to infuriate traditionalists and/or believers, one can't do much better than the above. At the same time, there are probably many Greeks who agree with Dimou. My wife certainly does.

Since Greece doesn't strike me as a very secularized society, I can see that there would be violent reactions against any perceived mockery of traditional beliefs. For me as a non-Greek, it is very difficult to form an opinion about this but I would very much hope that there will be commentaries and/or discussions in the Greek media about Dimou's position.

Tuesday, April 15, 2014

Greece 50 Years Ago!

This is a nice video about Greece in1963. Maybe a little poorer country than today but also maybe a little happier country than today.

Anybody Confused About Greece's Primary Surplus 2013?

I have read about Greece's sensational primary surplus for 2013 so many times that I simply took it for granted. This article in the respectable German blog Querschuesse prompted me to look into the details of the primary surplus. The article is based on the Ministry of Finance's General Government Data Bulletin December 2013 and its State Budget Execution Bulletin December 2013. Finally, I have also reviewed this article from the MacroPolis blog.

As can be expected, there is always a confusion of terms and terminology. There is not one single primary balance. It all depends... on how one defines what.

My understanding is that the figures originate in the Ministry of Finance and are subsequently verified by ELSTAT. From there they go to Eurostat where differences of opinion are sorted out with ELSTAT. When all is said and done, Eurostat incorporates the figures into the European System of National and Regional Accounts (ESA95). Quite independent of that is what the Greek government agrees with the Troika as to what the primary balance is. All clear so far?

There is not just one balance. Instead, there is the balance of the State Budget (SB) and the balance of General Government (GG). The GG is the aggregate of the SB, Local Governments, Social Security Funds and Extrabudgetary Funds. As a layman with budget figures, I would guess that what counts is the bottom line and the bottom line seems to be the General Government (GG). And the real bottom line is ESA95 for the General Government. Still with me?

What then is the primary balance of the GG balance? I would argue that it is primary revenues minus primary expenses (i. e. excluding interest expense, adjustments for arrears, one-time effects, etc.). That primary balance of the GG was minus 450 MEUR in 2013 compared with minus 707 MEUR the year before. Yes, an improvement. No, not a sensational improvement. And now come the adjustments.

The first adjustment is for 'other expenditures'. Typically, these are a-periodic items like settlements of past arrears or advance payments. They were minus 5.770 MEUR in 2013 compared with minus 334 MEUR in 2012. This would suggest that substantially more arrears were settled in 2013 than in the year before.

Note, however, that after making the adjustment for other expenditures, the new balance is minus 6.220 MEUR for 2013 compared with minus 1.041 MEUR the year before. All of a sudden we have a substantial deterioration!

The last adjustment is the interest expense which was 6.599 MEUR in 2013 compared with 12.864 MEUR the year before. Put differently, interest expense was cut in half in 2013.

Making this final admustment leads to an ESA95 of minus 12.019 MEUR for 2013 compared with minus 13.905 MEUR the year before. A very modest improvement, particularly when considering that the interest expense was cut in half. Querschuesse takes an even more radical approach by concluding: when adding to the ESA95 the cost of bank recapitalizations and making adjustments for arrears and taxes not refunded, the overall deficit comes to about minus 33 BEUR.

I suppose the moment of truth will come when Eurostat releases the official figures for all EU-countries on April 23. In the meantime, I have to resign myself to the fact that in all the tables of the Ministry of Finance and among all the different primary balances reported there, I could only find one primary surplus. That was the surplus of 603 MEUR in the State Budget, that is primary state revenues minus primary state expenses. There one has to keep in mind that the state can play around with its expenses: if payments are deferred into the next year, the current year's expenses are lower.

Cynics may question what the point of all this is when the Greek government and the Troika have already agreed on what the primary deficit was; whatever that was...

Monday, April 14, 2014

How Greece Miscalculated

The question then becomes why Greece fared so poorly and how that performance contributed to its recent economic disaster. The most straightforward interpretation of the Greek figures is that it simply failed to integrate effectively with the rest of the European economy. The rest of the periphery was tying itself into EU supply chains, experiencing capital deepening and ungrading technological capabilities, contributing to a rise in underlying growth potential. Greece wasn’t. The southward rush of capital that occurred in the 2000s may therefore have pushed Greece much, much farther beyond potential than was the case in Spain or Portugal. In other words, we see another example of the way in which the Greek government’s profligacy was more symptomatic of the economy’s troubles than a principal cause of them. 

There may be a bright side here for Greece. If a failure to integrate helps explain recent woes, then perhaps that also means that Greece has more capacity to grow rapidly in future as it goes through the integration others enjoyed previously. Assuming, that is, that Greeks themselves remain committed to a club that has yielded them paltry benefits relative to what might have been expected.” 

The original FT article can be found here.

Should Greece Default Now?

"Now contemplate the alternative. Greece defaults on all its foreign debt. It establishes a new currency that would immediately devalue. To lock in the competitive gain – to turn it into a real devaluation – would require a central bank with a credible inflation target and sufficiently deregulated labour and product markets. This is not a soft option, and would require a lot more structural reforms than Athens has so far undertaken. While such a scenario would freak out foreign investors when it happened, they could be relied upon to forget it quickly, and come back quickly. After all, the probability of a default is lowest right after you have defaulted. At that point, a reformed Greece should be very attractive to foreign investors, not just financial investors. I am not advocating exit. Greek voters and foreign investors should however know that Greece is now in a position where there is a choice".

I emphasized the last sentence in bold because that, to me, is the key. Four years after the first rescue loan for Greece, the EU is still acting on the premise that 'there is no alternative'; that 'if the Euro fails, the EU will fail'. A much more convincing scenario is that, if this premise is blind-foldedly pursued, the Euro may very well fail in the longer term and with it the EU.

If the EU were to take off its blind-folds and act as a fair arbiter, it would be the EU - and not a financial journalist - who would advise Greece that the country now has an alternative. That the Greek government should comprehensively inform the Greek population about these alternatives (continue on the present course or follow Münchau's suggestions) and that the Greek government should possibly put this to a national referendum.

The word 'default' has such a bad taste to it. In reality, default is a legal event which occurs when a borrower can no longer fulfill his financial obligations. Corporations can, in such a situation, declare bankruptcy because there are bankruptcy laws for corporations. Since there are no bankruptcy laws for countries, the legal event of default is the only honest alternative. Default is not a unilateral debt repudiation (that term justifiably has a bad taste to it). Instead, default simply says 'we would like to but, sorry, we can't pay our debts'. If creditors continue to make loans to an insolvent corporation, that is, in most countries, a criminal offense. Regrettably, there are no laws which make new loans to insolvent countries a criminal offense.

When I started this blog 3 years ago and for the first couple of years, I was an adamant supporter that Greece could and should make it with the Euro. Nearly 28% unemployment and nearly 60% youth unemployment after 4 years of adjustment prove me wrong. Yes, Greece is now financially stable with both domestic and external accounts in balance (or rather: in surplus). But how long will Greece remain politically and socially stable with these kinds of unemployment ratios?

I cannot judge how quickly Greece's employment situation would improve if the country switched to a default/exit course but I am certain about the following: with the Euro, the Greek employment situation will not return to more or less satisfactory levels for a very long time.

If default were to become a serious point of (confidential!) discussions, its timing would also be of significant importance. Greece is having a run on international capital markets these days and there is a good chance that Greece could raise another few billion Euros there before the end of the year. And Greece still has about 8 BEUR to draw under the rescue program. Possibly by the end of the year, when Greece would have exploited all possible sources of funding, the time might be ripe to put a lid on it and call it quits.

Malicious tongues might suggest that this could be used as a political ploy: set the timing in such a way that it yields maximum benefit at next year's election. Well, actually, why not if it is good for the country?

Saturday, April 12, 2014

Not All Germans Are Blind-Folded About the Euro!

Hans-Olaf Henkel is Germany's most critical voice regarding the Euro as a "one-fits-all" currency. His judgement carries weight since, for many years, he has been the most prominent voice of German industry. Henkel had been a passionate supporter of the Euro in its early years. Since the crisis, he 'has seen the light' and became an opponent. Below is a very apt quote from this article in Die Welt.

"The Euro is far too strong for the economies of Southern Europe and France. Of course, Germany still benefits from the Euro so far. But what kind of a ludicrous system is that which allows Germany, as a result of a currency which is too cheap for the German economy, to export too easily when, at the same time, it requires German tax payers to carry the financial consequences of a currency which is too cheap for Germany but too expensive for the South?"

Five Explanations for Greece's Bond Yield

This article explains superbly the reasons for the success of the latest Greek bond issue. Five reasons are given and the conclusion is:

"None of these reasons, individually or collectively, are particularly good reasons to buy Greek bonds at 4.95%. It has always been very easy to lose a lot of money buying junk-rated sovereign debt at low single-digit yields; that hasn’t changed. But if you’re a bond investor, there’s a surprisingly large number of ways that you could end up making money after buying Greek debt at these yields. Which in turn explains why Greece found it so easy to sell €3 billion in bonds".

Greece Stands No Chance if it Stays on the Euro?

"Simply put, Greece doesn't stand a chance if it stays on the euro with no control over its monetary policy. Greece needs a cheaper currency to help compete with its neighbors so it can grow organically, much like it was able to do when it was on the drachma. It cannot do that if its monetary policy is being conducted in Frankfurt and its currency remains so expensive relative to the U.S. dollar and especially to the Turkish lira, its major economic rival in pretty much everything from tourism to olive production".

Full article is here.

Friday, April 11, 2014

"I would ask Mrs. Merkel to bring investments to Greece!"

SpiegelOnline wrote about Chancellor Merkel's upcoming visit to Athens. They asked some Greeks what they would wish of Merkel. One of the respondents, a 20-year old economics student by the name of Christos Nasmis, answered:

"I would ask Mrs. Merkel to bring investments to Greece!"

Whoever and wherever you are, Christos Nasmis --- POWER TO YOU!!!

Greece --- Exports Down, Imports Up?

I hope that there is something wrong in this Google-translation: the article would suggest a very disturbing trend in Greece's trade, as follows:

* February is the fifth consecutive month that exports recorded a decrease on y-t-y comparison. The last time there was an increase in exports was recorded last September.

* February is the first month since last September where imports increased (this despite a significant reduction of oil imports). Excluding oil, imports inreased by a phenomenal 16,4%! 

Exports down, imports up? That would indeed be the wrong trend!

Greece Trusts Anonymous Capital Markets More Than Its Governmental Partners!

Financings can be differentiated by two different types: those financings where the borrower knows the lender and those where the borrower does not.

Where the borrower knows the lender (such as in the case of loans; like the bail-out loans), the borrower has someone to negotiate with. In case of trouble, the borrower can sit down with the lender to cure the problems; to cure defaults before they happen; to renegotiate the terms of the financing.

Where the borrower does not know the lender (such as in the case of capital market instruments; like bonds), the borrower does formally not know the lender. There is noone to negotiate with in case of trouble. A bond is a tradeable capital markets instrument which has an independent life of its own. That life is governed by the terms lined out in the bond prospectus. If those terms, for whatever reason, are not complied with, the bond goes into default and triggers all sorts of consequences such as cross-default. Even if one large bondholder were willing to renegotiate terms, he could not do so on his own.

I am surprised that this key difference between bond financing and loan financing has not at all been discussed in the case of Greece. In good times, bonds are a wonderful instrument: the borrower can raise large amounts of money in a rather simple way; there are no instalments of principal until the bullet maturity; one only has to pay interest annually during the life of the bond. Instead of a tough credit analysis, the borrower works out with the arranger of the bond a structure for which the arranger feels that there is 'investors' appetite'. They work out a 'story' which will 'sell'. The arranger has no credit risk responsibility other than the documentary responsibility (that the facts presented in the bond prospect are correct and, typically, one of the largest sections in a bond prospect is where the arranger spells out what he is NOT responsible for). The credit risk responsibility lies with the purchaser of the bond.

In bad times, investors' appetite goes out the window; bond prices go South and bonds cannot be refinanced upon maturity. In the worst case, it can lead to 'sudden stop' and NOONE can control that!

Hardly any country can 'repay' its bonds upon maturity these days. Virtually every country must refinance its bonds upon maturity. As long as there is investors' appetite, anonymous capital markets are a wonderful business partner. When investors' appetite goes out the window, capital markets are brutal because they can remain anonymous.

No investor of sound body and mind would buy the bond of a borrower who already has unsustainable debt, out of fear that, upon maturity in 5 years from now, the borrower might not be able to refinance. Unless...

Unless, of course, the investor has reason to believe that the implied support of a third party stands behind the bond. In the case of Greece, that third party is the EU. The most wonderful opportunities for investors are those where the real risk is much lower than the perceived risk. From the investors' standpoint, the perceived risk is that Greece might not be able to refinance in 5 years from now whereas the real risk, in the investors' estimation, is that of the Eurozone in toto. The investors get a return based on the perceived risk but only carry the real risk.

Greece has now opted to trust anonymous capital markets more than governmental partners (cynics could argue that Greece has opted to trust governmental partners that they will bail-out anonymous capital markets in case of need). If Greece were a stand-alone country with it own currency, a return to capital markets so early into the expected recovery would have to be considered as a sensational feat. It would indeed have reflected 'trust in the country's ability to exit the crisis' (Finance Minister Stournaras).

Trust is an elementary part of all financings. The only trouble is: one can only trust people whereas with anonymous capital markets there is noone on whom to bestow the trust. Greece has opted, at a cost of roughly 90 MEUR in excess interest expense annually, to trust anonymity.

PS: in reality, Greece has, of course, not totally trusted anonymity. Instead, it has trusted EU partners to bail-out anonymity in case it becomes necessary. The 3% interest premium goes to investors' P+L statements; it will be paid by Greek tax payers and, in the final analysis, by Eurozone tax payers.

Greece Has Issued the First Eurobonds!

Greece has successfully raised 3 BEUR in capital markets via the sale of a 5-year bond. Finance Minister Stournaras is quoted in the Ekathimerini as saying: "The international markets have expressed in the clearest possible manner their trust in the Greek economy, their trust in Greece’s future. They have shown trust in the country’s ability to exit the crisis, and sooner than many had expected."

Let me rephrase that a bit as follows:

"The international markets have expressed in the clearest possible manner their trust in the continuation of the Eurozone's bail-out policies. They have shown trust in the EU's continued ability to force tax payers to bail out banks and one wonders why it took capital markets so long to figure that out!"

PS: the headline was 'borrowed' from my reader Lennard.

Wednesday, April 9, 2014

Greek Bond Sale --- "A Hugely Significant Step?"

The Ekathimerini reports that Greece plans to sell 2 BEUR 5-year notes to foreign investors this week. That is quite a feat when considering events of the last few years; no doubt about it! Perhaps even a "hugely significant step", as the Irish Finance Minister is quoted as saying.

Greece pays about 2% (or even less) on bail-out loans. The new 5-year notes are expected to sell at just under 5,5%. That makes for a premium of about 3,5%. Multiplying 2 BEUR x 3,5% results in 70 MEUR surplus interest expense annually. Not the whole world but not a piece of cake, either.

What is that premium for? “It’s very much symbolic,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. "Even though it’s more expensive than the bailout loan it could mark the start of a return to normality.”

Money is a fungible entity, so it can never be said with certainty what borrowed money is used for. Since Greece now has a primary surplus, one can only assume that the 2 BEUR will contribute to paying upcoming interest and principal maturities. As far as I know, the upcoming maturities of principal and interest are due to official lenders (ECB, etc.). In short, money will be borrowed from Peter in order to repay debt owed to Paul. Peter is the private investor who will now get a superb return since he can feel confident that Paul, the official lenders, will pay him out in case Greece cannot. The latter is, of course, my assumption but events over the last years would suggest that it is a fair assumption.

When Warren Buffett invested billions of dollars in Goldman Sachs stock in the midst of the sub-prime crisis, that indeed marked the start of a return to normality for GS. The difference with Greece is that Buffett did not have an explicit and/or implicit pay-back guarantee from the US government. Buffett was gambling of the future of GS and his investment showed that he believed in that future. And, as time went on, other market participants started sharing Buffett's belief. Beliefs reinforce themselves mutually and the herd instinct of financial players swings into full force.

All of this may happen in Greece, too. Or not. Time will tell. The 70 MEUR surplus annual interest expense is a bet on the chance that it will happen. If it does happen, it will have been a good bet. If not, it will have been a waste of money.

There is another difference between GS and Greece. In the case of GS, it is highly unlikely that there will be a management crisis and/or complete management replacement when the company is on a solid recovery track. In the case of Greece, a complete government change cannot at all be ruled out. When GS recovers, there may still be periodic but manageable setbacks. Not much needs to go wrong in Greece and there could be a complete set-back. In that case, Greece would - once again - face a moment of 'sudden stop' as regards foreign funding. Put differently, there is only limited assurance that the return to the markets will be a sustainable one.

To cut a long story short: I would not opt for a return to the markets at this stage. The premium for doing that appears too high when compared to the benefit which might possibly be derived from it. Instead, I would go after cheap bail-out money as long as I can get it and I would do it to the fullest extent possible.

Good Competition and Good Regulatory Framework = Big Impact on Growth!

"What struck me most was that Greece was a relatively closed economy and that Greek consumers did not have at their disposal enough options for goods and services because of the lack of competition. Therefore we took a very, very thorough and in-depth look at the question of competition. And competition helps in many ways, not only in terms of empowering the consumer. It brings with it investment, management skills, access to other markets; it helps combat corruption. What you will find, which has inevitably and invariably been the case, is that one measure will count for one, but two measures will count for three, and three for 25. Measures are mutually reinforcing, they don’t work in isolation. Put good competition and a good regulatory framework together and you will have a big impact on growth – you can have an increase in growth in the next 5-20 years of between 5-20 percent of GDP".

Angel Gurria, Secretary General of the OECD, in this interview with the Ekathimerini.

Sunday, April 6, 2014

Beware of Greeks Bearing Primary Budget Surpluses!

"A primary budget surplus is a surplus of revenue over expenditure which ignores interest payments due on outstanding debt.  Its relevance is that the government can fund the country’s ongoing expenditure without needing to borrow more money; the need for borrowing arises only from the need to pay interest to holders of existing debt.  But the Greek government has far less incentive to pay, and far more negotiating leverage with, its creditors once it no longer needs to borrow from them to keep the country running. This makes it more likely, rather than less, that Greece will default sometime next year".  

This was written in the Geographis Blog last December. Today, nothing seems further from reality than a Greek default: the country is receiving accolades from all sides; financial investors are lining up to get a piece of the action before the recovery goes through the roof; Greece's borrowing costs are declining to levels last seen only before the crisis; etc. 

Still, the argument is in and by itself correct: the government can now pay its domestic bills without requiring money from abroad. Furthermore, with a current account surplus, the entire economy can now survive without funding from abroad. As long as Greece had a primary budget and a current account deficit, its negotiating strength was the nuke. Using it would have brought down Greece itself as well. With surpluses in domestic and external accounts, the nuke has turned into a strong weapon.

Perhaps Greece should use this new weapon to introduce a new kind of conditionality. So far, conditionality has meant that Greece gets money in exchange for reform commitments. However, the tone has changed already. Where previously Greece was told to "do this, or else...", the German Finance Minister Schäuble, the old fox, now says in a remarkable Ekathimerini interview that the terms of any new program for Greece "would certainly be much lighter. Help from the European rescue mechanism can only come with conditionality. But this obligation for a commitment to reforms served one purpose only: to bring growth to Greece".

This is exactly the argument on which Greece could rest its own demand for a new kind of conditionality: "We accept your conditionality because, as you say, it is meant for growth, i. e. for our own good, but that will only work if you also arrange for new foreign direct investment in Greece". Put differently: just barely keeping Greece alive while saving the Euro is no longer good enough. There now have to be measures which help the patient to speedily recover. Or else...

By foreign direct investment, I do not mean financial investors who acquire Greek financial assets. Instead, I mean foreign companies which transfer money and know-how to Greece to create new economic activity/value in Greece, preferably stimulating new exports. That, in my opinion, is the only way to achieve an accelerated increase in employment.

Would that new conditionality mean asking too much of foreigners? Not at all! Foreigners wouldn't be asked to give anything; instead, they would be offered the opportunity to make good investments! Foreigners will immediately reply that there simply are no good investments in the Greek real economy as long as the economic framework remains as it is. Fine. So both, potential foreign investors and the Greek government, will have to agree on something which is satisfactory for both sides. A new Foreign Investment Law would be a suitable instrument to accomplish this.

In certain ways, the window of opportunity for a constructive approach to a new kind of conditionality as above may not be open forever. Given everything that SYRIZA has said so far, it would be almost reckless of them not to use the new weapon of balanced internal and external accounts should they come into power. But given everything SYRIZA has said so far, it would appear highly unlikely that they would use the new weapon in a constructive way.

Incidentally, I came across the Geographics Blog through John Mauldin's newsletter which, as always, is very interesting to read. This time, his analysis of "The Lions in Europe" seems particularly fitting the current situation.

Thursday, April 3, 2014

The Euro --- A Most Successful Currency!

When the Euro was introduced, it started with an exchange rate of 1,17 USD/EUR. The Euro initially lost value against the US dollar, hitting a low of 0,82 USD/EUR within two years. Soon thereafter, the Euro recovered, returning to and exceeding the initial value of 1,17 USD/EUR and never falling below it again. It peaked in 2008 at 1,60 USD/EUR. Nowadays, the Euro is trading close to 1,40 USD/EUR.

An American who converted all his dollar savings into Euros when the Euro was introduced would today be substantially better off than he is with his dollars: the currency appreciation on one hand and higher interest rates on the other.

Wikipedia states that 332 million Europeans use the Euro and another 210 million worldwide use currencies pegged to the Euro. The Euro is the world's second largest reserve currency.

So what's wrong with the Euro? Nothing really, as long as one believes that the primary purpose of the Euro was to be a strong international reserve currency.

However, take Greece as an example. Suppose the austerity of the last 5 years have made Greece 15% 'cheaper' within the Eurozone. Relative to third currencies, that effort was wiped out by the revaluation of the Euro by about 15% in the last 2 years.

What a deal! You go through all sorts of pains to become more competitive pricewise and due to factors totally beyond your control, that pain turns out to have been for nothing. Well, not really for nothing because Greece does much of its trade within the Eurozone but the rest of the world could potentially hold very much promise for the Greek economy and that potential has been damaged by the Euro.

Wednesday, April 2, 2014

Prof. Hans-Werner Sinn Agrees With Alexis Tsipras!

Prof. Sinn has published a new book titled "Gefangen im Euro". I have only read a brief summary of it but the following stands out.

Sinn proposes a European Debt Conference to relieve the periphery countries of some of the excessive debts they have. If memory serves well, that is also a major point of Alexis Tsipras. Perhaps the two should combine forces.

Sinn, of course, also makes numerous other proposals (e. g.: a mechanism for 'temporary exits' from the Eurozone; a European Confederation following the example of Switzerland; etc.) but for him to propose a European Debt Conferrence with the above-stated aim is something I would not have expected to come from Sinn.