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Monday, April 24, 2017

Thessaloniki's Private Equity Port

It was announced that 67% of the Thessaloniki Port Authority has been sold by the Hellenic Republic Asset Development Fund to a socalled 'German-led consortium'. The lead member of this consortium is "Deutsche Invest Equity Partners GmbH", joined by the French "Terminal Link SAS" and "Belterra Investments Ltd." of Cyprus.

The financials of the transaction sound rather attractive: the total value of the deal is said to be 1,1 BEUR, of which 232 MEUR are for the acquisition of the shares. The remainder consists of mandatory investments, license fees, dividends, etc.

Deutsche Invest is a Munich-based private equity fund. Its website doesn't reveal very much information. The internet information about Terminal Link is even less. And no information can be found about Belterra (other than the fact that it is domiciled in Cyprus).

The above consortium won the deal over two other bidders: the International Container Terminal Services, a Philippines-based powerhouse in the field of container ports and terminals worldwide, and P&O Steam Navigation Company, the 168-year old bastion of the British shipping industry which now belongs to Dubai Ports World, a giant in the industry.

Since I have no background information on this transaction, I can only comment on it based on the brief announcement about the transaction in the media.

Here is, on one hand, a Munich-based private equity firm whose website lists a total staff of 5, and two powerhouses in the industry on the other. That is in and by itself highly unusual. The Deutsche Invest consortium won the deal because it had submitted the highest bid. If that was the only criterion of the seller, the HRADF, it was a rather short-sighted criterion.

A private equity firm has only one strategic interest when making investments: to sell the investment to someone else within a foreseeable time frame, seldom more than 5 years. Obviously at a good profit. That's neither good or bad; it's the business model of a private equity firm. Everything that is done during the limited period of ownership, every decision which is taken has one single priority - to increase the value of the investment for resale. More often than not, the methods applied in making the bride presentable for the next wedding are somewhat questionable.

Not in my wildest imagination can I come up with any explanation as to why the HRADF would have chosen a private equity firm over seemingly interesting strategic investors. Sorry, I can come up with one: maximize short-term profit. The only problem with that is: when privatizing state assets, the maximization of short-term profits should be the least priority of all. Far greater priorities would be the strategic importance of the buyer, the potential for know-how transfer, etc.

I have written on many occasions that I consider Cosco, the investor in the Piraeus port, as the prototype of an ideal foreign investor for Greece. Based on what I know so far, The Deutsche Invest consortium seems to be the prototype of the foreign investor that Greece should stay away from.

ADDENDUM per April 25, 2017
According to an article in DER SPIEGEL, the person behind Belterra of Cyprus is Ivan Savvidis, the Greek-Russian dealmaker of questionable renown. That rounds out the picture quite nicely: a small private equity firm which wants to cash-out reasonably soon; a questionable Greek-Russian miniature oligarch who obviously aims at collateral benefits and two global players in the industry who wonder about the ways and means of the Greek government.

I have just learned that behind the French "Terminal Link SAS" is the French Group CMA CGM Group. That also seems to be a powerhouse in the industry so that I have to take some of my above criticism back. The question would still be: why does such an industry powerhouse need the services of a small Munich-based private equity firm and a questionable Greek-Russian dealmaker?

Friday, April 21, 2017

On One Hand... And On The Other...

My return to Greece after a 4-month absence coincided with 2 articles which nicely sum up what the 'Greek problem' is all about. The first one was the following comment in the Ekathimerini:

"Foreign investors and international markets are awaiting tangible results from Athens in order to be convinced that the country is, finally, turning a corner, and that something is moving after years of frustration. Their wait has been a long one and the economic pressure on the country has been unbearable. But the deals regarding the old airport, and the new one as well, could do the trick. However, if foreign investors are to be convinced of Athens’s commitment to change, it will need to make some bold decisions that will allow the country to circumvent, and essentially neutralize, the naysayers within the administration and within the state that are doing everything in their power to stand in the way of the growth Greece so desperately needs. The problem is that those opposed to progress are determined as ever to keep standing in the way."

And the second article was written by Bill Rhodes, the doyen of sovereign financial crises. I had written about Rhodes on several occasions in the early years of this blog when I lamented that no one was listening to his advice (had they listened, the crisis would have been resolved within 2-3 years, in my opinion). The gist of Rhodes' message is summarized in the following sentence:

"Debt relief really means softening the terms on interest rate payments on the outstanding debt as the Greeks have no requirement for many years to come to start repaying principle."

We have now observed a song-and-dance around the above two positions between Greece and its creditors for months and it is likely that it will continue for even more months. Bill Rhodes once said exasperatingly: "We are in a sense of gamemanship here and everything is being played out in the public rather than getting in a room, something that I was accustomed to for 25 years with so many debt restructurings around the world, and to say 'Let's get it done!'"

In case of doubt, one is well advised to take the advice of those who have the most experience and the best track record. Between the Eurogroup, the IMF and Bill Rhodes, there is only one party which has a good track record; an excellent one, for that matter! And that party is not the Eurogroup nor the IMF!

As a starting point, it would be helpful to do some public educating that there are various kinds of debt relief. The key available elements are: forgiveness of principal, extension of maturities and reduction of interest. Greece so far has had a bit of all but never in a truly consequential manner. And the big mistake is that many understand debt relief to be a forgiveness of principal. A forgiveness of principal of official debt is totally out of the question in a year with several important European elections.

And - a forgiveness of principal is really not necessary because principal debt only matters to the extent that it carries interest and has maturities for repayment. If, for example, interest is brought down to close to zero and if maturities are extended into the next century, debt assumes the character of equity.

So far, the IMF has taken a huge profit on its 'help for Greece' because its lending margins are in the area of 2-3% and, as a super senior lender, it faces no credit loss. With the Eurogroup, the situation is a bit different because they now have a large portion of their loans on zero interest and they certainly face the risk of credit loss sooner or later. Neither is the IMF's 'help for Greece' recognizable with their maturity structure because all their loans mature in the foreseeable future. The Eurogroup, on the other hand, has already extended some maturities substantially.

Perhaps it is wise to have the IMF in there with maturities in the foreseeable future because, that way, one always has some leverage over the borrower. However, there would have to be some explanation why the IMF is not lowering its interest rate to the lowest they have ever charged a country because, as they have stated, they have never had a country in as bad a shape as Greece.

The Eurogroup should restructure its maturities in such as manner that there are no maturities for at least 10 years. And on the interest side, they should reduce the rate to their funding cost and lock in as much of the rate for as much of time as possible. That would be some 'help for Greece' without really costing anything. As a final 'gift', one could offer the deferral of interest for, say, 5-10 years.

If Greece were a company with the benefit of bankruptcy laws, its creditors would already have given debt relief involving massive forgiveness of principal, significant extension of maturities and zero interest rates on large portions of the debt. All that because it would still have been a less costly affair than a bankruptcy.

The only reason why Greece has not gotten such debt relief is that there are no bankruptcy laws for countries. But that should not be a free ticket to get away with bloody murder.

Wednesday, March 29, 2017

The 120 BEUR Chuzpe

Handelsblatt writes about an internal paper at the German Finance Ministry with calculations that an interest deferral for Greece until 2040 would 'cost' Germany 120 BEUR. Well, they really don't say that it will 'cost' Germany 120 BEUR. Instead, they say that if Greece did not pay any interest until 2040, the total of such unpaid interest would amount to 120 BEUR by 2040. That 120 BEUR would simply be added to Greece's debt.

Or so they allegedly say because I haven't seen any original document.

When does Germany (or any other country) make or lose money on loans to Greece? In the absence of a haircut of principal, this can only be a function of interest rates.

A company keeps its books on an accrual basis. If the annual interest revenue is 365.000 to be paid on December 31, every single day, starting with January 1, will accrue interest revenue of 1.000. After 100 days, interest revenue of 100.000 will have been accrued. Since no cash payment has been received yet after only 100 days, the 100.000 accrued interest will be shown as a receivable. Should interest not be paid on December 31, the entire accrued interest of 365.000 (account receivable) will have to be written off, resulting in a full revenue loss of 365.000.

The state operates on a cash basis and not on an accrual basis. Whenever cash comes in, it is recorded as revenue. If no interest cash ever comes in, no revenue loss is recorded because the expected revenue was never shown as a receivable.

The German state has cash interest revenue from loans to Greece and cash interest expense on the funding of those loans. For all practical purposes, the German state currently has a funding cost of 0%. Put differently, if the German state lends to Greece at 3%, it is making a 3% true profit (revenues minus expenses). If, out of generosity and solidarity, the German state lowers its interest rate for Greece from 3% to 1%, it is not taking a loss of 2%. Instead, it reduces its profit from 3% to 1% but it still makes a profit!

If, instead of deferring interest, the German state would simply waive all interest on loans to Greece until 2040, and if the German state could indeed refinance itself at 0% for that period, that great gift to Greece would cost the German state exactly --- nothing!

A smart business deal is one where you offer something to your business partner which costs you nothing but which means a great deal for your business partner!

Thursday, March 23, 2017

Dijsselbloem's Dutch Flippancy

I joined a large American bank as a trainee back in 1972. After having gone for over a year through various training programs with fellow MBAs, I was sent into the field where business development was the job description. My first boss was a Dutchman. An unforgettable man. Simply Dutch. The ideal boss to take one down from the academic heights of MBA training programs to the rough field of selling.

His Dutch humor was great for those who could take it and terrible for those who were overly sensitive. The former laughed about the latter for being overly sensitive. The latter asked whether being sensitive wasn't part of responsible conduct.

MEP Ernest Urtasun (Spain): But you apologize for saying, or for implicitly saying, that the South has spent the money on women and alcohol in the last years? Would you apologize for that?

Jeroen Dijsselbloem (Dutch President of Eurogroup): No, certainly not!

My Dutch boss would have fired a guy who gave such a stupid response. And, frankly, I, too, thought - after listening to that exchange - that Dijsselbloem ought to tender his resignation the very next day. Absolutely irresponsible his insinuation! Some, like Nick Malkoutzis, took it with sarcasm by tweeting: "Dijsselbloem under fire for claiming Southern Eurozone spent money on ‘alcohol & women.’ The rest we just wasted."

At the same time, my Dutch boss might have said: "Wait a minute! Something is wrong, here. A Dutchman would never give such a stupid response. Let's look at the source!"

So I looked up the source. It was an interview with the FAZ where Dijsselbloem talked about solidarity and emphasized his well-known position that solidarity must be a two-way street if it's going to work. And then came the crucial sentence: „Ich kann nicht mein ganzes Geld für Schnaps und Frauen ausgeben und anschließend Sie um Ihre Unterstützung bitten" ("I cannot spent my whole money on liquor and women and subsequently ask you for help!"). He then added that this principle was valid in all situations, on a personal level, on a local or national level or on a European level, for that matter.

My Dutch boss might have made the same comment. Most of us would have understood what he meant and some of us might even have smiled at his directness. Those who felt completely insulted by the comment would sooner or later have discovered that they worked for the wrong bank.

The only difference between my Durch boss and the Dutch Dijsselbloem is that whatever happened between my Dutch boss and the rest of us was a private affair whereas Dijsselbloem spoke for the public record.

When speaking for the public record, a senior politician must know that being sensitive is a pre-condition for responsible action.

And there is another thing my Dutch boss might have said to Dijsselbloem: "I am embarrassed that you as a Dutch would fall for a trap which some Spanish politician laid out for you!"

Saturday, March 18, 2017

The Perennial Greek Question: ποιος φταίει?

Every language has expressions which are difficult, if not impossible, to translate into other languages. The German "Gemütlichkeit" would be one of them. The Greek "φιλότιμο" would be another one.

When I first came to the US as a young student and when I was still brushing up my English, I couldn't find a translation for a phrase which most young people in German-speaking countries grew up with at the time: "Du bist schuld!" Literally translated, that would have meant "You are guilty!" but short of sending people to the electric chair, Americans didn't use that phrase. Instead, they would say "It's your fault!". The English translation of Dostoyevsky's famous novel is "Crime and Punishment". The German translation is "Schuld und Sühne" (Guilt and Repentance).

To accuse someone of his or her fault is a perfectly proper assignment of responsibility because it can be rationally discussed. To accuse someone of guilt is something which can destroy a personality over time because there can never be a rational discussion about that.

This was a long way of introducing a comment by an anonymous reader which I reproduce below. Its focus is on ποιος φταίει except that the author is rather clear as to whose guilt it really is.

"A closer look at the Eurozone shows imbalances building up from the very beginning—with money rushing into the periphery countries in the misguided belief that eliminating exchange rate risk had somehow eliminated all risk.

This illustrates one of the key flaws in the construction of the Eurozone: It was based on the belief that if only government didn’t mess things up—if it kept deficits below 3% of GDP, debt below 60% of GDP, and inflation below 2% per annum—the market would ensure growth and stability. Those numbers, and the underlying ideas, had no basis in either theory or evidence. Ireland and Spain, two of the worst afflicted countries, actually had surpluses before the crisis. The crisis caused their deficits and debt, not the other way around.

The hope was that fiscal and monetary discipline would result in convergence, enabling the single-currency system to work even better. Instead, there has been divergence, with the rich countries getting richer and the poor getting poorer, and within countries, the rich getting richer and the poor getting poorer. But it was the very structure of the Eurozone that predictably led to this. The single market, for instance, made it easy for money to leave the banks of the weaker countries, forcing these banks to contract lending, weakening the weak further.

Economists assessing the prospects of a single currency arrangement some quarter century ago emphasized the importance of sufficient labor mobility and an adequately large common budget to buffer against shocks as well as sufficient economic similarity among the countries. But the euro took away two of the critical instruments for adjustment—the exchange and interest rates—and didn’t put anything in their place. There was no common deposit insurance, no common way of resolving problems in the banking sector, and no common unemployment insurance scheme.

Equally important, these early discussions ignored the importance of intellectual convergence: There is a huge gap in perceptions of what makes for good policies, especially between Germany and much of the rest of Europe. These differences are longstanding. Thus, the austerity policy—which Germany thought should have brought a quick return to growth—has failed miserably in virtually every country in which it has been tried. The consequences were predictable, and predicted by most serious economists around the world. So too, many of the particular structural reforms have actually weakened the countries on which they have been imposed, lowering growth and increasing their trade deficits.

So please get off this bandwagon that Greece and Greeks are responsible for their own failure because all evidence points to the exact opposite. The eurozone is failing miserably not Greece or the Greek people. What you are asking us to do in response to the crisis makes absolutely no sense to me. It only makes you(the austerity crowd) look better because you are responsible for the mess. And by you I mean the conservative part of Europe with its roots to monarchies and absolutism. You can't talk to the Greeks like you do because we are inherently free people; free of despotism and free of blind obedience for the benefit of the rulers. We don't like rulers in Greece; we are against ruling classes. O.k.?"

Well, Ok. But still: some form of a response ought to be permitted.

I observe that I have different answers to the above questions depending on the environment I am in. When I am in a 'Germanic' environment where everyone blames the Greeks for their terrible failure ("wasting our good tax payers' money"), I tend to argue like the anonymous commentator above. When I am in a Greek environment and when I get the victim's plea as above, or rather the assignment of guilt, I react differently.

There really isn't any specific point in the above comment which I could counterargue with substance. Yes, the Euro was an 'unfinished product' which was put into operation for political considerations far too soon. The EU itself, via the Delors Report of 1989, pointed that out. All the problems which the Euro later on ran into were spelled out in that report ("sudden stop", etc). One of the members of the Delors Commission (Karl Otto Pöhl, then president of the Bundesbank) later said: "When the report was formulated, I did not think that a monetary union would become reality in the foreseeable future. I thought perhaps sometime in the next hundred years. I thought it was improbable that other European countries would simply accept the model of the Bundesbank".

Ok, so we've settled that: the Euro was an unfinished product, some countries benefited from that and other countries suffered. And Greece suffered tremendously. And, in consequence, Greeks should rally in the call against the EU with the two most harmful words of the Greek language: εσύ φταις!

Such a call again the EU would appear even more justified when considering how much Greece had achieved without the EU in the half century prior to joining it:

"Greece’s average rate of growth for half a century (1929–1980) was 5.2 percent; during the same period Japan grew at only 4.9 percent. These numbers are more impressive if you take into consideration that the political situation in Greece during these years was anything but normal. From 1929 to 1936 the political situation was anomalous with coups, heated political strife, short-lived dictatorships, and a struggle to assimilate more than 1.5 million refugees from Asia Minor (about one-third of Greece’s population at the time). From 1936 to 1940 Greece had a rightist dictatorship with many similarities to the other European dictatorships of the time and during World War II (1940–1944). Greece was among the most devastated nations in terms of percentage of human casualties. Right after the end of the war a ferocious and devastating Civil War took place (in two stages: 1944 and 1946–1949) after an insurgency organized by the Communist Party. From 1949 to 1967 Greece offered a typical example of a paternalistic illiberal democracy, deficient in rule of law, and on April 21, 1967, a military junta took power and ruled Greece until July 1974, when Greece became a constitutional liberal democracy. The economy of Greece managed to grow despite wars, insurgencies, dictatorships, and a turbulent political life."

So that is quite a remarkable success story! Whoever interrupted or even halted it would deserve the blame of εσύ φταις! So let's read further on.

"Seven years after embracing constitutional democracy the nine (then) members of the European Community (EC) accepted Greece as its tenth member (even before Spain and Portugal). Why? It was mostly a political decision but it was also based on decades of economic growth, despite all the setbacks and obstacles. 

When Greece entered the EC, the country’s public debt stood at 28 percent of GDP; the budget deficit was less than 3 percent of GDP; and the unemployment rate was 2–3 percent.

But that was not the end of the story. Greece became a member of the European Community on January 1, 1981. Ten months later (October 18, 1981) the socialist party of Andreas Papandreou (PASOK) came to power with a radical statist and populist agenda, which included exiting the European Community. Of course nobody was so stupid as to fulfill such a promise. Greece, with PASOK in power, stayed in the EC but managed to change Greece’s political and economic climate in only a few years. 

Today’s crisis in Greece is mainly the result of PASOK's shortsighted policies, in two important respects: 

(a) PASOK's economic policies were catastrophic; they created a deadly mix of a bloated and inefficient welfare state with stifling intervention and overregulation of the private sector; and 

(b) The political legacy of PASOK was even more devastating in the long-term, since its political success transformed Greece’s conservative party (“New Democracy”) into a poor photocopy of PASOK. 

From 1981 to 2009 both parties mainly offered welfare populism, cronyism, statism, nepotism, protectionism, and paternalism. And so they remain. Today’s result is the outcome of a disastrous competition between the parties to offer patronage, welfare populism, and predatory statism to their constituencies."

So what is the answer to the question ποιος φταίει? I suppose like everything else in life: it depends on a combination of factors. Sometimes, it is more prudent to abdicate the search for the ultimate truth and focus on pragmatic solutions for a problem.

PS: the above quotes are taken from the paper "Greece as a precautionary tale of the welfare state" by Prof. Aristides Hatzis.

"Debt Trap Report" - Debt Restructuring Without Reforms Would Not Help!

"A debt restructuring by itself, without some deep reforms, would not help. In a few years’ time Greece would again be on the razor’s edge. Therefore Greece will have to continue with reforms in crucial sectors such as justice and combating corruption and tax evasion, and by improving state mechanism operation and governance. Only in this way will it ensure that it does not revert to a bankruptcy situation.”

Thus spoke Wolfgang Schäuble! Or so one might think. Instead, it was Panagiotis Liargovas, head of the Greek Parliamentary Budget Office who presented the "Debt Trap Report".

One really doesn't have to be an economist (or a genius, or both) to understand the correctness of this position. A simple look at Greece's external accounts over the last 3-4 decades will do.

The Greek economy has historically been rather dependent on capital inflows from abroad. Until the early 1980s, those capital inflows did not represent a great danger because (a) their overall size was limited by credit risk considerations on the part of investors; (b) there were sizeable capital inflows in the form of investment instead of debt (Marshall Plan, etc.) and (c) remittances by Greeks working abroad formed a major portion of such capital inflows. Also, a reasonable share of those capital inflows went into investment instead of only consumption.

The last 3 decades changed all of that: (a) credit risk considerations on the part of investors (or rather: lenders) declined once Greece joined the EU and virtually disappeared after Greece became a member of the Eurozone, thus leading to a tsunami of capital inflows from abroad; (b) investments ceased to be a major pillar of such capital inflows; and (c) remittances by Greeks working abroad virtually disappeared. Finally, the capital inflows from abroad became almost exclusively debt and they went primarily into consumption instead of investment.

The Greek economy had become a turntable for money: money would flow into the country in the form of debt, it would be recycled within the country to generate unsustainable growth and it would leave the country for imports and capital flight (but the debt stayed on the books). It was like a hot air balloon which would collapse once the hot air supply ceased.

If all of Greece's debt were forgiven but the economy's structure would not change, all that would happen is that the turntable for money would be set in motion again (and the debt would increase again without any sustainable benefit). In order for the turntable for money to become a machinery for domestic wealth generation, more of the necessary capital inflows would have to come in the form of investment and much more of it would have to go into the productive sector of the economy. Young Greeks should not look for jobs in cafés but in producers of tradable goods, instead. And there would have to be job opportunities in that sector.

One doesn't have to make a much greater case than that in order to show that the structure of the Greek economy needs to be reformed before any more foreign debt makes sense.

Monday, March 13, 2017

803 Million USD Unaccounted For?

The website Refugees Deeply published an article titled: "Refugee Talks: Lessons From the Refugee Response in Greece". The bottom line is that Greece received 803 MUSD in 2015-16 as humanitarian support for handling the refugee crisis, an amount which the authors call "the most expensive humanitarian response in history". That's the good news.

The bad news is that a senior EU official, whose name is wisely not revealed, estimates that about 70% of that amount has been wasted.

People who are accustomed to dealing with numbers can only be flabbergasted at this revelation. When 803 MUSD flow to Greece, there are those who send the money and those who receive it. One would expect that the senders would keep some sort of records about who they sent the money to. One would further suspect that the senders would periodically ask the recipients what they did with the money. In fact, it would only be reasonable for the senders to require the recipients to maintain some form of bookkeeping.

For 654 MUSD out of the total 803 MUSD, the sender was the EU itself. Everything the EU can send is ultimately tax payers' money. If the EU could not provide a reckoning as to what happened to that tax payers' money, it would reflect a high degree of irresponsibility.

The remaining 149 MUSD came from other sources. To the extent that those other sources were not ultimately tax payers' money (some were undoubtedly donations), an accounting of those funds is not necessarily mandatory as long as those other sources comply with the rules and regulations which they are subject to.

Regarding the recipients, only 184 MUSD went directly to the Greek government. One could reasonably expect that the Greek government can report EXACTLY what that money was spent on. According to the authors, that has not been done as yet.

The much larger portion of the 803 MEUR, namely 619 MUSD went through multiple other channels. The authors do not reveal under what conditions those other channels received those funds or whether they complied with any conditions. The only thing which seems certain is that no one really knows exactly where the money went.

The refugees now stranded in Greece will find it interesting to read that 14.888 USD were spent per capita on their behalf. A family of four might come to the conclusion that 59.552 USD (14.888 x 4) would have provided them an excellent base for maintaining a decent living standard during their refugee status. In fact, they might conclude that it was a tremendous humanitarian effort.

Which had been the original idea of the 803 MUSD.

Friday, March 10, 2017

Greek Parties: Adjust Your Programs To What Voters Really Want!

A frequent experience with management consultants is that their beautifully phrased ideas and proposals, all in PowerPoint format, don't work so well during implementation. Many times the reaction to that is to involve the consultants even more, based on the belief that, eventually, their beautifully phrased ideas and proposals simply had to show results.

Every once in a while a common sense manager asks a different kind of question, namely: "If we want to increase efficiency in, say, Operating Division A, why don't we ask the people concerned how they think we could accomplish that?" More often than not, the result of such common sense is miraculous.

The non-profit think tank Dianeosis made a survery where they tried to find out "What Greeks believe". The results are astonishing! Here are some excerpts:

"In short, this part of the survey tells us that Greeks would like to see a smaller public sector and lower taxes – even if this means a reduction in social benefits – with growth driven by foreign investments and exports, rather than the spending policies of a 'populist government'. Globalization, which three in five see as a threat to Greece on an abstract level, is also regarded as the only way to return to prosperity."

"The conclusion that can be drawn from the part of the survey concerning the crisis is a sense of pragmatism and acknowledgment of a new reality. For example, 62.1 percent of respondents admitted that 'our own failures' are largely responsible for the crisis, while just 9.7 percent put it down to foreign influences. A large percentage (76 percent) put the onus on society at large, which had become accustomed to living beyond its means, while a smaller percentage blamed the global financial system (59.4 percent compared with 77.3 percent in April 2015)."

"According to 62.4 percent of respondents, Greece needs a smaller public sector. Just 21.8 percent believe that a rebound will come from raising state salaries and pensions, against 73.2 percent who said that the government needs to provide incentives to attract investment and boost exports as a means of economic recovery."

"Finally, 84.4 percent of Greeks have a positive view of foreign investments, with 92.1 percent saying they create jobs and 88.8 percent that they introduce new technologies."

In an age where populism is on the rise, one wonders why there wouldn't be a populist Greek party which would immediately jump on the above feelings of Greeks and amend their party program accordingly. If the above survey was an accurate reflection of what Greeks really believe, that party ought to win the next election in a big way.

Sunday, February 26, 2017

Small Greek Brewer Against Heineken - David Vs. Goliath!

I first heard about Demetri Politopoulos back in January 2011 when the NYT published an article about his (ad)venture as a Greek-American entrepreneur in Greece. At that time I felt very sorry for Mr. Politopoulos because it seemed that his wonderful intentions to make a contribution to his home country had run against the realities of the Greek market place. He had already lost several million dollars of his own money and it seemed only a question of time until he would go out of business.

So much more surprised and happy was I when I read a few months ago that not only had his company, a brewery, made it but it was also very successful by branching out into non-alcoholic beverages. 'Tuvunu' was one of those new brands which made it even into the FT.

Luck now finally seems to have settled on the side of Demetri Politopoulos. Following the ruling of a Greek court that Heineken had abused its dominant market position in Greece, Macedonian Thrace Brewery (Politopoulos' company) has now sued Heineken for 100 MEUR damages which they allegedly suffered from Heineken's dominant market position.

I don't have any details on the law suit and whether Politopoulos has good chances of getting some compensation but this certainly has all the ingredients of a David vs. Goliath tale. One can only wish that David will win (again).

Friday, February 24, 2017

Bad News On The Current Account

Below are Greece's current account statistics for 2016, compared with the previous year. It should be noted that the source of these statistics is the Bank of Greece. ELSTAT has not published its statistics yet and their numbers are always a bit different from those of the Bank of Greece.

(in BEUR)

Current Account
Revenue from abroad
Exports 24,5 24,8
Services (e. g. tourism) 25,0 27,9
Other income 6,7 7,5
Current transfers 1,8 1,9
Total revenue from abroad 58,0 62,1
Expenses abroad
Imports 41,1 42,0
Services (e. g. tourism) 9,7 11,0
Other expense (e. g. interest) 5,9 6,5
Current transfers 2,4 2,4
Total expenses abroad 59,1 61,9
Net foreign deficit (current account) -1,1 0,2

Trade balance -16,6 -17,2
Services balance 15,3 16,9
Other balance 0,8 1,0
Current transfer balance -0,6 -0,5
Net foreign deficit (current account) -1,1 0,2

Exports "Other Goods" 18,2 17,9
Imports "Other Goods" 31,8 30,5
Balance of goods excluding oil and ships -13,6 -12,6

By and large, there was deterioration across the board. The overall balance was a positive 206 MEUR in 2015 and a negative 1,1 BEUR in 2016. A deterioration of 1,3 BEUR is quite significant!

The balance in services declined from 16,9 BEUR to 15,3 BEUR and, ideally, this would have been offset by a reduction in the deficit from trade. That trade balance was indeed reduced from a negative 16,9 BEUR to a negative 15,3 BEUR but that was not enough. When only looking at "other goods" (i. e. excluding oil and ships), which is really the key figure for Greece's foreign trade, there is a significant deterioration.

What does a deficit in the current account mean?

First of all, it means that the country had to import capital in the amount of the current account deficit, i. e. 1,1 BEUR. Put differently: someone within Greece (the state, the banks of someone else) had to import capital to the tune of 1,1 BEUR (net). Since hardly anyone makes voluntary loans to Greece these days and since there was no significant foreign direct investment (in fact, net FDI declined!), it must have been the Troika which put more money into Greece than it took out by way of principal and interest payments.

When revenues from abroad fall short of expenses abroad, there has to be new borrowing from abroad (in the absence of FDI). Greece could raise the necessary funding abroad to finance the shortfall in the current account thanks to being a member of the Eurozone. Otherwise, Greece would have had to cut foreign expenses (such as imports) by 1,1 BEUR.

Another way of looking at the current account deficit is this: a current account deficit is nothing other than the transfer of domestic wealth into foreign ownership. During 2016, 1,1 BEUR of domestic Greek assets were transferred into foreign ownership.

Monday, February 20, 2017

Favorite Destinations Of Emigrating Greeks

Now this is an interesting chart! It shows the number of Greeks who moved abroad during the crisis (2010-16) and to which countries they moved. The total number of 355.000 appears low compared to what has been reported elsewhere but the chart does state that data from France, Sweden, Italy and many other countries are not included.

Still, the four clear champions are: Germany (by far!), UK, Australia and Cyprus.

This Time It May Be Different, After All!

It has literally become routine since 2010: negotiations of new programs; followed by reviews; each review accompanied by high drama with anticipation of a possible Armageddon; and finally - agreement for the next several months. Against this background, the present phase of uncertainty comes across as déjà-vu all over again.

Perhaps it's because President Trump is now capturing all the headlines, perhaps it is for other reasons but somehow there is no real excitement this time around. Yes, various papers have tried to incite panic by publishing panicky articles with panicky headlines but one doesn't sense the nervousness as on previous occasions. Even when Greek depositors withdraw 2,5 BEUR in less than 2 months (and that in times of capital controls!), the pulse remains at rather regular levels.

Could it be that nobody really cares any more? Could it be that even the Greek population does not care any more? The threat of Grexit has been posed to them so many times that perhaps they are now feeling "Ok, get it over with! It can't get much worse!" Finance Minister Schäuble doesn't say much but for some reason no one has forgotten his proposal that Greece should exit the Eurozone, albeit temporarily, with a satisfactory alimony in the form of a haircut.

My sixth sense tells that that this time it may be different, after all. Everyone warns that the longer things draw out, the greater the risk that an 'accident' may happen along the way. I have no idea what they have in mind by way of 'accident' because Greece seems to have enough cash to meet its obligations for quite some time, at least until July. But, for sure, the longer things draw out, the more the energy to really make it one more time will decline. At some point, déjà-vu all over again may just not be déjà-vu all over again.

Has the likelihood that the Greek economy will ever make a turn-around within the Eurozone increased in recent years? I do not have that impression. As a champion of the idea that Greece should stay in the Eurozone (back in 2010/11) because it would be the lesser of 2 evils, I now have to admit that the social costs involved with that over the last 6 years are so high that I have trouble seeing that they would have been equally high (not to mention even higher) if Greece had exited the Eurozone back in 2010.

Bottom line: if PM Tsipras is prepared to sign on the dotted line, everything will probably fall into place and, before long, we will be talking about a 4th program. If, however, sand gets into the machine and negotiations become as difficult as back in 2015, I think there is a high probability that Greece will end the year 2017 with a new local currency.

Nobody seems to be fighting for Greece to remain in the Eurozone any more, not even the Greeks.

Thursday, February 9, 2017

The Bitch Is Back!

Suddenly, the Greek crisis is back. Or so all the media have reported in recent days. In actual fact, the Greek crisis is neither back nor has it ever been gone - it's just there!

The question is only whether the crisis is dormant or coming back to life. It is dormant when there are no 'decision points' (no major payments due, no major deadlines to be kept, etc.). When a new tranche has just been disbursed with a new review date set in 6 months, one can rest assured that there will be no Greek crisis until 6 months later. When there are decision points all the time, there will be a Greek crisis all the time. We are now, once again, approaching decision points. And the bitch is back.

As always, the Greek Analyst nails it above. I think even if all of Greece's debt were forgiven, the problems would continue. They wouldn't be felt for a number of years because, starting from zero, Greece could again start borrowing heavily. But that wouldn't change the process: as soon as a decision point comes up, the crisis returns.

Marcus Walker of the WSJ put together a coherent thread about the timeline of the Greek crisis where he traces Greece's problems to the fiscal mismanagement from 2002-09. Not quite! I believe that today's Greek crisis has its origins back in the early 1980s when two tectonic movements reinforced each other: the spendthrift policies of the PASOK/Papandreou (father) government and the financial benefits of having joined the EU. This is not to blame PASOK alone. On the contrary, PASOK started it and when ND came to power, they tried to be a cheap copy of PASOK.

Until there is a general acceptance of this development on the part of the Greek government and the Greek people, Greece will be in crisis for the simple reason that one only changes behavior if one realizes that one has done wrong.

As long as those who uncover and correct scandals are sued by the Greek government while those who caused the scandals walk free, the Greek crisis will not be 'owned' by Greeks.

Footnote: Interestingly, in most of the private conversations I have with Greek friends there is agreement on the above.

Tuesday, February 7, 2017

The Challenge Of Understanding Greek Statistics

Only recently had I commented on the most favorable preliminary state budget figures for 2016. I had reported that the "state" recorded a primary surplus of 4,4 BEUR in 2016, compared with 2,2 BEUR in the year before and a target for the year of 2,0 BEUR. By all standards, a rather sensational result.

What matters in the final analysis, however, is the "general government" of which the "state" is the largest component (other components: "state, local governments", "social security funds", "other non-consolidated items"). I thus concluded that, for 2016, the "general government" would look even better than the "state".

Yes, but with a question! Below is the table for the "general government" in P+L format:

The message is short: revenues (mostly taxes) went up quite a bit and expenses went up a bit less so that there was a significant overall improvement over the previous year. In 2015, the primary surplus was 3.993 BEUR (after adding 5.690 BEUR interest expense back into the overall deficit of minus 1.697 BEUR).

In 2016, the primary surplus was 5.007 BEUR! (after adding 5.260 BEUR interest expense back into the overall deficit of minus 253 MEUR).

That would be all fine and dandy if the same figures always remained the same and if they all added up. Half of the confidence of an analyst derives from the fact that the same figures are always the same and that they always add up.

The primary surplus of the "state" in the preliminary state budget figures was 4,4 BEUR (see here). When one looks at the break-down of the general government figures, on the other hand, the primary surplus of the "state" is only 701 MEUR. Perhaps - and most probably - one "state" is not the same as the other "state" but it would be good to be explained the difference.

My overall prediction that the "general government" would turn out even better than the "state" proved correct. I doubt that the major discrepancies described above represent incorrect figures because, after all, all figures come from the same source (Ministry of Finance). My guess is that the discrepancies are a matter of categorization and presentation, which often happens, but it would be useful to be explained what they are.

Friday, February 3, 2017

Donald Trump - Saviour Of The Eurozone?

“I had in a previous career a diplomatic post where I helped bring down the Soviet Union. So maybe there’s another union that needs a little taming" - so mused Ted Malloch recently. He is allegedly President Trump's preferred choice for US Ambassador to the EU.

The response came from the EU parliament in a letter to the EU Commission: “The prospective nominee expressed his ambition to ‘tame the block like he brought down the Soviet Union’, eloquently supported dissolution of the European Union and explicitly bet in the demise of the currency within months".

Malloch's views seem to be current thinking in Washington because President Trump himself had recently said similar things in an extensive interview.

This could be terrible news for the Eurozone. Or - it could be excellent news!

Whether it is a family, a state, a currency union or a political union - they may internally be torn by infights but as soon as there is a threat from the outside, they typically close the ranks and become unified. What if the new attitude out of Washington brought the EU elites to senses and made them realize that they have to take some real decisions if they want the Eurozone to survive?

And if they hadn't wanted the Eurozone to survive before, after the musings of President Trump and Ted Malloch, they should now certainly feel fired up! If for notother reason than to show the bullies in Washington that Europe has teeth, too.

Wednesday, February 1, 2017

A Debate About Germany's "Exorbitant Privilege"

Exactly one month ago, I published the article "Will Donald Trump brand Germany as a currency manipulator?" As we know since yesterday - the answer is a resounding YES!

It was not (yet) the President himself who did it. Instead, his new head of the National Trade Council, Peter Navarro, launched the missile which will severely impact European economies in an interview with the FT. The Guardian and The Telegraph also reported on the issue.

Navarro's argument is as simple as it is correct: Germany enjoys and 'exorbitant privilege' as a member of the Eurozone: (a) thanks to the weak countries, the EUR is much cheaper for Germany than a separate DM would be, thus making German exports easier; (b) thanks to the weak countries, the EUR, which is too cheap for Germany by virtue of its structure, has devalued 30-40% in recent years against the USD, making the benefit for Germany even greater; and (c) thanks to the weak countries, capital has flowed into Germany like a tsunami, allowing the German state to save billions in interest expense every year.

Where Navarro is wrong is when he blames Germany for manipulating all of this. In actual fact, Germany's 'exorbitant privilege' derives from the structure of the Eurozone and not really from actions or decisions on the part of the German government. Thus, it would be unfair to blame Germany for it. What Germany can indeed be criticized for is that it doesn't give the Eurozone much in exchange for enjoying that 'exorbitant privilege'.

It also needs to be pointed out that Germany is not the only beneficiary of the structure of the Eurozone. One could probably generalize and say that the Euro is too cheap for all of Northern Europe and too expensive for all of Southern Europe.

Responses from the European side to Navarro's statements have been rather weak so far. Chancellor Merkel issued some commonplaces about the ECB's acting independently. Other German commentators are bluntly saying that if only all the other countries had behaved like Germany, ALL countries would share the same 'exorbitant privilege' (which is equivalent to adding arrogance to ignorance). There have also been musings out of Brussels that Navarro does not understand the Euro. When this turns into real negotiations, the European side will have to be much better equipped with arguments than thay are now.

Progressive European economists and commentators (from Yanis Varoufakis on down) have made Navarro's point for years now. It will be very interesting to observe whether they hold on to their views now that the Trump administration is also making their point.

Thursday, January 26, 2017

Another Boost For Foreign Investment?

There has been extensive discussion in this blog about foreign investment. Of late, the discussion has focused on the question whether foreign investment is a rip-off of the country or a benefit for it. One case in point has been the Trainose deal where - in the opinion of some - immense value of the Greek nation was given away to an Italian investor for a song, i. e for 54 MEUR.

The Ekathimerini now reports that this give-away deal may not come to fruition after all. Allegedly, the Greek government has neglected to amend to ministerial decision for the transaction in accordance with the agreement between the two parties upon signing.

If that is true, it certainly brings to mind the not too distant episode where the government tried to pull a fast one on Cosco only to be caught in the act by the Chinese investor.

"How can Greece attract foreign investors?" is a question very frequently asked. The much easier to be answered question is "How to scare foreign investors away?"

Tuesday, January 24, 2017

Why A Current Account Deficit Again?

The improvement in Greece's current account over the last years has got to be one of the great success stories amid the financial catastrophe. The current account deficit had gotten as huge as 36 BEUR in 2008. A staggering figure both in absolute amounts as well as in relation to GDP (about 15%). Anyone predicting at the time that Greece would succeed in bringing the current account into balance would have been considered a dreamer.

However, and literally on a straight line, Greece reduced the current account deficit from year to year only to reach a surplus of 206 MEUR in 2015! A smashing success in terms of numbers. Not in terms of economic effects because the improvements came mostly via curtailing imports instead of expanding exports.

And now it looks very likely that the current account may again have returned to deficit in 2016. The final figures are not out yet but by end of November 2016, there was already a deficit of 171 MEUR (a surplus of 990 MEUR a year earlier) and December is typically a negative month. Thus, 2016 will in all likelihood see a current account deficit between 500-1.000 MEUR.

What is happening here?

It seems prudent to wait with a detailed analysis until the figures for the full year are out. Based on the figures for 11 months, a few observations can be made: (1) it seems that tourism, while a record year in terms of number of visitors, was not such a record year in terms of net receipts; (2) it seems that regular exports (excluding oil and shipping) declined whereas regular imports increased; and (3) other income from abroad which is not specifically defined in the preliminary figures seems to have declined significantly, too.

But those are only the answers. What are the reasons for these declines?

Skeptics about Greece's enormous current account improvement have always argued that it came about by way of killing demand for foreign products and not as a result of structural changes (import substitution, export promotion). The warning was that the current account would quickly return to deficit once the economy stabilized because demand for foreign products would then return.

Could it be that Greece's return to a current account deficit in 2016 signals that the economy (the official one, the black one or both) has stabilized in 2016? That perhaps demand returned and was directed at foreign products?

Friday, January 20, 2017

Primary Surplus 2016: Ministry of Finance vs. Bank of Greece

If the numbers below are too small to read, one has to follow this link.

The above is the preliminary budget execution bulletin for 2016, as published by the Ministry of Finance. Whenever there is a table with many numbers, the first questions are: Where is the bottom line? Where are the numbers that matter?

The bottom line is the second line from the bottom where it says "State Budget Primary Balance". One has to hasten to add that this is NOT the (in)famous "primary balance" which is always cause for contestation between Greece and its creditors. It is "only" the primary balance of the "state", not of the "general government". The figures for the general government have not yet been published (they include, in addition to the state, local governments, social security funds and other non-consolidated items). For 2016, it can be expected that the "general government" will look even better than the "state" alone.

The bottom line says that the "state" recorded a primary surplus of 4,4 BEUR in 2016. In the previous year, in 2015, the equivalent number was 2,2 BEUR. The target for 2016 had been a primary surplus of 2,0 BEUR.

In short: the Greek state doubled its primary surplus from 2015 to 2016! And it exceeded the target by 1,2 BEUR!

Assuming a GDP of about 180 BEUR, the state's primary surplus represented 2,4% in 2016. The percentage for the general government can be expected to be even higher.

All of this would be fine and dandy if the Bank of Greece had not come out with the following press release on January 19, 2017 (i. e. yesterday):

"In January-December 2016, the central government cash balance recorded a deficit of €3,569 million, compared to a deficit of €3,359 million in the same period in 2015. During this period, ordinary budget revenue amounted to €48,941 million, compared to €45,607 million in the corresponding period of last year. Revenue of €43 million regarding Securities Markets Programme (SMP) income transfers from the Bank of Greece is excluded. Ordinary budget expenditure, including expenditure of about €3,850 million for the repayment of arrears, amounted to €51,143 million, from €48,043 million in January-December 2015."

Here is the table published by the Bank of Greece which shows a primary surplus in the state budget for 2016 of 1.948 MEUR, compared with a comparative figure for 2015 of 3.490 MEUR.

I am sure that there are convincing explanations why there is, in actual fact, no discrepancy between the figures, only between reporting formats but it would certainly be helpful to be informed about what these discrepancies/explanations are.

Friday, January 13, 2017

Foreign Investment - A Long Shot?

This rather pessimistic commentary by Alexis Papachelas of the Ekathimerini concludes with the following paragraph:

"Greece has become cheap, it has potential and a capable manpower; but in order to lure investors it will have to implement reforms and inspire confidence, and it will need a government that speaks the same language as investors."

There, in only one sentence, everything is said! I would only add: Greece also needs a society which sees the positive aspects of foreign investments.

The economic ingredients all speak in favor of Greece: yes, Greece has become rather cheap and, of course, Greece has a capable manpower and potential. So why are foreign investors not lining up to put their money into the Greek economy, into real investments instead of only financial speculations?

To blame it all on "those old-school leftists, revolting against every privatization and investment plan, by whom the Prime Minister is surrounded" is simplifying things. Yes, the PM's aides are "constantly trying to douse the flames that continue to erupt here and there. Perhaps it is even against the PM's political DNA, which makes him feel more at home in Havana or when promising handouts to the electorate." But even if there were a center-right government tomorrow, I am not sure that things would change radically overnight. Yes, there would be more visits and photo-op's with visiting potential foreign investors and a few of them might even put their money into projects which promise good short-term returns.

But will those potential investors really see Greece as a great place to do business in the longer term? Some of them, like Cosco, most certainly will because Greece offers them a long-term perspective (entry to Europe via the South-East) which is promising enough to outweigh any short-term hurdles and/or disappointments. But how about the regular non-European foreign investor who is screening European countries with a view of determining the best place to build his new plant? How about the European foreign investor who wants to take advantage of Greece's cheap labor, its capable manpower and its potential?

I have no doubt that the country's elites, political and otherwise, when visited by potential foreign investors, will express great interest, if not even enthusiasm about a potential investment. The question I have, however, is whether those elites really represent the general feelings among Greek society. Is Greek society really convinced that foreign investments can be a very good thing for the country? Or is there a general view that foreign investors, after all, are here for profit and the profit which they will take abroad is profit which, without them, would stay in Greece?

I think only real results would change any prejudices among Greek society, if at all. Only if there is a significant number of foreign investments which truly show what long term benefits they are for the Greek economy and for the prosperity of Greeks, only then is Greek society likely to give up any prejudices which there may be.

It's really a matter of education. As long as society feels that a most valuable train company is given away to Italians for a song; that the most profitable regional airports are given away to the Germans for nothing; in short: that this is a sell-out of valuable Greek assets to greedy foreigners; well, as long as that is the general feeling in society, foreign investment will never flourish.

Thursday, January 5, 2017

State Investment In Banks: Money Gone Up In Smoke?

My neighbor Yiannis, the theoretical Marxist, is furious. He has found out that most, if not all, of the 25 BEUR which the Greek state borrowed offshore in order to invest in Greek banks as part of the bank recapitalizations may turn out to be worthless. Let me clarify: only the investment may turn out to be worthless; the loans will continue to remain 100% obligations on the part of the Greek state.

Yiannis asks me two very simple questions: Where did that money go? And, as he suspects, if the money simply went up in smoke, why should Greek tax payers pay for it?

No money ever goes up in smoke; it only changes owners. But who are the new owners of that 25 BEUR which the Greek state is no longer owner of? That's where it gets a bit tricky.

The Greek state invested in banks, the value of which went towards zero and, in consequence, the value of the Greek state's investment also went towards zero. But who got that money?

Nobody got that money! The answer is that some parties who still have money today would no longer have that money if the Greek state had not invested the 25 BEUR. That's where the money is! Had the Greek state not invested the 25 BEUR, the 4 large Greek banks (and others) would have gone bankrupt and the creditors of those banks (bondholders, savers) would have lost a lot of money (in sum certainly more than the 25 BEUR which the state lost). Not to mention the collateral damage involved when the largest banks go bankrupt.

So I told Yiannis that he himself was one of the beneficiaries. Yes, as a tax payer he is now responsible for paying off that 25 BEUR in debt but, in exchange, the value of all his bank deposits remains in place.

Yiannis said he had no bank deposits. I told him he was out of luck.