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Sunday, June 25, 2017

Greek Mytilineos Group A Better Risk Than Greece?

The announcement that the Mytilineos Group successfully placed a 300 MEUR 5-year bond at a 3,1% yield caught my attention for a number of reasons.

For starters, Mytilineos' yield of 3,1% is substantially below the current yield on Greek sovereign bonds in the secondary market (5%+). That is the first time in my experience that I see a national borrower issuing debt in international markets at a lower yield than that of the sovereign. One of the general rules about country lending which I had learned over the years was that no national borrower, private or public, could raise debt at lower yields than the sovereign. The reason for that is the so-called 'country risk'. Country risk is the sum of many components, one of which is that within the national borders, it is the national jurisdiction which counts. Theoretically, a sovereign could any time of the day declare a moratorium on all foreign payments. If that happened, even a AAA-rated borrower in that country, flush with liquidity, could not service his foreign debt.

After browsing Mytilineos' website (the first time ever; I had not been familiar with this group), I saw that this group is internationally diverse with operations in several foreign countries. That could be part of the explanation. If the bond is secured by foreign assets or foreign revenues or whatever else is outside the jurisdiction of Greece, that could explain the below-sovereign yield. But then a couple of other observations came up (which I have to hedge by emphasizing that they are based on a very cursory review only and without any other knowledge about the Mytilineos Group).

This is not a large group by international standards with group sales just below 1,3 BEUR. Certainly not the kind of group which one could expect to be an important player in international capital markets attracting the very best conditions. A cursory glance at the group's P+L and balance sheet suggests the following:

* the most obvious financial strengths of the group are (a) very high cash flows (roughly 20% of sales); (b) a rather decent profitability (ROS of 5%+); and (c) almost 200 MEUR in cash on hand.
* with current assets exceeding current liabilities, the group's liquidity would appear fine.
* with equity representing about 40% of total assets, the balance sheet structure would appear to be stable.

However, there are some items which, at first glance and in the absence of more information about the group, could be considered 'scary':

* consolidated total assets include (a) 209 MEUR goodwill; (b) 243 MEUR intangible assets; and (c) 257 MEUR in own stock, or a combined total of 709 MEUR. This means that about 60% of the group's equity of 1.284 MEUR are invested in what cynical credit risk officers would call 'hot-air-assets'.
* the group has almost 800 MEUR in trade and other receivables. That reflects extremely unfavorable trading terms and possibly includes substantial risk.
* total group debt of 650 MEUR appears rather high even for a capital intensive industry.

In summary, the 3,1% yield raises more questions in my mind than it provides answers. Obviously, the immediate reaction is that the low yield (for Greek risk) is due to the group's outstanding creditworthiness and reflects investors' belief that Greece as a country is on the rebound.

Or it could be, as mentioned at the outset, that the bond is secured with foreign revenues or assets.

Or - one could be a bit suspicious. A very important element is not known in this matter, namely: who purchased the 300 MEUR bonds? Suppose it were the Mytilineos family itself. 3,1% on 300 MEUR is close to 10 MEUR per year. If the Mytilineos family had purchased these bonds, they would have arranged for an annual transfer out of Greece of close to 10 MEUR, and that in the presence of capital controls which would normally impede such a thing. Shamed be he who thinks such a thing!

Wednesday, June 21, 2017

A New Narrative For Greece. Again?

The article from the Ekathimerini about building a fresh narrative for Greece made me wonder what the old narrative was/is. Since I couldn't remember any, I thought what kind of a narrative I would like to see. These are some of the thoughts which came to mind.

The first question I asked myself was what exactly is it that I would like to see achieved? And here is the answer I came up with: "We will seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

As I pondered this statement, my first reaction was that it basically says everything there is to say. But, of course: stating a goal alone will not do the trick. There has to be a discussion about how this goal can be achieved.

"We will create an obsession with exports!" This proclamation will have to be heard in all walls and halls of Greece. What is it that we could possibly export? Where do we have comparative advantages? Where would be good export markets? How can we move our products up the value chain before they leave Greece? How can we get assistance in pursuing this objective? And why, exactly, should we do all that? Well, because through exports we achieve financial inflows which we can then use to pay for imports, i. e. to increase our living standard. Not to mention the fact that many new jobs will be created.

"We will create an obsession with import substitution!" Now why would we want to do that? Because with imports, all the jobs along the production chain (product development, manufacturing, marketing, selling) are in other countries. We want to 'steal' those jobs from other countries by no longer importing products which could just as well be produced in Greece. Questions are: Which products which we are importing now could be just as well produced in Greece? Can we get any foreign manufacturers to manufacture in Greece? Where should we import from? (presumably from those countries which can reciprocate in one way or another). Import substitution is a job creation program!

"We will create an obsession with tourism!" Tourism is actually another form of exports and through tourism we achieve financial inflows which we can then use to pay for imports, i. e. to increase our living standard. We are first class in the luxury segment but in the rest of the industry we leave quite a bit of money on the table. Either because we have cheap tourists from cheap countries or because rich tourists from rich countries pay cheap all-inclusive prices. We will put the focus on improving quality. Quality of the infrastructure and quality of the service.

"We will create an obsession with foreign investment!" Every Greek will have to understand that there are only 3 options to get out of our economic crisis: foreign investment, foreign investment and foreign investment, again! We will pursue very aggressively foreign investors who take a long-term view with their investments. Who plan to add value to the Greece. And we will de-emphasize any kind of financial investors because such investors are principally interested in short-term financial gain. The key question will always be: Does the foreign investor promise know-how transfer, further investment and expansion. Put differently: Does the foreign investor accomplish something which we could not accomplish by ourselves. Or: Does the foreign investor contribute to the increase in exports, in import substitution and in improving the tourism infrastructure and quality of service?

And, finally -

"We will turn the Greek state into an efficient administration with a strong public service ethos!" Meritocracy will the the buzzword reverberating in the halls and walls of our public administration buildings! In the future, it will be very difficult to get a job in the public sector because the required qualifications will be very high. Patronage or nepotism will no longer be qualifications!

Our guiding policy will be that anything which hinders the above described measures or even makes them impossible will be reformed with great speed. We invite our critics to remind us forcefully should we deviate from this policy.

Friday, June 9, 2017

Debt Relief For Greece - A New Proposal

This article proposes an approach to Greece's debt relief which has not been discussed by authorities. At the heart of the proposal lies the following premise:

'Debt burden' is the amount of government revenues which has to be allocated to debt service (i. e. interest). Populists would argue that 'this is the amount of government revenues which we have to give to banks instead of building new schools and hospitals'.

In consequence, 'debt relief' can only mean reducing the 'debt burden'. If one considers the percentage of the debt burden (i. e. percentage of government revenues allocated to debt service) as the 'Borrower's Sacrifice', the premise of 'debt relief' must be to reduce the 'Borrower's Sacrifice'.

The table below shows the 'Borrower's Sacrifice' for all Eurozone countries. I have made the arbitrary decision to consider countries whose annual debt service exceeds 5 BEUR as 'significant countries'. The 'significant countries' are marked in blue and sorted by 'Borrower's Sacrifice' top-down.

Year 2016
Ordinary Interest "Borrower's
Government Expense Sacrifice"
Portugal  76.613 7.836 10,2%
Ireland 73.029 6.178 8,5%
Italy 788.502 66.272 8,4%
Spain 421.672 31.358 7,4%
Greece 87.473 5.649 6,5%
Belgium 214.063 12.074 5,6%
Austria 173.077 7.347 4,2%
France 1.181.278 41.983 3,6%
Germany 1.411.381 43.372 3,1%
Netherlands 307.004 7.551 2,5%
Finland 116.047 2.277 2,0%
Slovakia 32.345 1.339 4,1%
Slovenia 17.352 1.275 7,3%
Lithuania 13.315 523 3,9%
Cyprus 7.019 465 6,6%
Latvia 9.097 282 3,1%
Malta 3.871 218 5,6%
Luxembourg 23.147 183 0,8%
Estonia 8.507 16 0,2%

Portugal has the highest 'Borrower's Sacrifice' (10,2%) and the Netherlands have the lowest (2,5%). Greece ranks in the middle with 6,5%. However, it must be noted that Greece's 'Borrower's Sacrifice' is highly subsidized by the fact that the bulk of its debt carries below-market interest rates. That is 'debt relief' right there.

Under normal circumstances, the 'Borrower's Sacrifice' of a country is determined by the markets. Not so with Greece because Greece is bankrupt and kept afloat by the Eurozone. Thus, in the case of Greece, the 'Borrower's Sacrifice' can (and must be) steered by its creditors. The balancing act is to make the sacrifice as large as possible for the creditors' benefit without making it so large that it becomes politically unsustainable in Greece (and/or slows the growth potential).

In short, the 'Borrower's Sacrifice' for Greece should be somewhere between 2,5% (the lowest of the 'significant countries') and 10,2% (the highest). My point is: it does not matter so much where the 'Borrower's Sacrifice' is set at the outset. What really matters is that (a) it is made variable; that (b) it is tied to the correct base; and that (c) it has the right adjustment mechanism when the situation changes.

Suppose the 'Borrower's Sacrifice' had been agreed at 2,5% for Greece. In that case, Greece would have been expected to set aside 1.750 MEUR for interest in 2016 (2,5% of 87.473 MEUR). Put differently, Greece would have had to pay 3.899 BEUR LESS in interest than it actually did. That would have been real 'debt relief'.

Once Greece has made its 'Borrower's Sacrifice' (i. e. paid the 1.750 MEUR), Greece's part would have been done. Now it would be up to the creditors to negotiate an agreement among themselves who gets what of the cake. As long as Greece needs to be subsidized, it is clear that none of the creditors can get everything they want. The trick will be to make all creditors equally unhappy.

Why should the 'Borrower's Sacrifice' be tied to government revenues? (instead of, perhaps, to GDP?). The answer is quite simple: interest is paid out of government revenues and not out of GDP.

What should be the right adjustment mechanism? That's the tough part. The adjustment mechanism must assure that as Greece's economic strength increases, the 'Borrower's Sacrifice' increases accordingly. At some point in the future, the 'Borrower's Sacrifice' will reach levels which are acceptable to the markets and, at that point, and only at that point, Greece can truly return to markets.

In summary: the negotiation with Greece should be about the initial 'Borrower's Sacrifice' and the adjustment mechanism, and the negotiation among the creditors should be about allocating the 'Borrower's Sacrifice' amongst themselves. No more, no less.

Monday, June 5, 2017

Greece's Creditors Waiting For 123 BEUR!

The story has been making the media rounds that if Greece's Eurozone creditors agreed to a debt relief in the form of interest deferral until 2048, they would be waiting until 2048 to receive 123 BEUR. This is allegedly based on a forecast by the German Finance Ministry. No details as to how that calculation was made were given.

After having recovered from the shock of this piece of news, one can justifiably ask the question: "What else is new?"

Interest deferral does not mean that interest is forgiven. Its payment continues to be due but, as the name suggests, instead of paying interest every year, all interest is deferred until payment at a later date in the future. Until 2048, for example. And, normally, interest on interest deferred is also added to the bill.

Suppose Greece owed 200 BEUR out of its total debt of about 320 BEUR to Eurozone creditors. At a rate of 2%, the annual interest amount to be deferred would be 4 BEUR. Multiply that by 26 (from 2022-2048), you come to 104 BEUR. Given the difference with the above 123 BEUR, the German Finance Ministry's forecast calculates either with a higher level of debt or a higher interest rate or high interest on deferred interest, or a combination of these.

So there isn't really any news in this shocking news because we are talking about 'debt reprofiling' and not 'debt relief'. Debt reprofiling means to reprofile the existing debt and interest maturities in such a way that they become more amenable to the borrower's cash flow. That's all. There is no relief in that whatsoever.

To express shock about having to wait until 2048 for payment would only be justified if one felt that the payment can eventually be made. I don't believe that there is any person in the world who still believes that Greece can service its debt (i. e. pay interest at market rates), today or in 2048. Thus, to calculate interest at market rates (which cannot be paid), defer it out to 2048 so that a huge bullet payment results and then clamor that 123 BEUR have to be written off, well, that reminds a bit of Paul Kazarian's accounting tricks.

The only thing which will work for Greece is a debt reprofiling combined with a reasonable debt relief. To avoid that governments of lending countries have to tell their tax payers that they had to forgive Greece debt, the relief should be played via the interest rate.

The simplest way would be to set the interest rate at zero percent and to build in certain 'kickers' stipulating that interest could be charged in the future under certain unforeseen developments. For example, if Greece were to discover the world's largest oil reserves and became very rich, that could be a situation where the 'kicker' kicks in.

In the present interest rate environment, this debt relief would not be too costly for the lending countries. They could fix their funding cost until 2048 at rather low rates and the resulting 'loss on Greece' would become an opportunity loss (not collecting interest) whose bookkeeping entry no outsider could find in the published fiscal statements (because there is no bookkeeping entry for opportunity losses).

Everything else is a bit of a farce.

Saturday, June 3, 2017

America First! Germany First! Greece Perhaps last?

The Germans are all upset about President Trump not living up to global responsibilities. The President tells people to 'buy American' and to 'employ Americans'; he withdraws from the Paris Agreement because it would enrich other countries at the expense of Americans and then he even has the nerve to say it loud and clear: "America First!" President Trump blasted that message to the whole world in his inauguration speech.

That is indeed bad behavior. The Germans (and many other European countries) would never say that out loud. But a closer look merits the observation that there are indeed some parallels between Germans within the Eurozone and Trump within the global world community. Germany does not want to enrich other Eurozone countries (or rather: make them less poor) at the expense of German tax payers. Nevermind that it would be good for the Eurozone overall. Germany does not purse rogue companies like VW as forcefully as they pursue rogue (because profligate) states like Greece. The German Chancellor criticizes the American President for tweeting an unintelligible word but she does so in a sentence without true content. And one doesn't have to be a linguist to hear behind every statement of the German Finance Minister the unspoken appeal: "Germany First!"

Well, well, well. This doesn't look good for Greece. If everyone else aims at being first, someone has got to come out last. No point in pondering that. Better to have an ouzo!

PS: this obviously was written with tongue in cheek!

Wednesday, May 31, 2017

The Lure Of Grexit - Debunked!

An author by the name of Leonidas Stergiou published an analysis in the Ekathimerini under the title "Why depreciation is the wrong medicine for the Greek economy". It is, for once, an objective discussion of the pro's and con's of a Grexit for the Greek economy. Stergiou takes issue with the premise voiced often by FM Schäuble: Greece should return to the Drachma, adjust its economy and when a new equilibrium is reached, Greece could return to the Euro. Schäuble's argument is that an adjustment of the Greek economy cannot be avoided and, given that, it would be far less painful to make that adjustment with the Drachma as currency instead of the Euro.

Leonidas Stergiou says that Schäuble is wrong, and he makes very good points to support his argument. His key point is:

"Harsh reality together with economics teach that the devaluation of a currency may help, provided that the country does not import more than it exports, and mainly that it does not import a lot of raw materials or intermediate materials that have to be processed. A country with such issues that proceeds with depreciation will be plagued by inflation. ... So in a country with a negative trade balance that imports a lot of raw materials, depreciation raises production costs and creates inflation. The raised production costs annul part of the competitiveness that was achieved by the depreciation. Should the inflation be transferred to salaries, then all the gains from the depreciation will be lost because, in the end, nothing became cheaper."

So for all those who would be hoping that a return to the Drachma would make their lives more comfortable, Stergiou serves a grand disillusionment:

"In other words the measures mandated by the memorandum would be inevitable and would have to be implemented strictly – but without the funding that came with the memorandum. In any case, right now there is internal devaluation taking place within the eurozone. If Greece did not have the euro, a tough economic adjustment program through austerity measures would still be necessary. Otherwise, the inflation due to depreciation would offset the benefits of the competitiveness after the depreciation. Now, Greece in the euro area cannot depreciate its currency in order to make its products and services more competitive. But it could directly reduce the prices of all components of the domestic GDP. To put it simply, if you cannot increase the purchasing power of others, you must decrease your own."

And Stergiou concludes with a condemnation of the Greek government (or rather: all Greek governments since the crisis broke out):

"Greek governments have preferred to accept austerity measures particularly through tax increases and reductions in pensions and wages rather than proceeding to reforms and speeding up the implementation of the MoUs. Instead of this, they entered into long-term and overnight negotiations with the troika in an attempt to postpone the political cost of the reforms for later. Thus, the recession period was prolonged, the debt increased, the financing needs remained unmet. This tactic leads to new MoUs and the prolonging of the recession period and increases the the chances of spiraling into recession and default. On the other hand, without a new MoU, a default can be considered a certain outcome."

Sunday, May 28, 2017

Greek Pensions - Dreams Turned Sour?

Under the heading of "They stole my money", the Ekathimerini reported about 4 cases of pensioners who feel that they have been 'destroyed' by the various pension cuts of the last 7 years. There is no question that a very large number of Greeks have ridiculously low pensions (below 500 Euros!) but if the average Greek pension is almost as high as the average German pension, as the IMF states, that can only be explained by a high number of pensions significantly above the average and/or by a high number of pensioners who do not fullfil today's pension criteria.

My understanding is that the 'reformed' pension criteria are now: ordinary retirement age 65 and minimum contribution years 40. Also, the survivor's pension is 50% of the original pension. I would guess that those are rather standard criteria in today's Europe.

One should review the 4 cases in the above article with a focus on the following questions:

1) At what age did the person retire?
2) How many years did the person work/contribute?
3) In the case of survivor's pensions, how high would the original pension have been?

When one reviews the 4 cases with the above questions in mind, one would come to the conclusion that there have indeed been drastic reductions but when looking at these 4 pensions as they now are after allegedly 13 pension cuts, one can only conclude that perhaps the Ekathimerini did not chose the best examples of how much many pensioners are suffering today.

The following 2 statistics about Greece's approximately 2,6 million pensioners also merit consideration:

* 633 thousand pensioners (24% of the total) are over the age of 81 and their average monthly pension is 712 Euros (compared with average Greek pensions of 890 Euros).

* 727 thousand pensioners (28% of the total) are below the age of 65 and their average monthly pension is 1.028 Euros. Put differently, pensioners below the new legal age of 65 account for almost one-third of the entire pension expense.

Wednesday, May 24, 2017

Current Account Vs. Fiscal Results

An anomaly is developing in Greece's domestic and foreign accounts. The historical trend was one of double-deficits, i. e. a deficit in both the budget as well as the current account. Makes sense in as much as a budget deficit increases domestic demand, puts money into the economy, increases imports and, in consequence, leads to a current account deficit.

Since 2010, austerity has taken money out of the economy leading to the well-known collapse in domestic demand. Greece turned a giant primary deficit into a surplus and, simultaneously, turned a giant current account deficit into a surplus in 2015.

In 2016, the primary surplus exploded as more money was taken out of the economy (taxes, etc.). However, an anomaly began: despite this further erosion of domestic demand, the current account went from a surplus of 205 MEUR in 2015 to a deficit of 1,1 BEUR in 2016. This trend now continues in 2017 where the government continued to run a primary surplus (albeit not a large as the year before) while the current account drifted more into the negative territory.

Below are the figures for Greece's current account in the first quarter of 2017, compared with the same period of the previous year. Also, the month of March is compared for both years.


January-March March
2017 2016 2017 2016
Revenue from abroad
Exports 6,7 5,5 2,6 2,0
Services (e. g. tourism) 3,6 3,0 1,3 1,1
Other income 2,6 2,5 0,6 0,8
Current transfers 0,9 0,7 0,2 0,2
------ ------ ------ ------
Total revenue from abroad 13,8 11,7 4,7 4,1
Expenses abroad
Imports 11,8 9,7 4,5 3,5
Services (e. g. tourism) 2,6 2,3 0,9 0,8
Other expense (e. g. interest) 1,4 1,5 0,4 0,4
Current transfers 0,5 0,6 0,2 0,2
------ ------ ------ ------
Total expenses abroad 16,3 14,1 6,0 4,9
Net foreign deficit (current account) -2,5 -2,4 -1,3 -0,8
Trade balance -5,1 -4,2 -1,9 -1,5
Services balance 1,0 0,7 0,4 0,3
Other balance 1,2 1,0 0,2 0,4
Current transfer balance 0,4 0,1 0,0 0,0
---- ---- ---- ----
Net foreign deficit (current account) -2,5 -2,4 -1,3 -0,8
January-March March
2017 2016 2017 2016
Exports "Other Goods" 4,7 4,3 1,8 1,6
Imports "Other Goods" 8,4 7,8 3,2 2,8
---- ---- ---- ----
Balance of goods excluding oil and ships -3,7 -3,5 -1,4 -1,2

Gone are the days of positive surprises with Greece's current account. What is even more disconcerting is the trend: the 2017 deterioration started noticeably in the month of February (January had actually been an improvement) and led to a whopping deterioration of 500 MEUR over the previous year in the month of March alone.

But the real question is: where is the money coming from to pay for this rather dramatic increase in imports? There is no significant increase in employment, no known increase in wages/salaries, certainly no increase in pensions and the increase in unpaid taxes would suggest that people are financially very strained.

I repeat the question: Where is the money coming from to pay for this rather dramatic increase in imports?

Saturday, May 20, 2017

A Plea For Greek Elites!

I had never heard of Mr. Aristides Alafouzos before. Like many foreigners, I have practically zero knowledge of the Greek elite (political, economic, social or otherwise) except for those who are in the media all the time. Whether one likes the term 'elite' or not, every society, even a communist one, produces its own elites. Some are artificial elites (i. e. hereditary or appointed), others are natural ones (meritocracy, charisma, etc.).

I learned about Mr. Alafouzos through two obituaries in the Ekathimerini (here and here). It seems clear that Mr. Alafouzos was one of the natural elites.

There is a German saying which cannot well be translated into English: "Wie der Herr, so das Gescherr". One translation might be: "Like master, like man."

Henry Ford II was known to be a CEO who would slap his top executives in their faces (almost literally). During his reign at the Ford Motor Company, managers all the way down to the supervisory level were known to slap their subordinates in their faces (literally speaking).

Other CEOs are of the gentleman kind and the culture in their companies will undoubtedly be gentleman-like. In fact, culture is very much influenced by the elites.

Based on the two obituaries, I have no doubt that Mr. Alafouzos formed and shaped a culture in his companies which corresponded to his own values. While he is now dead, cultures tend to survive for quite some time.

I have always wondered what kind of a society Greek society would be if the elites of Greek society (of the Alafouzos kind) came more to the forefront, played a more significant role in society. Some of the things we see these days on TV, like physical fights in the Greek parliament, are clearly the worst of Greek society.

Why can't we see more of the best of Greek society?

Tuesday, May 9, 2017

The Gut Says: "Greece Is On The Rebound!"

My wife and I always spend springs (typically 2 months) and autumns (up to 4 months) in Greece. I admit that the microcosm in which we move may not be typical of all of Greece but it is always the same microcosm: a mixture of big-city life in Thessaloniki, visits to villages, trips to tourist areas in Chalkidiki, travels throughout Northern Greece, etc. This microcosm may not reflect Greece overall but it serves well as a basis to measure trends. And here is my surprise for you:

Greece is on the rebound, no doubt about it!!! I first had that feeling last spring and it intensified last fall. After having been here for 3 weeks this spring, I am now convinced. I sense a level of positivism if not optimism which I haven't sensed since 2010. In the villages, I see 1-person shopmen who suffered terribly in the past and who now say that they have quite a bit of work. Some of them even in the construction industry. For my car service, I used to get an appointment at Hyundai with a week. Last spring it was already 10 days and this time around it was a little over 2 weeks. I see traffic jams in down-town Thessaloniki which I haven't seen since 2010, and this at gasoline prices 30-40% higher than in Central Europe! When I look out at the Thessaloniki harbor, I now see up to 10 freighters loading and/or unloading freight. I could go on and on. If the official stats do not show that, it's because the official stats miss a lot of reality.

Barring unforeseen surprises, Greece will sign a deal with creditors soon and it is likely to start benefiting from the ECB's QE. Today, I even read that they are thinking about placing a bond in the markets next June. If some of that (or even all of that) really happens, there will be a lot of positive news about Greece. And positive news will feed upon itself, particularly when a record tourist season reinforces such positive news every day. The steady decline in Greek bond yields will also be a continuous reinforcer of the good news. Financial investors will start wondering whether perhaps they might be missing the bottom of the crisis to make good deals. That, too, could feed upon itself.

I have no facts to offer but my gut says that Greece is on the rebound. The key variable for increased economic activity in Greece is the net inflow of foreign capital. Foreign capital does not always flow on the basis of hard facts. Oftentimes, if not even very often, it is the 'leading steers' that make the herds move. It would only take a few 'leading steers' to set a trend in motion. Who knows? We may soon see the financial herds turning around and 'discovering Greece' anew!?!

Mind you, I don't believe that Greece today is a much better place to do business than 7 years ago. But once the herds start moving, they never pay attention to such details. Neither do I think that the bottom of Greek society will benefit all that much from the herds. As Adam Smith said: "The problem with fiat money is that it rewards the minority that can handle money." I recently read that about 1,5 million people in Greece are without income and assets. I don't think miracles will happen for them.

But there will be a fairly large section of society which will benefit from the renewed bandwagon. As I said, I don't think it will be a new start in a fully reformed country. Not at all!

But I think that there is a good chance that we will soon see a renewed herd movement. Essentially a repeat of the past. When money comes into Greece, Greece does well. The better Greece seems to do, the more money comes into Greece. And I am fairly certain that the herd will start moving again soon.

Until the next 'sudden stop' happens...

Trade Balance: Bank Of Greece vs. ELSTAT

Much publicity has been given to the fact that ELSTAT reported an increase of 36,2% in Greece's trade deficit in March of this year (versus March 2016). The numbers are distorted by oil and ship transactions but even without those, the trade deficit increased 6,6%.

While this is interesting information, it always reminds me of a question which I have been trying to get an answer to for years, albeit without success, namely: why do ELSTAT and the Bank of Greece report trade figures which differ quite substantially, sometimes even enormously. For example, for 2016, ELSTAT reported a trade deficit of 18.705,0 MEUR whereas the corresponding figure from the Bank of Greece was 16.581,0 MEUR. A difference of that magnitude can certainly be considered as enormous.

Will I ever get an answer to this question?

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.