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!

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!"

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.

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.

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.