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Wednesday, August 22, 2018

"The Rescue Is Over" - Reviewing 7 Years Of Blogging

"Greece - The Rescue is Over" titled the online portal of Austria's national broadcaster on August 20. The European media were full of self-congratulatory statements by EU elites. Yes, the Greek people had to go through severe hardships in the last 8 years but now that chapter is closed and the stage is set for a prosperous future. Provided, of course, that Greece continues successfully on the reform path of the last years. Etc., etc. This blog has accompanied the Greek crisis since June 2011. In this elaborate essay I will reflect on the observations I have made and the opinions I have expressed over the years.

In early 2009, and in preparation for my upcoming retirement, my Greek wife and I started looking for an apartment in the Thessaloniki area where we planned to spend a good portion of our retired life. We had lived in Munich at the time, one of Germany's most expensive cities, and we expected a life in a less expensive environment. We quickly found an optimal apartment in Kalamaria and in April of 2009, we flew to Thessaloniki with the purpose of getting the apartment in shape, i. e. furniture, etc.

Germany at that time had been hit hard by the financial crisis. At one point, Chancellor Angela Merkel and her Finance Minister had to go on TV to assure the public that all German bank deposits were guaranteed by the state. This against the background that a bankrun was feared. In my banking job, I was responsible for corporate banking in Southern Germany, the home of the German Mittelstand. Every day we received new panic reports from our customers.

As the taxi drove us from the Thessaloniki airport to our hotel (there was no furniture in the apartment yet), we passed an impressive looking furniture store. That, I said to my wife, would be our first stop the next day. I was looking forward to the opportunity of buying top quality furniture at low prices. The first living room arrangement which they showed us (2 sofas and a chair) went for 10.000 Euros. I expressed shock at the price. The sales lady looked at us with the expression on her face: "If you can't afford our furniture, don't waste my time." We decided not to waste her time.

From then on, one surprise was followed by the next. There was an unbelievable number of large furniture stores. At IKEA it was difficult to find a place in their huge parking lot. Downtown Thessaloniki was exploding with economic activity. In short, wherever I looked, I saw shops, people shopping and the prices were high. In several instances (like supermarkets) higher than in Munich.

Through my wife's cousin, a very well connected man around 50, we made our first friends. They were either rentiers or retirees even though none of them was over 60. The cousin had sold his small business (a t-shirt manufacture) when he was 45 and he was looking at about 5.000 Euros in monthly rental income and real estate properties which he valued at 1,5 MEUR. His best friend told us that he had collected a severance package from OTE in his early fifties and was now receiving a monthly pension of almost 3.000 Euros net per month. I asked him what he had done at OTE and he proudly said 'nothing'. He would come to the office in the morning, leave his jacket on his chair and go out to the beaches. Another friend had taken early retirement from a public sector company where he had been a big shot in the union. He was just completing a new mansion which I thought would be worth at least 2 MEUR. On the side, he was pursuing projects with EU subsidies and we learned through the grapevine that a good portion of those subsidies found their way into his private pocket. A neighbor told us that he was collecting 12.000 Euros net per month in the form of pensions from 3 management positions in the public sector. Our real estate agent, a former policewoman in her mid-fifties, told us that she had retired at 48, collected a pension of 1.800 Euros net per month and now earned substantial income as a broker.

In a relatively short time, we had built up a circle of friends of over a dozen people. Only one of them was over 60 (the former public sector manager) but none of them was in a working relationship, either employed or self-employed. There were either rentiers and/or early retirees.

Around that time, I read an analysis of Greece's economic situation by a reputable international institution. Regrettably, I did not keep it and I don't remember the name of the institution. The gist of the analysis was that Greece would probably remain unharmed by the financial crisis because its banks were not involved in international speculation. If anything, Greece had a good chance of coming out of it as a winner.

Upon returning to Munich later in the spring of 2009, I happened to attend a presentation by the well-known economist Michael Huether. He was talking about the financial crisis in Eastern Europe and how the banks had to put together a rescue package. And then he said: "Mind you, before the crisis is over, we will also have to put together a rescue package for Southern Europe." I thought the man was dreaming. A rescue package for Greece? Didn't he know that Greece was a booming place and that analysts predicted a glorious future for the economy?

Around that time, I happened to read "The Battle of Bretton Woods" by Benn Steil. It was the battle between the British John Maynard Keynes and the American Harry White. Keynes had one predominant objective: to assure that the new monetary order would control imbalances in the current accounts. He proposed a new reference currency ("Bancor") in which surpluses/deficits would be settled. Over a certain level, a surplus country would have to pay into the Bancor and the deficit countries would receive them. A perfect recycling mechanism. Keynes' counterpart White also had a predominant objective and it was diametrically opposed to that of Keynes: to establish the predominance of the USD in the new monetary order. The dollar would be fixed against gold and the other currencies would be kept in a trading range versus the USD. Responsible conduct of the US would assure that world-wide imbalances would he held in check. White prevailed.

In 1971, Keynes was posthumously proved correct. The US had not displayed responsible conduct, had accumulated large external deficits and there was no longer enough gold to cover the USD in circulation. In a short TV speech, President Nixon surprised the world with the news that the USD would no longer be convertible into gold at a fixed price. In practice, it was a haircut of all USD claims held by the rest of the world. The age of fiat money had begun.

I came away from reading that book with the conviction that the most important factor in international financial stability was a country's current account, that it was a country's balance of payments that had to be checked, and that conviction shaped almost everything which I would write about Greece's financial crisis later.

When the Greek financial crisis erupted in late 2009 and until the first rescue package of May 2010, it felt to me like a déjà-vu. I had witnessed, as local country manager of a large American bank, the economic turn-around in Chile in the late 1970s/early 1980s. Since then, Chile has become the prototype for me as regards how to overcome an economic crisis. When I arrived in Chile in 1980, the economy was booming. Only 7 years earlier, Chile had been in total economic chaos caused by the policies of Salvatore Allende: Chile in 1973 was what Venezuela is today. How could a totally bankrupt economy be turned around into a booming economy in only a few years?

Two very simple factors: a very competent economic management team (the "Chicago Boys" in Chile) and a political leadership which could give that management team air cover to implement their policies. In Chile, that political leadership was the dictatorship of Augusto Pinochet, rightly blamed for atrocious human rights violations. However, without such air cover it would have been unlikely for the economic management team to succeed owing to the enormous adjustment pains which came along with the new policies. It was a shock treatment like changing traffic from left to right overnight. I often wondered whether a democracy could survive such a shock treatment. In Greece, I thought the shock treatment could work IF there were a competent economic management team and IF there were a strong, unified government supporting it.

The most important factor for the success of the Chicago Boys was that they had a plan and consistently and unwaveringly pursued it. It was nothing but applied common sense: increase exports, reduce imports, apply efficiency criteria to the huge public sector, create market conditions for the private sector and create an economic framework which would attract foreign capital. The Chicago Boys committed one major mistake which eventually caused their downfall and the external payments crisis of the early 1980s: they fixed the exchange rate to the USD 'forever'. With Chilean interest rates much higher than USD interest rates and with no perceived foreign exchange risk, foreign capital flowed into Chile like there was no tomorrow. When the bubble exploded, the Chileans eliminated the fixed exchange rate and the economy stabilized relatively quickly. Chile's luck was that they had only fixed the exchange rate instead of joining a currency union with the USD. The rest of the model of the Chicago Boys remained in place, resulting in Chile's becoming one of the most successful economies in Latin America to this day.

Later in the 1980s, I was transferred to Argentina where my bank was one of the largest foreign creditors of the country. In 1983, Argentina hit the then largest external financing crisis ever with American banks being by far the largest creditors. It was the American Citibank which headed up the crisis management. Its principal negotiator, Bill Rhodes, literally personally developed the model for handling Argentina's external financing crisis, a model which became the standard for handling the dozens of external financing crises throughout the world since then. Its components, again, were quite simple: negotiations had to be carried out directly between Argentina and its private creditors; official institutions (the Fed, the US government) only quarterbacked behind the scenes; private creditors had to maintain their Argentine exposures, i. e. loans and trade credit ("risk takers must remain risk carriers"); and the IMF assumed responsibility for providing fresh money and negotiating economic measures ("memorandum") with the Argentine government. The banks agreed subject to the involvement of the IMF, the IMF committed subject to the agreement of the banks. The mutual dependency between private creditors and the IMF was born. No bank was bailed out. Instead, their benefit was that they could keep their existing exposures on performing status instead of having to write them down.

Given the above experiences, I thought by late 2009 that Greece's problems would be solved rather quickly. As regards reforming the economy, I thought they would copy the Chileans: put in place a competent economic management team and have a unified government provide it with air cover. And as regards the external financing crisis, I thought the EU would consult with Citibank, by then the world's premier expert in how to handle external financing crises. The EU refused to consult the experts. Bill Rhodes later said in interviews that he had offered his advice to the EU as well as to the then Prime Minister George Papandreou. He was told by all parties that the experience with emerging countries would serve no purpose because the EU and, particularly, the Eurozone were completely different animals. The trouble was that the EU had zero experience with the handling of external financing crises of a country.

By early 2010, I was baffled with the events unfolding in the Eurozone. Instead of consulting experts, Angela Merkel consulted with the CEO of one of Greece's largest creditors, Joseph Ackermann of Deutsche Bank! Ackermann, as his job required, defended the interests of his institution and argued with Merkel that not only the Euro and the Eurozone but the entire world-wide financial system would fall into chaos if Greece were not bailed out. At the peak of those dramatic developments, Merkel coined a phrase which may go down into history as the most expensive phrase ever: "If Greece falls, the Euro falls and if the Euro falls, the EU will fall!" That misinterpretation was the source of every other problem which followed subsequently.

What should Merkel & Co. have said to the bankers pleading for a bail-out of Greece? Something like this: "We realize that you have a problem with Greece but, truly, this is a problem between you the creditors and Greece as your borrower. You will have to negotiate a restructuring of your claims directly with your borrower. We are on standby when it comes to financing Greece's new financial needs going forward and for negotiating economic measures with Greece but first you have to restructure your claims. Should you fail to do so, you correctly say that your institutions may fail. You need not worry about that because we already have protective measures in place. We have already put in place successor vehicles for each of your institutions. If you declare bankruptcy in the morning, our successor companies will take over your operations in the afternoon and your shareholders will be wiped out. At some point in the future, your successor companies will again be privatized and we will hopefully recover much if not most our our investment. The tax payers will not lose everything, which is what would happen if we bailed you out via Greece. Mind you, if you do not follow our advice and if your shareholders are wiped out, you may become personally liable for any damage suffered by your shareholders because you had the opportunity to avoid that damage and you chose not to use it."

The utter misinterpretation of EU elites was that, in a major financial crisis, it was the banks which had the power and the governments which were 'alternativlos'. The opposite is the case. In any major financial crisis, it is the creditworthy governments which have the power and the banks are dependent on them for the simple reason that governments have time and the capacity to raise money. If a bank falls below equity requirements, it needs to file for bankruptcy immediately, as Lehmen had shown. A creditworthy government can provide the time for an orderly bank restructuring and/or liquidation and the liquidity required. The US government had demonstrated how this is done. When the world's largest insurance company, the giant AIG, faced bankruptcy because a couple of hundred employees in London had engaged in reckless credit default swaps, the US government stepped in and it demanded its pound of flesh: 90% of shareholdings were wiped out. Only a few years later, the US government successfully exited the restructured AIG and took a huge profit on the exercise. AIG's largest former shareholder sued the government for damages to the tune of 30 BUSD. The law suit failed on the grounds that not only profits are for private shareholders but losses as well.

As I explained above, a first memorandum could not have been avoided even if the EU had handled the Greek crisis correctly: no creditor would have agreed to keep his exposures if there was no commitment for reform measures. What puzzled me during visits to Greece throughout 2010 was that life had hardly changed: Greeks were still buying imported goods like there was no tomorrow. Under normal situations, when a country loses access to foreign financing, its current account needs to be balanced literally overnight. Imports are drastically reduced. The entire population feels that there is a problem. Greece, however, continued to run very high current account deficits. In the spring of 2011, Prof. Hans-Werner Sinn provided the explanation when he introduced the world to the marvels of Target2, the ECB's cash management system. By then, the Bundesbank had accumulated Target2 claims of 324 BEUR and Sinn prophesized the demise of Germany (today they are close to 1 trillion Euros).

One can make intellectual arguments whether Target2 is the key component of a currency union or whether it is an unlimited credit card. In practice, Target2 allows a domestic banking sector to pay for imports, for deposit flight and for capital flight even if it has lost access to foreign funding. Without Target2, the Greek banking sector would have become illiquid in 2010. In June 2011, I started this blog and one of my first articles was about Target2. My argument was that Target2 was the principal reason why there was no crisis awareness among the Greek population. As long as one can buy imported goods, withdraw savings from banks and transfer capital abroad, it is hard to convince the general public that there is a crisis.

As I studied the first memorandum, I couldn't help to think that it was a bookkeeper's approach to solving financial problems: increase tax revenues and cut costs. What I was looking for was a long-term economic development plan à la Chile which would aim to drastically restructure the Greek economy so that it could stand on its own without funding/subsidies from abroad. A plan which would have a 10-20 years time frame. In the first month of this blog I proposed such a plan. To summarize the content: "If Greece cannot make it with the Euro but if a Grexit is the worst of all evils, Greece should hold on to the Euro but temporarily simulate a situation as though it had returned to the Drachma: import controls and substitution with the focus on 'infant industry protection and development'; export promotion; attraction of foreign investment AND, finally, a shock treatment for the public sector. Instead of attempting to change the entire economy at once, Special Economic Zones should be established where the new economic framework could be gradually spread through the country." I later referred to it as the "4 obsessions" which would have to be fostered throughout the Greek economy and population: an obsession with import substitution, with exports, with attracting foreign investment and with making the public sector efficient. To this date, I have not seen such a plan.

Soon after I started this blog, I became aware of Yanis Varoufakis and his blog and other publications. His 'Modest Proposal' had caught my attention because it was a most ingenius proposal to solve the Eurozone's problems. It was certainly better than everything I had heard from EU elites on the subject. The only problem I had with it was that it was a solution for the Eurozone's problems and not a solution for Greece's problems. My dialogue with Varoufakis began at that time. It continued throughout the years and became extremely intensive in the weeks prior to the election of January 2015. Only a few weeks after his appointment as Finance Minister and after observing his conduct on the international scene, I discontinued the contact.

My early critique of Varoufakis was as follows: "Why do you use all your intellectual brilliance, your competency, your eloquence and your charisma to solve other people's problems (i. e. the Eurozone's problems) and don't focus at all on solutions for the problems which Greece could provide on its own?" Varoufakis' standard reply was that, during the American depression in the 1930s, there was nothing which the state of Ohio could have done on its own because it was a systemic crisis. My standard answer was: as long as Greece ranked as the least attractive country for doing business in the entire EU (World Bank) and as the most corrupt country (Transparency International), there is no one other than Greeks who can solve these two problems.

Still, I remained optimistic throughout 2011 that, eventually, the Greek government would take its fate into it own hands (instead of focusing on the victim's role), that it would come up with a long-term economic development plan and implement it. I saw enormous potential in the Greek economy given that its problems were so obvious, could quickly be identified and attacked as long as there was the political will to do it and I also thought that the economy not only had great catch-up potential but also new opportunities as a regional economic hub. At one point, I even dreamed that Greece could become the economic power center of the Eastern Mediterranean.

Two things happened in the fall of 2011 which enormously encouraged my optimistic thinking: the EU Task Force for Greece (TFGR) was established and the Athens office of McKinsey published its economic plan titled "Greece 10 Years Ahead". McKinsey proposed how 500.000 new jobs could be created over a period of 10 years and 50 BEUR added to Greece's GDP and the TFGR proposed "to be at the disposal of the Greek authorities as they 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."

All of this seemed so easy: a unified government would take the McKinsey plan and implement it and it would mandate the TFGR to implement the modernization of Greece in a hurry. Animal spirits would start flowing and foreign investors would take note. Instead of rescue funding from the EU, Greece would receive voluntary funding from private investors. After all, that's how it had happened in Chile.

I had initially been quite enthusiastic about Prime Minister Papandreou. He struck me like a polished individual who seemed competent, was saying the right things and seemed to have a will. By the fall of 2011, I had developed serious doubts. There simply did not seem to be much of a backbone. More of a diplomat than an executive. In early November 2011, I knew that there would be a moment of truth: would Papandreou prove himself as a Margaret Thatcher ("I want my money back!") or only as the son of his father. Regrettably, he showed himself only as the son of his father.

When Papandreou surprised the EU by announcing a referendum, I thought that this was an ingenius plot. Obviously, not to really hold a referendum but only to use it as a negotiating instrument versus the EU. I expected the Nice conference to become a showdown: when the French President lost his nerve, exploded and pounded the table, I expected Papandreou to remain quite relaxed and say to the President: "Look, there is no reason to get so excited; there is an easy way out. All I ask is that you do this and that for Greece and I will call off the referendum. Otherwise, the will of the Greek population will count and I am afraid you may not like the result." Given that discussions had already been in the 3-digit billion Euro sphere, a demand for, say, 10-20 BEUR in the form of additional investments in Greece's private sector would have been like the icing on the cake, a satisfactory 'this and that'.

Papandreou caved in, the political opposition behaved irresponsibly and all my hope for ever seeing a solid solution for Greece evaporated. With the benefit of hindsight, I would say that the period of 2010-12 was the crucial period where Greece 's future was determined: would Greece become the country which the TFGR envisioned or would it remain an underdeveloped economy with totally unequal distribution of wealth, income and burdens? Too geopolitically important to be allowed to fail completely but a far cry from utilizing its potential?

The cynical celebrations about 'Greece's success story' are offset by more balanced critiques of what really happened in Greece since 2010. The celebrators claim that they saved Greece, the more balanced commentators say that Greece saved the banks and the Eurozone but not itself. Very little in-depth analysis is being made as to why Greece really ended up in 2010 where it ended up. Was it unavoidable that the Euro-dominos would fall and Greece was simply the first one to fall? Was the rescue program satisfactory or were mistakes made? If mistakes were made, who is to blame? Greece or the creditors?

I have always maintained that there were 2 crises in Greece: an economic crisis and a financial one. The economic crisis, I argued consistently, began with the assumption of power by Prime Minister Andreas Papandreou and his PASOK in 1981 and the nearly simultaneous admission of Greece to the EU. The financial crisis began when 30 years of reckless mismanagement culminated in a 'sudden stop' of external financing in early 2010.

In his book "The 13th Labor of Hercules", Yiannis Palaiologos gives an account of the reckless mismanagement referred to above. In essence, PASOK managed to change Greece's political and economic climate in only a few years: a bloated welfare state with stifling interventions and overregulation; welfare populism, cronyism, statism, nepotism, protectionism and paternalism. And worst of all, the opposition, Nea Demokratia, when in power, did its best to copy PASOK instead of correcting their policies. There no longer were checks and balances. Aristides Hatzis described this as follows: "Today's result is the outcome of a disastrous competition between the parties to offer patronage, welfare populism and predatory statism to their constituencies." The responsibility can be assigned equally to both parties: if it was PASOK who initially embarked Greece on this disastrous path, the last chapter in the story "how to ruin a country" was provided by ND when, during their term from 2004-09, they drove the public sector out of control.

Was it the Euro which caused the demise of the Greek economy? Not really. When one visits Greek industrial parks today, many are more reminiscent of industrial cemeteries. Most of those industrial failures date back to the 1980s and 1990s when Greek competitiveness was essentially blown out of the water. In 1993, a young Greek professor teaching at an Australian university was asked, in a TV interview, his opinion of the state of the Greek economy. The professor stated that the Greek economy was in a state of terminal decline. His name was Yanis Varoufakis. In 1997, the so-called Spraos Report about Greece's pension system recommended urgent reforms lest the system fail. The President of all unions criticized the report for suggesting that the pension system would collapse by 2010 if corrective measures were not taken. That, the President prophetically ridiculed the authors, would assume that the Greek state would go bankrupt by 2010 (his assumption being that the Greek state could never go bankrupt).

No, the Euro did not cause the demise of the Greek economy. The stage for that was set during the 1980s and 1990s, facilitated by the wave of foreign capital flows after EU membership. The Euro only added a turbo to that process, a giant turbo to be sure, and the wave of foreign capital flows turned into a tsunami during the 2000s.

The economic crisis turned into a financial crisis during 2008. The sub-prime crisis had made lenders very risk-aware and cautious and many of Greece's lenders, previously unanimously enthusiastic, had begun looking more carefully at Greece's numbers. New lending to the Greek banking sector dried out and some existing loans were called back. This is evidenced by the rise in Greece's Target2 liabilities which began during 2008 (before then, Greece's Target2 was rather balanced). In 2009, the outflow of capital accelerated and once the new PASOK government revealed the true dimensions of Greece's deficits, 'sudden stop' was only a natural consequence. I once read an analysis which pointed out that there have been about 70 'sudden stops' world-wide since 1945. As a result, there was nothing new or unusual about Greece's 'sudden stop'. What was new about Greece's 'sudden stop' was the inadequate, if not irresponsible, EU's handling of it. Any 'sudden stop' triggers a major domestic crisis, particularly when an economy has become totally dependent on foreign capital. Thus, the question is not whether the suffering of the Greek population could have been avoided. Instead, the questions are: Could the suffering have been less? Could it have been for a shorter period of time? And, above all, did the suffering serve any constructive long-term purpose?

Anyone who argues that the post-2010 rescue programs intended 'to save Greece' is disavowing reality. As long as the mantra was "If Greece falls, the Euro falls and if the Euro falls, the EU will fall!", the obvious conclusion is that the purpose of the post-2010 rescue was to save the Euro and the EU. The only thing that Greece was saved from was a default on its external liabilities, something which doomsayers dramatically referred to as 'the bankruptcy of Greece'. The Chief Economist of Citibank reacted to this as follows: "What the Europeans did not know was that sovereign defaults have been the most ordinary thing in the world of finance in recent decades." When the threat of a default appears on the horizon (or when it has already occurred), countries - like private or corporate borrowers - need to sit down with their creditors to discuss a restructuring of the debt. Never before in the history of finance have private lenders been let so easily off the hook as in the case of Greece!

Only self-centered dreamers can have the nerve to call a rescue program which still leaves the country in shambles after 8 years a success. "Never let a serious crisis go to waste", the saying goes. The Greek crisis went to waste. No Greek parent can tell his children that "yes, we really had to suffer for a long time but we did it for you because you now live in a better country!" What went wrong?

It is much easier to identify responsibility for the failure on the Greek side instead of elsewhere. Yes, 'ALL Greeks had eaten the lunch', as a Greek politician once said, and, therefore, all Greeks should now pay for it. Yes, the Greek side never left the impression that it assumed ownership of the problem but always left the impression that reforms were undertaken only unwillingly, only under severe pressure from the Troika and then only haphazardly. Yes, the Greek side always focused on the victim's role and sought to put blame elsewhere. Etc., etc.

But the most important point is missing! What if a country is not yet quite ready for the framework of a highly developed EU, particularly for a complicated currency union? What if a country is not yet quite ready for the free movement of products, services and capital? What if a country had joined the EU and the Eurozone in the expectation that it would find help in its development?

Looking back, I would argue that the resource allocation over the last 8 years was at best 10% for assisting Greece "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" and at least 90% for debt issues. What if it had been the other way around? A debt problem, however large, can be solved by a group of people in a conference room as long as they agree. 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' is a project for a generation and it requires the best brains not only of Greece but of the EU in general.

As Greece exits the program, its debt is now more or less regularized: much of the interest burden has been deferred, most of the debt maturities have been extended way into the future and a cash reserve has been built up. Here is the million-dollar-question: Why could that not have been accomplished within the first year of the rescue, thereby allowing resources to be allocated to more constructive purposes?

In 2009, Greece had a primary deficit of 24 BEUR: before paying enormous amounts of interest, the Greek state spent 24 BEUR more than it had revenues. A staggering figure by all accounts. Naturally, that can be viewed as an example of extreme profligacy and, naturally, that can quickly be turned into an emotional issue: the profligacy of the Greeks must be stopped; the primary balance must be brought to zero as quickly as possible! So far, so good.

But anyone who has attended Economics 101 in college knows that national income is the sum of private sector and public sector income. If one of the two is cut drastically, the other one must increase if a destruction of national income is to be avoided. The problem is much greater than the 24 BEUR because when the state, as by far the largest economic agent in any country, cuts dramatically, there will be a multiplier effect throughout the economy. With the benefit of hindsight, one can debate whether the multiplier effect was calculated correctly or not. My point is that one doesn't really need a calculator. When one takes 24 BEUR out of an economy the size of about 220 BEUR, one knows that there will be shockwaves. Unless...

Unless one accompanies the (necessary) austerity with growth measures elsewhere to ameliorate the damage. Granted, no one could reasonably have been expected to give the Greek state a fresh 24 BEUR for growth measures given the Greek state's history of misspending funds. But it should not have been too difficult for EU experts to design ways to steer 24 BEUR into the private sector for growth projects. After all, the Chinese company Cosco steered millions of investments into their Greek subsidiary in the midst of the crisis and they are today very happy about that. Why could the EU not have accomplished with the country what a Chinese company accomplished with its subsidiary?

Many have argued that Greece should have been given a major haircut back in 2010 to get back on its feet. That is an illusion! Greece did not achieve a primary surplus until 2016. In other words, debt service (interest) did not burden the budget until 2016. Instead, all interest which was paid until then had first to be lent to Greece (and increased the debt). What would have mattered much more is if Greece had been given the interest terms back in 2010 which it has now (or better yet: an immediate interest moratorium for, say, 10 years). The example of Germany, half of whose debt had been haircut back in 1953, was often cited. With the benefit of hindsight, one can question whether that was a good decision. What if the debt which Germany was forgiven had been replaced with a 50-year bond including deferred interest? Would Germany in 2003 have been able to service that debt? Of course it would have and it would have been fairer to those parties who had to finance Germany's haircut back in 1953.

In short, true help for Greece would have looked something like this back in 2010: extending all loan maturities out into the future, say 25-50 years; an interest moratorium for at least 10 years; fresh money to finance the primary deficit with the proviso of achieving a surplus within 5 years; a commitment to maintain the stability of Greece's banking sector; and fresh money of at least 20 BEUR for growth measures in the private sector. All except the last point would have been quite easy to do as long as reasonable people came to an agreement in a conference room. The last point would have required true brainpower.

With that kind of an offer of 'help for Greece', the EU would have acquired a legitimate claim to put 'demands' to Greece in exchange. Those 'demands' would have consisted of the standard measures of a memorandum, albeit it in a more intelligent way than it was done. But most importantly, the 'demands' would have had to address the 'hot potatoes' of the Greek public and private sector, all those structural weaknesses that everyone knows of but no one dares to touch. Above all, the 'demands' would have had to assure that the 20 BEUR for growth measures would not go to waste.

What if the Greek side had not accepted this? What if the Greek side had interpreted this as an interference with national sovereignty? What if there could not have been accomplished consensus in the Greek government?

Well, it's like the above mentioned conversation with Joseph Ackermann: "We offer you help but it's up to you to accept it. If you don't accept it, you have to live with the consequences!"

Having written all that, it begs the question: Where are we today? Can there still be prosperity for Greeks in the foreseeable future?

At this point, there is no prosperity for the Greek population in toto in sight. Of course, the upper third of the Greek population (or so) will continue to do well to very well, as they have done in the past, even during the crisis, and they may even profit from the current situation. The middle-third (the former middle-class) will struggle to survive. And the lower-third will continue to suffer. All those Greek friends who are telling me that 'Greece will never change' are really saying that it will be this way for a very long time.

However, when I put myself back into the idealistically optimistic mode which I was in back in 2010-12, I envisage the formation of a competent economic management team and a unified government which provides it with air cover. If that were ever to happen, one could realistically hope that the day will come when Greece is 'a modern and prosperous country: a country characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

PS: reviewing what I have written above at great length, the thought comes to mind that I have said everything there is to say and that, perhaps, this is a good time to close this blog. I will ponder this.

Friday, August 17, 2018

Long-Run GDP Growth Prospects Are Poor

Last month, the IMF pubslished its 2018 Article IV Report on Greece and it was widely commented in the media. I have now read the full 80+ pages and can only recommend others to read the full report. It can be found under this link (under the caption Electronic Access, click on Free Full Text).

I focus here on Annex VI about Greece’s Long-Term Growth Potential and I reproduce it below. A summery statement would be: "Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades. Labor productivity (output per worker) would grow only at about 0.4 percent in the steady state (the rate of TFP growth adjusted for the labor share in output). Long-run GDP growth prospects are thus poor, absent a major change in policies. Structural reforms to raise TFP growth and employment are therefore the only option to achieve higher long-term output growth."

Below is the Annex VI about Greece's Long-Term Growth Potential.


1. Greece is set to experience dramatic population aging over the next several decades. In its 2018 Aging Report, the EC projects Greece’s working age population to fall by about 35 percent between 2020 and 2060 due to a shrinking and rapidly aging population. This is among the largest such declines in the Euro Area, and three times the average fall for the Euro Area. Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades.

2. Greece’s productivity growth has historically been poor. Greece’s underperformance relative to peers is often associated with relatively low openness of the economy and a high share of labor allocated to non-tradable sectors. Total factor productivity (TFP) growth over the last 47 years averaged just ¼ percent annually, by far the lowest in the Euro Area. Assuming this historical average TFP growth rate going forward, labor productivity (output per worker) would grow only at about 0.4 percent in the steady state (the rate of TFP growth adjusted for the labor share in output).

3. A pickup in investment could provide a short-run boost to growth, but productivity and demographics will dominate in the longer run. Investment is bound to recover from its highly depressed level once Greece emerges from the crisis, but the growth effect of this will wane once the capital stock returns to its long-run level. Staff’s medium-term projections already assume a temporary boost to GDP growth from higher investment (with real GDP growth rates averaging close to 2 percent during the investment recovery). Once the transition to the new, higher capital ratio is completed, however, the impact of increased investment will fade and growth dynamics will be determined by the evolution of output per worker and of the number of workers.

4. Long-run GDP growth prospects are thus poor, absent a major change in policies. As a starting point, combining the historical growth in output per worker of 0.4 percent with expected growth in the number of workers of -1.1 percent would imply long-term annual growth of -0.7 percent. This simple result is broadly similar to other recent findings in the literature, which estimate Greece’s baseline growth rate (before the effect of reforms) at -0.4 percent during 2024–2043.

5. Structural reforms to raise TFP growth and employment are therefore the only option to achieve higher long-term output growth. Estimating the gains from structural reforms is technically difficult, and results are necessarily imprecise. The empirical evidence suggests that the GDP growth gains from reforms are somewhat modest and transitory: while studies have documented an impact on output levels of 3 to 13 percent over the initial decade, the impact of reforms on growth tends to fizzle out afterwards.

7.
 • The 2016 WEO estimates the GDP level gain from past episodes of product market deregulation in 26 advanced economies over 1970–2013 at about 3 percent on average, with gains accruing over a period of eight years, suggesting a GDP growth gain of about 0.4 percentage points per year during the eight-year period.
• Adhikari et al. (2016) looks at case studies of major past reformers in both labor and product markets—Australia, Denmark, Ireland, Netherlands, and New Zealand in the 1990s, Germany in the 2000s—and finds that the GDP effect of reforms ranged between 0 and 34 percent over a period of 5 years. Excluding Ireland, which is a clear outlier, the average impact was 0.6 percentage points per year over the five-year period, and in two out of six cases, there were no significant gains. Permanently raising growth would require a period of reform implementation that exceeds in both ambition and duration what Greece has achieved so far. While Greece has initiated numerous structural reforms in the context of its adjustment programs—from labor markets to energy, judicial reforms, closed professions, and others—implementation has sometimes lagged. The country’s key accomplishment has been a cornerstone labor market reform adopted in 2011, but this is set to be partially reversed after the current program. Other legislated reforms have faltered at the implementation stage. For example, numerous attempts at privatizing state monopolies in the energy sector are yet to reduce significantly the state’s share in this sector; judicial reforms have been slow moving, with continued high court backlogs; reforms to liberalize close professions have fall short from expectations in terms of both pace and scope; and; the investment licensing reform, which started in 2011, is still not fully completed. Given demographics, the impact of structural reforms will need to be substantial to achieve an overall long-term GDP growth rate of 1 percent over the next half century. Lifting long-term growth from its baseline of –0.7 percent to 1 percent requires reforms to add 1.7 percentage points to growth per year for the next decades. The OECD (2016) estimates that full implementation of a broad menu of structural reforms could raise Greece’s output by about 7.8 percent over a 10-year horizon, which translates into an increase in annual growth of some 0.8 percentage points for about a decade. Bourles et al. (2013) estimate this gain to be slightly higher, at about 0.9 percentage points per year, while Daude (2016) finds that reforms focused on product markets and improving the business environment in Greece could boost growth by about 1.3 percentage points per year for a decade.

9. In conclusion, achieving staff’s assumption of 1 percent growth in the face of adverse demographics and historically weak productivity growth will require that the Greek authorities and people commit to an extended period of profound structural reform. Implicitly, the 1 percent growth projection presumes that Greece would manage to increase labor force participation to levels that exceed the Euro Area average (to offset the significant projected decline in Greece’s working age population) and that would generate TFP growth rates permanently far above Greece’s historical average. This underscores the importance of rapid and decisive action on the part of the authorities to tackle the many bottlenecks that constrain growth and limit the country’s ability to prosper in the Euro Area. 

Tuesday, July 31, 2018

Pierre Moscovici Interviewed About Greece

A short article in the Ekathimerini referred to an interview which EU Commissioner Pierre Moscovici had given to the Austrian magazine Profil. Here is the original interview.

Right in his first response, Moscovici made the bold prophecy that "the Greeks will now see that their sacrifices mattered." His argument seemed to be that Greece now has more flexibility to provide for more social justice but he gave no specifics. In that same response, Moscovici described pre-crisis Greece as follows: the country's economy had been very weak, taxes were not paid, public administration was inefficient as evidenced by the fact that there was not even a nationwide real estate cadastre. A superficial reader could interpret this to mean that now, after 8 years of reforms, the economy is strong, taxes are being paid, public administration is efficient as evidenced by a nationwide real estate cadastre. Well, Moscovici didn't say that, of course. Instead, he reverted to the common phrase that "much progress has been made but there are still steps to be taken."

"The market now have confidence in Greece again. Greece has recovered the freedom to pursue its own policies. We have stopped the growth of debt" - bold statements by Moscovici.

Moscovici blames the German Finance Minister Schäuble for having been too aggressive in 2015, for having brought the idea of Grexit into play. At the same time, Moscovici believes that Schäuble's aggressiveness was in response to the unfortunate conduct of the Greek Finance Minister Yanis Varoufakis. And that brought the conversation to the subject of Varoufakis.

"Varoufakis is a brilliant and eloquent person, but he is a fake. He was the wrong person at the wrong time in the wrong place. I have had many meetings with him. At least in the beginning we had a good relationship. But he was never interested in a true compromise. He always lectured all the others. His methods were not those of a statesman but, instead, of a spy. He secretly recorded conversations and negotiations. That may perhaps help the sale of his books but one doesn't generate trust that way. Furthermore, all his talk about Plan B increased the danger of a Grexit. It's alright if you have disagreements with some of your friends but if one disagrees with everyone, then one is a lone wolf."

Moscovici praised the recent debt relief agreement, emphasizing that Greece will not have to pay any interest until 2032. Presumably, he only referred to the ESM debt here. Moscovici also mentioned that the subject of debt relief might be revisited in 2032.

Moscovici was quizzed about the figure of 50 BEUR which, at one time, was used as the target for privatizations and which now is obviously unrealistic. Moscovici sidestepped this question by saying that the EU Commission had never mentioned this figure.

Finally, Moscovici was quizzed about Greece's military expenses. The interviewer tried hard but he/she could not get Moscovici to say that Greece's military expenses were too high.

Bottom line: an uninformed reader could well come to the conclusion that Greece had been in deep trouble 8 years ago, that 8 years of EU-guided reforms had delivered positive results and that a bright future was ahead for Greece.

Monday, July 30, 2018

No Longer A Task Force To Turn To!

One expression keeps recurring whenever some form of disaster strikes Greece (be that the refugee crisis, forest fires, etc.), namely that "the Greek state is dysfunctional."

One conveniently tends to forget that there once was an EU Task Force for Greece whose mandate it was, among other things, to help the Greek state to become more functional. Its mission statement proposed that "the Task Force is a resource at the disposal of the Greek authorities as they 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."

Whether it is a nation-wide real estate cadastre with zoning maps, emergency plans for natural disasters, waste management, etc. etc. - all that and many, many more things fall into the category of an 'efficient public administration'.

The trouble with the TFGR was that it was "at the disposal of Greek authorities" to be used by the Greek authorities "as they seek to build a modern and prosperous Greece." It couldn't have any authority on its own because that would have been considered an interference with Greek sovereignty.

There no longer is a TFGR which the Greek state could turn to for assistance but it is highly doubtful, in my opinion, that the Greek state, on its own, can accomplish something within a short time frame for which other countries have required decades and centuries of experience and culture to develop - a well-functioning state and public administration. The TFGR falls into the category of missed opportunities.

Wednesday, July 18, 2018

A Lesson From Fraport's Success

Fraport Greece, the 14 regional Greek airports which were acquired in 2017, reports records in revenues and earnings. Pre-tax earnings were 20,4 MEUR. Since after-tax earnings were 14,4 MEUR, mathematics would indicate that the Greek state shared in Fraport's success to the tune of 6 MEUR. Total revenues were 233 MEUR and the target for 2018 is 300 MEUR. One doesn't need a calculator to figure out that this is VERY substantial growth!

From the distance, I can visualize my Greek friends, with whom I discussed Fraport on many occasions, blaming the government for having given away such a profitable company on the cheap. I cannot judge this because I don't know the details of the transaction but I would guess that as long as the Greek state shares 30% of Fraport's earnings, it sounds like a reasonable deal.

My point is a different one. The idea of foreign investment is not only to share in the success (albeit it a very important goal!). The principal idea of foreign investment, from the beneficiary's point of view, should be to obtain something which could not have been obtained otherwise (in addition to tax revenues). Things like new investment, new employment, etc. The most important derivative of foreign investment is the transfer of know-how in all respects, above all know-how in management, so that the foreigners' experience can be leveraged-up into domestic progress.

What is Fraport doing differently than before? Is it really only the access to capital? Very unlikely. Access to capital can be destructive when that capital is invested and managed poorly. One of the great secrets of China is that they acquire (and often steal) foreign know-how. When investments are managed well and profitably, capital will come on its own.

Tuesday, July 17, 2018

Comparative Charts About Greek Pensions

I came across the below selected charts in a paper by the Austrian think-tank Agenda Austria where they analyze Austrian pensions. They come to the conclusion that Austria should switch to the Swedish pension model (both, higher pensions and lower contributions than at present). Perhaps someone will some time compare the Greek pension system to the Swedish model. The source of the graphs is the OECD:

1. Actual vs. Legal Retirement Age

The dots show the legal retirement age and the bars the actual one. For men, the legal retirement age in Greece is 65, the actual is about 3 years below that. That puts Greece roughly in the middle of the group. Interestingly, for women, the legal and actual retirement ages are identical at 60.




2. Contribution Rates

Here, too, Greece is in the middle of the group with 20% of gross salaries. One wonders how there can be such huge differences among pension systems (33% in Italy, 16% in Belgium).



3. Pension Gap

The table shows pensions as a percentage of the former gross income. Here, too, Greece is in the middle of the group with a rate of 70%. I am highly suspicious of the chart because the 90% for Austria seems far from reality and the 101% for the Netherlands seem unreal.

Sunday, July 15, 2018

Bloomberg's Model Shows Dramatic Decline In Greek Interest Expense

The source of the below graph is Bloomberg, as presented in this article. The graph shows annual debt payments broken down into bond maturities, loan maturities and interest on both. What stands out is the interest payments shown in this graph. It's a bit hard to tell from the width of the bars how much the underlying interest is in Euros but a full column represents 5 BEUR. And there is at best one column (2019) where the interest bar spreads over half a column, i. e. interest in the area of 2,5-3 BEUR.

In recent years, Greece has spent on average about 5,5 BEUR on annual interest. The Bloomberg graph would suggest a dramatic decline in interest, much more so than I read in the recent debt relief agreement. So either Bloomberg's numbers are wrong and/or they know something which the world hasn't been told yet. If someone from Bloomberg reads this, a clarification would be welcome.

Saturday, July 14, 2018

The Farce Of EU Elites' Jubilation About Greece

Tansparency International has published a report on the "Evaluation of the Level of Corruption in Greece and the Impact on Quality of Government and Public Debt." Here are the highlights (very interesting reading!) and here is the full report.

The highlights list 10 "other key facts" (other than corruption) which underline my previous argument that the recent jubilation by EU elites about Greece having turned the corner were rather a farce.

Sunday, June 24, 2018

"The Greeks Can Now Smile!" - After Having Benefited From The "Biggest Solidarity The World Has Ever Seen.”

Government spokesman Dimitris Tzanakopoulos is credited with the promise that the Greeks can now smile following the successful settlement of Greece's exit from the 3rd program in August and ESM chief Klaus Regling reminded Greeks that they had been the beneficiary of the world's biggest solidarity effort ever. No better way for Alexis Tsipras to celebrate all this than by putting on a red tie.

It would be unfair to spoil the party by diminishing Greece's accomplishments. Only 3 years ago, the vast majority of politicians, commentators, analysts, etc. expected chaos for Greece's future: declaration of default and perhaps even repudiation of debt; exit from the Eurozone; breakdown of domestic stability; etc. It is unquestionably to the credit of Alexis Tsipras that all of this could be avoided and that now, 3 years later, the political establishment is celebrating Greece as a great success story. The fact that Tsipras accomplished this by essentially accepting just about everything, without resistance, that was put before him is a moot point. The end justified the means. I would further venture to say that no non-leftist government could have gotten away with accepting just about everything the creditors demanded.

If Tsipras celebrated with a red tie, the EU and Eurozone leaders celebrated with an effusion of self-praise. That, I think, was inappropriate, to say the least. The way the EU handled, beginning in the spring of 2010, the external payment crisis of Greece was a blunder of historical proportions and here is a compilation of articles I wrote about the subject back in 2012.

So how good is the new agreement which was reached a few days ago?

I propose that in any debt crisis, be it personal, corporate or sovereign, the borrower is faced with 2 principal issues: (a) the amount of interest he has to pay and (b) the amount of loan instalments he has to repay. The unique character of sovereign debt is that loan instalments never really get paid, i. e. nominal debt is hardly ever reduced. Instead, loan instalments are always refinanced. As a result, to offer an overindebted borrower like Greece an extension of maturities is nothing other than the recognition of reality. Those who consider this substantial debt relief should explain why they would prefer to waste time and effort every few months to renegotiate individual debt maturities.

So the crux of the matter is interest expense. Interest expense flows through the budget which means that it comes out of government revenues. Every Euro of interest payments is a Euro which is not available for other government expenditures. Pensions may have to be cut in order to pay interest. The point is: if one wants to give a sovereign borrower debt relief, one has to reduce his interest expense.

In 2016 and 2017, Greece's interest expense was stable at 5,6 BEUR. Back in 2011, Greece's interest expense had been 15,0 BEUR. The enormous reduction in interest expense, particularly when considering that debt was increased during this time, reflects that Greece has received substantial debt relief in recent years.

If the new agreement reduces Greece's interest expense below the 5,6 BEUR, then it is debt relief. If it doesn't, it is no relief at all.

The published information does not allow me to pass judgment on this. There are references about not applying the step-up interest margin on a certain portion of the debt which only means that interest expense would not increase; neither would it decrease. There are references about a further deferral of EFSF interest which would also hold interest expense stable but not reduce it. There are references about finally distributing to Greece SMP profits which had so far been held in an escrow account. This would be a significant reduction of interest expense. And there are references about replacing some expensive IMF debt with cheap ESM debt. This, too, would reduce interest expense.

At the same time, Greece is taking on quite a load of new debt for the primary purpose of building up a cash buffer. That cash buffer, of course, would increase interest expense.

In short, the principal benefit for Greece seems to be that its debt has now been regularized. That is in and by itself a very significant benefit because only if one's debt is regularized can one begin to commit time and resources to things other than debt negotiation. Whether or not Greece's budget will be relieved of interest expense as a result of the agreement remains to be seen.

Sunday, June 3, 2018

At Some Point Germans May Discover That They Are In Deep Trouble

Below are some interesting charts which I picked up in this Zerohedge article.

First, the phenomena which got the problem countries into trouble in the first place - current account deficits: Greece & Co. had been spending much more money outside their borders than they had revenues outside their borders, having to cover the gap with loans from outside their borders. Today, 8 years later, the situation is as follows:


There are current account surpluses wherever one looks. Almost wherever one looks: France seems to have become rather problematic with a current account deficit representing almost 4% of GDP but Greece's current account deficit is now minute compared to what it used to be.

A current account surplus doesn't mean that the domestic economy is in order. All it means is that the country is financially self-supporting as regards its economic activities outside its borders. It has enough revenues outside its borders to pay for all the essential and non-essential imports the country is buying. Theoretically, the country could be barred from any foreign credit and yet, it could continue its cross-border transactions.

The next chart is particularly interesting. The credible narrative had been that the ECB's Target2 payment system - as a quasi unlimited credit card - allowed countries to run current account deficits even though the foreign private banks were no longer funding them. That was certainly true in the early years but following that logic and seeing current account surpluses now, one would expect Target2 claims of the North to decline.

The following chart shows the development of the (in)famous Target2 balances:


The earlier narrative no longer holds because Target2 claims of the North, specifically of Germany, have increased phenomenally even though current account surpluses were recorded in most countries. There is only one other explanation: capital flight. Now here is something to ponder for all those who always blame Germany for bleeding out the suffering South: Germany has run up nearly a trillion Euros worth of Target2 claims so that, mostly, Italy and Spain could transfer money out of their countries (even back to Germany). Should Italy or Spain ever exit the Eurozone, the Bundesbank might say to them "We want you to give us our money back" and Italy or Spain would respond "The money is already back in your banking system, except it's now in our name and no longer in yours!"

Much has been said about the brutal internal devaluations which the South has had to go through. No doubt that's true for Greece but when one looks at Italy, one sees that nominal unit labor costs, the most crucial element of international competitiveness, have actually increased by 10% since the crisis began. The new Italian government intends to increase deficit spending which is unlikely to favorably impact nominal unit labor costs.


And now to the final chart which leads J. P. Morgan to the conclusion that an exit from the Eurozone may be Italy's best option:


Italy's net foreign investment position is only minimally negative which leads J. P. Morgan to conclude that an Italian Euro exit should be a lot less threatening to creditors than a Spanish one. Put differently, with a current account surplus and a walk-away from Target2 liabilities, Italy would owe only very little to foreigners. Well, not quite because the above foreign investment position is a net between assets and liabilities. While the assets/liabilities are not necessarily owned/owed by the same parties, it is still a fact that there are about 3 trillion Euros of Italian financial assets outside the country's borders and foreign creditors would use all legal expertise to get a hold of some of them.

The old saying goes "If you owe the bank 100.000 Euros, you have to be nervous. If you owe the bank 100 million Euros, the bank has to be nervous." Germany has many more reasons to be nervous about an Italian exit from the Eurozone than Italy itself. And here is another thought.

Deutsche Bank, once Germany's financial calling card, is in great difficulties. Should Germany ever be called upon to bail-out Deutsche Bank, they will discover that Deutsche Bank is counter-party in derivatives with a notional amount totalling almost 3 times the GDP of the United States!

Certainly at that point, Germany will stop educating others about reforming their financial sectors and economies.

Wednesday, May 30, 2018

Parallel Currency - Revisiting Justified?

Ever since it became public that Yanis Varoufakis had worked on a Plan X for a parallel currency, the term 'parallel currency' has assumed a bad odor. When it became public that Star-Lega of Italy were also eyeing the alternative of a parallel currency, markets went into shock. But why?

Before the introduction of the Euro, every country had a parallel currency. It was called 'local currency'. Business was conducted in other currencies as well and they were called 'foreign currency' (I remember when, years ago as a tourist, Greeks seemed to prefer getting paid in Deutsche Marks rather than Drachma). The difference between the two currencies is that the local currency was the only legal tender in each country and it could be printed by each country whereas the foreign currency had neither advantage.

With the Euro, the members of the Eurozone gave up their local currency and opted for a foreign currency as their only legal tender, a foreign currency which they could not/cannot print. What's badly missing now is a local currency which a country can print, even though it may not be legal tender. In short, a parallel currency.

Greece, actually, already has one parallel currency - postdated checks. If B accepts a check from A, dated for payment 3 months later, in lieu of cash payment, then the postdated check has assumed the character of a currency. B will only accept the postdated check in lieu of cash payment from A if he knows that he can pay his creditors' bills with that check. I do not know how common this practice is today but I remember that, only a few years ago, I was told that postdated checks were a rather common form of payment among small businesses.

Assume that Greece starts with a parallel currency called 'Drachma' with an exchange rate of initially 1:1 to the Euro. Assume further that the Bank of Greece commits that the new Drachma is fully backed by the gold reserves of the Bank of Greece, i. e. each holder of a Drachma can redeem his notes in gold at the current gold price. I doubt that Greeks would have a problem accepting this new Drachma at the same value as the Euro. The only problem is that the Bank of Greece will not have enough gold to back all the new Drachma issued.

As a result, the new Drachma would be backed by the full faith and credit of the Greek state, no more. And since the Greek state would generously print the new Drachma (that would be the idea of the whole thing), it is near certain that this new Drachma would lose value against the Euro very quickly.

The great advantage of a parallel currency over a Grexit would be that Greece remains a fully-fledged member of the Eurozone and those who have Euros can happily continue to do business in Euros without incurring any additional fees. The advantage for the Greek economy is that the state could provide financial breathing space by issuing the new Drachma. Greeks may discover that it is better to receive payment in a parallel currency of lesser value than no payment at all in a Euro of full value.

The great challenge of a parallel currency lies in its implementation. Since it is not legal tender (only the Euro is allowed as legal tender within the Eurozone), no one can be forced to accept it. And people will only voluntarily accept payment in a parallel currency if they know that they can pay others in the parallel currency and how much they can buy with it.

Perhaps the time has come to revisit Yanis Varoufakis' Plan X.

Tuesday, May 29, 2018

Greece's Debt Profile Per March 31, 2018

Below is one of the best graphs which I have seen of late, Greece's debt profile per March 31, 2018:



The most expensive sources of financing for the Greek state are freely placed bonds and Repo's (both currently around 4%). Yet, the state seems to be in love with its two most expensive forms of financing: the famous 'return to the market' is being celebrated every other day and Repo's are treated like a permanent source of financing.

The least expensive source of financing is the ESM (a little over 1%). That's the source which Greek politicians are bragging to get rid of before long. The GLF is irrelevant for the purpose of comparing costs because it is not available for fresh money (GLF stands for Greek Loan Facility. It was the first financial support program for Greece, agreed in May 2010. It consisted of bilateral loans from euro area countries, amounting to €52.9 billion, and a €20.1 billion loan from the IMF).

There is only one argument for not taking advantage of the least expensive source of financing, and it is a political one: if freeing Greece from the shackles of foreign domination has been elevated to the most important political objective, one cannot very well continue doing business with those who allegedly had imposed the shackles in the past.

A very high price to pay for a political objective!

Monday, May 28, 2018

Yanis Varoufakis In Overdrive

In a blogpost after Varoufakis's resignation as Finance Minister, I predicted that he would remain in the public eye for a long time to come and I put the following words into his mouth: "The only thing I have not yet decided is the timing of my future publications. I do not intend to put everything out there at once. Instead, I will time my publications in such a way that they keep the flame burning for a long time."

For almost 3 years now, I have been amazed at the media's fascination with a failed Finance Minister of a small country. Time and again, and rather often, Varoufakis was able to place thought pieces in major international publications and give interviews to prominent news media. But this was nothing compared to the last 24 hours.

In the last 24 hours, I received a total of 12 alerts to publications, interviews, podcasts, etc. authored by Varoufakis. One of the publications was a very interesting article about Italy in The Guardian which was appropriately titled: "With his choice of prime minister, Italy’s president has gifted the far right!"

I am now pondering an article with the title: "With its enormous political turmoils, Italy has gifted Yanis Varoufakis!" My prediction is that Greece will turn out to have been only a warm-up for Varoufakis. Italy will give him a much broader audience and my guess is that he will play that audience better than most other commentators.

Friday, May 11, 2018

Piraeus & Cosco: A Pure Success Story!

The Piraeus Port Authority S.A. (PPA) is a publicly traded stock corporation which operates everything that takes place in the Piraeus harbor (the land is leased from the state; not owned by PPA). The largest shareholder is Cosco Shipping of China with 51% outright. Another 16% are held in escrow in favor of Cosco until 2021 by which time they will also pass into outright Cosco ownership provided that Cosco completes the mandatory investments. The Hellenic Fund and Asset Management Association (HRADF), i. e. the Greek state, still owns 7,14% after having sold the above 67% to Cosco in 2016. Domestic and foreign institutional investors own roughly 8-10% each and the rest of the stock is widely distributed.

PPA has made a comprehensive Presentation of Financial Results 2017 to the HRADF. Here are some highlights:

* PPA recorded total revenues of 112 MEUR in 2017, spread over 5 business divisions: 3 container terminals (64 MEUR), 1 car terminal (12 MEUR), cruise operations (11 MEUR), coastal operations (10 MEUR) and ship repair (7 MEUR).
* The 3 container terminals are named Pier I, Pier II and Pier III. Already in 2008, Cosco had signed a lease for Pier II and it subsequently added, in 2013, Pier III. Pier I had operated under Greek management until Cosco's majority acquisition of PPA in 2016.
* PPA recorded earnings before taxes of 21,2 MEUR, which is a return of 19%; an outstanding performance!
* Leaving aside Pier I, the pre-tax earnings were contributed by Pier II and III (33,4 MEUR), car terminal (1,7 MEUR), cruise operations (2,0 MEUR), coastal operations (1,9 MEUR) and ship repair (1,0 MEUR). Since the sum of these individual parts amounts to 40,0 MEUR and since the total pre-tax earnings of PPA were 21,2 MEUR, it is obvious that there is a rotten apple in the group.
* Pier I, the pier which had been operated by Greek management until Cosco's majority acquisition of PPA in 2016, contributed a pre-tax loss of 15,1 MEUR! (this on revenues of 20,0 MEUR!). In previous years this loss had even been substantially higher.

The non-financial part of the presentation includes the following highlights:

* Piraeus is the 7th largest container port in Europe with good chances of moving into the top-5 in the near future.
* Piraeus is the 6th largest cruise port in the Mediterranean.
* Piraeus is the largest passenger port in Europe.
* 150 MEUR will be invested into the expansion of the cruise port.
* 20 MEUR will be invested into the expansion of the car port.
* 55 MEUR will be invested into the expansion of the ship repair operation.
* the cruise passenger terminal will be expanded and 2 warehouses will be converted into 4* and 5* hotels.

Conclusion
It is hard to think of a better foreign investment for Greece. A 'good' foreign investment is an investment which leads to something positive which would not have happened without that foreign investment. It is obviously impossible to say how PPA would have developed if Cosco had not become involved in 2008 but one point of reference is that the pier which had been operated by Greek management until 2016 had essentially been a money-squandering machine until that time (almost 100 MEUR pre-tax losses in 5 years!).

Thursday, May 10, 2018

ESM's Klaus Regling: Germany's 1953 Debt Restructuring A Model For Greece?

Klaus Regling, head of the European Stability Mechanism (ESM), this week drew a parallel between Greece today and postwar Germany in a speech in Aachen, Germany. Germany, he reminded the audience, had repaid the last instalment of the 1953 debt restructuring only in 2010. Successful debt restructuring was all a matter of long tenors, according to Regling.

Regling casually overlooked a few details in his speech. One, a very major debt forgiveness had been part of the 1953 debt restructuring (50% of all debt). And, two, there was the Marshall Plan which provided a key stimulus for the unfolding Wirtschaftswunder in Germany.

But still, the valid question is: Would the Greek economy experience its own Wirtschaftswunder if only a sufficient external stimulus and adequate debt relief were given? That is really the key question haunting Greece observers since 2010. Yanis Varoufakis, for one, had argued tirelessly in his blog, long before he became Finance Minister, that only a major public stimulus could get Greece out of its depression because, he said, when the situation is as depressed as it was/is in Greece, no private initiative could accomplish this goal.

One thing is certain: whenever there is an economic problem and one throws money at it, there will be an improvement. If Greece were given, as a present, say, 10 BEUR, the Greek state would spend most of that money domestically. The expenses of the state are incomes/revenues for privates. The privates, in turn, spend their new incomes/revenues and they become incomes/revenues of others. And so forth.

But here is the great uncertainty: Will that initial improvement trigger a lasting recovery or will it only turn out to have been a flash in the pan?

One can liken the situation to a large campfire. A cup of gasoline will certainly convert a flamelet into a darting flame. The question is whether that darting flame will lead to a lasting fire and lots of glow. If the campfire is built well; if there are small pieces at the bottom and the larger ones at the top; if the wood is dry; etc. --- the darting flame will likely lead to a full-fledged fire. If, on the other hand, the campfire is poorly built; if there are only few small pieces at the bottom; if the wood is wet; etc. - well, then the darting flame will soon extinguish and the situation will be worse afterwards than before because the darting flame will have burnt whatever there was left of small pieces.

There are many economic examples for both scenarios. The postwar German campfire was very well built and the Marshall Plan, actually a relatively small stimulus, provided the darting flame which turned into a lasting fire. Forty years later, the former East Germany was not a well-built campfire. The West did not throw a cup of gasoline on that campfire. Instead, the West threw (and still throws) truckloads of gasoline on that campfire (roughly 100 BEUR annually) and it still hasn't really developed its own strength.

How can one explain the difference between postwar Germany and the East Germany of the 1990s? Well, it certainly can't have been racial and/or cultural reasons: the East and the West were ethnically the same Germans. The answer must be found elsewhere.

Is the Greek economy today more akin to the postwar Germany of the 1950s or East Germany of the 1990's? One thing is certain: post-1953 Germany was a tremendous economy to invest in, both for Germans as well as foreigners (particularly Americans made huge investments in Germany). Greece, in contrast, ranks as one of the least attractive countries of the Eurozone, of the EU and of Europe in total to invest in (Doing Business Report 2018).

Statistics since 1981 show that as money flows into the Greek economy, as growth occurs, as purchasing power increases --- much of that purchasing power goes into consumption instead of investment. Since the Greek economy cannot satisfy, by far, the desires of Greek consumers, the increased purchasing power goes into imported products. All the reforms discussed/implemented since 2010 had as their declared objective to change/improve the structure of the Greek economy: more productive output and less services; more exports and less imports; more private and less public activity; etc. A distant observer cannot see that much has changed in that regard.

On the other hand, there are some positive examples. My favorite one is Cosco which I have described in many articles since 2012 as the prototype of a desirable foreign investor. Cosco proves a couple of important points to me: (a) there are investment opportunities in Greece which are of great interest to major foreign players; (b) there are major foreign players who are willing to invest even during risky times; (c) there are major foreign players who take a long-term view on Greece instead of eyeing only quick profits; and (d) when such major foreign players who take a long-term view on Greece make their investments, the results for the Greek economy can be miraculous.

Cosco had encountered a lot of criticism/objection in its early years. Reactions to my positive articles about Cosco pointed out inhumane working conditions in Chinese sweat shops. The announcement around 2013/14 that Cosco was projected to add about 1-1/2 - 2% to Greece's GDP by 2018 did not catch much attention. Today, it seems that actual results have persuaded the critics.

So is the Greek economy now akin to a well-built campfire waiting for the initial darting flame or not?

My gut feeling is that there is no major change/improvement in Greece's overall attractiveness as an economy to invest in. The truly important changes/improvement in the structure of the Greek economy have not taken place. At the same time, I believe that there could be new 'Cosco's' and the Greek government should make every effort to look for them and find them. If only there were a dozen 'Cosco's' in the Greek economy, their presence would probably do more to change/improve the structure of the Greek economy than all the Troika's, Task Forces, etc. put together.

Tuesday, May 8, 2018

Surprise, Surprise - Germany Not A Model Pupil!

The English edition of the German Handelsblatt published an article showing that Germany was, by the end of 2016, the leading breaker of EU rules:


The German author of the article concludes: "The country, which has lectured debt sinners like Greece, performs worst in complying with European Union legislation. Physician, heal thyself!"

Monday, April 30, 2018

Greece's GDP Per Hour Worked

Below is the link to a chart which observers call the chart which says it all about Greece's problems: GDP per hour worked.

GDP per hour worked

Saturday, April 14, 2018

Personal Economic Indicators

I have commented on several occasions about my personal economic indicators for Greece. Every spring and fall, we spend a couple of months in Thessaloniki and I have developed the habit of looking out for things which - albeit totally non-sophisticated - strike me as being indicative of how the economy is coming along. One of these personal economic indicators is the commercial traffic in the harbor of Thessaloniki.

That commercial traffic had been increasing significantly in the last couple of years. Where I used to count perhaps 3-4 ships in previous years, last year there were always at least 10 freighters, including some very large ones.

We have now been back in Thessaloniki for over one week and --- I see hardly any freighters in the harbor of Thessaloniki! I have certainly not yet seen as many as 4 at one time, not to mention 10 or even more. What is happening here???

Another personal indicator is life in the villages. We spent Easter in my wife's village near Kavala. Off the bat, the village seemed somewhat empty compared to previous visits. The one hotel was closed. Quite a few shops had closed. And, above all, some buildings had obviously been deserted.

On the positive side was the story of my wife's nephew, Giorgos, a graduate of a technical school and now 29-years old. Giorgos had taken over his father's business about a year ago. Essentially, a one-person earth-moving business with some sales of building materials on the side. Where Giorgos' father had considered "working" as sitting on his machines and moving earth, Giorgos considers "working" as doing business, as looking for jobs, as farming out jobs to others when he has no capacity on his own. Of course, Giorgos is - like his father was - an extremely hard worker and he also sits on machines and moves earth. BUT - he spends a good portion of his time knocking on doors to get orders. Most importantly, whereas his father had waited passively for customers to pay their bills, Giorgos spends time collecting them. In the evenings, Giorgos and his fiancée - who is taking care of the sales shop during the day - browse the internet for jobs which are tendered in the area.

When Giorgos' father did not get orders, he had nothing to do and there had been some extremely slow times since the crisis. Giorgos, on the other hand, is extremely busy and when he told me how much money his business made every month, I was stunned. Giorgos says that there is no crisis. Instead, money is lying on the ground and one only has to make the effort to pick it up. There is no unemployment, he says. Those who don't have work don't want to work, is Giorgos' opinion. Those who wanted to work but couldn't find work have left the country, Giorgos says.

Giorgos gives work to several people. They are Greeks and not Albanians, he says. Two of them have university degrees. He employs them officially under short-term contracts; they get between 30-50 Euros/day, depending on the type of work they do, plus insurance. I asked Giorgos if he officially declared all his revenues. He hesitated, thought for a moment and then he said: "If I did that, I would be bankrupt within a year."

Giorgos has the view of a "worker", a small-town operator who can drum up business when he tries hard. He says he doesn't feel too good for anything. When he had a slow period in the winter, he found someone who had a lot of manure to be removed and he found someone else who needed manure. So Giorgos got into the business of transporting manure.

I told Giorgos that, perhaps, the situation if different for a bookkeeper in a large city. If he loses his job and there is no new job as a bookkeeper, he can try as hard as he wants but he will not find work. Giorgos' response: "I would knock on 20 doors every day and ask people if I could do anything for them. I would find some people who needed something."

I discussed this with my neighbor in Thessaloniki. In his view, the overall economic situation is as bad as ever. But, he hastens to add, the situation might be a bit better in the villages. In the villages, he says, there is always something that can be done. If nothing else, one can start cultivating a field. My neighbor is not surprised that Giorgos feels that there is work for everyone but he stresses that this represents the narrow view of a small-town operator and is absolutely not reflective of the country as a whole.

Thursday, April 5, 2018

Greece Is Still The Least Attractive Place To Do Business In Europe

The World Bank's Doing Business Report compares roughly 190 countries in terms of competitiveness. Back in 2011, Greece ranked as Nr 109, the lowest ranked country in the Eurozone, in the EU and in Europe altogether.

There have been up's and down's since then but, overall, Greece improved its position significantly: the 2018 report ranks Greece as Nr 67. So much for the good news.

The not-so-good-news is that Greece is still behind everyone else in the Eurozone, in the EU and in Europe altogether. It pains particularly when seeing that Greece's neighbors outperform Greece: Albania (65), FYROM (11), Bulgaria (50) and Turkey (60).

Tuesday, March 27, 2018

Greece - Once Upon A Time There Was A McKinsey Plan...

Once upon a time...

Once upon a time, in mid-2011, McKinsey first published their report "Greece Ten Years Ahead" (GTYA). The report outlined a National Growth Model which, the study predicted, would create over 500.000 new jobs and add roughly 50 BEUR to Greece's GDP within a decade. I had written a total of 14 articles about it at the time.

I found the McKinsey report by googling "greece economic development plan". It is amazing how many different entries from different sources one finds when googling that subject. Including several Greek sources like the think-tank IOBE.

The common thread of all these plans is that "Greece needs to change its growth model to ensure the return of its economy to high growth rates and this model should be based on limiting the importance of consumption spending on economic growth, strengthening the role of business investments and raising "net" contribution of the external sector by boosting exports" - IOBE.

There has been no shortage of proposals as to what needs to be done about Greece's economy. Eight years after the first memorandum, it would be interesting to see a detailed report as to how many of these proposals have actually been implemented and with what degree of success.

Target2 Claims Revisited

Target2 is the cash management system which the ECB uses in order to settle balances among the banking systems of the Eurozone member countries. If a national banking system transfers more money abroad than it receives from abroad (e. g. Greece), it builds up Target2 liabilities with the ECB system. If a national banking system transfers less money abroad than it receives from abroad, it builds up builds up Target2 claims with the ECB system (e. g. Germany).

The miraculous world of Target2 was revealed to the public in February 2011 by the German economist Hans-Werner Sinn. This is how the tale goes: Hans Tietmeyer, a former President of the Bundesbank, was reviewing the Bundesbank's balance sheet over the Christmas holidays and he came across a rather large asset position, i. e. Target2 claims, which he didn't know what they were. Thus, he asked Sinn about it but, off the bat, Sinn did not have an explanation, either. Sinn then researched the subject and the net result has been a never-ending debate about the risks associated with Target2.

The below table shows the development of Target2 balances of the most significant countries since 2008 (details are here):


Target2 Balances (BEUR)
Belgium Germany Greece Spain Portugal Italy Lux
2008 -104 115 -35 -35 -19 23 42
2018 -20 882 -58 -399 -83 -433 196

Belgium has significantly reduced its (originally quite high!) liabilities from minus 104 BEUR to minus 20 BEUR whereas Portugal has increased its liabilities from minus 19 BEUR to minus 83 BEUR, a very large figure compared to the size of its economy. Greece has increased its liabilities from minus 35 BEUR to minus 58 BEUR, a rather moderate amount when considering what Greece has been through (at one point during the crisis, Greece's liabilities had exceeded 100 BEUR!).

These countries - like all the others - are only sideshows when comparing them to the truly big players: both, Spain and Italy, increased their respective Target2 liabilities by over 400 BEUR (!) since 2008! The magnitude of these figures is mind-boggling. To illustrate: through a combination of current account deficits, capital flight, QE, etc., the banking systems of Spain and Italy lost over 400 BEUR each in liquidity during the last decade!

"For every credit, there must be a debit" - this we learned in Accounting back in school. The debits of Target2 are in Germany, Luxemburg (particularly relative to its size) and the Netherlands (plus 114 BEUR, up from minus 19 BEUR). When Sinn first uncovered the secrets behind Target2 in February 2011, Germany's Target2 claims were 326 BEUR and Sinn considered this as coming close to the end of the world. Now, Target2 claims are almost 3 times as high. Inconceivable from the viewpoint of only a few years ago but an accepted fact today.

How high can Target2 claims go before they system breaks?