Monday, September 26, 2022

Greece On The Rebound?

An American friend recently asked me for my opinion on the current status of Greece. Below is the original mail which I sent him with 2 follow-up's. 


Original mail

News about Greece? Well, I think I said before that Nea Demokratia (Mitsotakis’ party) should erect a monument honoring Alexis Tsipras in downtown Athens! That man was to the Greek economy what Paul Volcker was to the American one. Except that Volcker did it out of conviction to wring inflation out of the US economy whereas Tsipras had signed everything the Troika had laid on his desk only to be loved by international leaders. No non-leftist leader could have done what Tsipras did - there would have been a rebellion. Sometimes I think that, in approaching the negotiations, the Troika had started with extreme austerity scenarios only to be prepared to negotiate them down but Tsipras didn’t do any negotiating. So screws were really put on EVERYTHING (wages, pensions, benefits, state employees, etc.) and taxes were increased like mad. And the result? A balanced budget and a wonderful trampoline for a new government - fresh leeway to lower taxes and increase benefits!

The really smart thing of Tsipras was that he did not agree to the Troika’s pressure so sign a standby-agreement for the time after the program. That would have again required memoranda with financial targets, reviews and so forth. Instead he opted for the option of a cash reserve (actually, at the time I argued that he should go for the standby-facility) and the Troika started with a dowry of 15 BEUR. 

But the smartest thing of all was that Tsipras had learned the lesson - „borrow when you don’t need the money so that you don’t have to borrow when you need it“. Mitsotakis subsequently took that lesson to the extreme. Greece borrowed and borrowed because markets were so eager to find yields and before you knew it, Greece was sitting on cash reserves of 40 BEUR+ without having any significant debt maturities until the early 2030s and very low interest expense. So here you have it - markets were lending to Greece because the risk looked so good with so much cash reserves and the more Greece borrowed, the more cash reserves it had and the better it looked. Investment grade is around the corner. Greece spent tons of money on Corona and, now, energy and under normal circumstances that might have led to a liquidity squeeze. As it was/is, it just made a small dent into cash reserves only to be filled quickly again with funds from the EU Recovery Fund.

Greece is swimming in cash and more cash is on the way out of the EU Recovery Fund. In theory, most of this cash is earmarked for certain growth projects and if Greece, for once, manages to spend borrowed money on sensible investments, that could really lead to a phenomenal future. But that is - as always - the big „if“ with Greece. I would be cautious.

And against the above background, enter Kiriakos Mitsotakis, a superbly smooth operator with cosmopolitan flair who is more eloquent and fluent in English than most native English speakers. The ideal interviewee for the global networks. The perfect pitcher for foreign investments. A man who managed to give back to Greece, in the eyes of the world, some of its greatness and that, of course, has an impact on the perceived creditworthiness of the country. Mitsotakis dances on the world stage like it is his home. When he visits Washington DC, he - naturally - is given a chance to address both Houses of Congress where he gets innumerable standing ovations. All this leads to a situation which was beautifully described by a recent NYT commentator:

"It is, rather, the unsustainable contradiction between the country Mr. Mitsotakis insists on pitching abroad — an unimpeachably democratic state whose respect for the rule of law and liberal bona fides ought to be rewarded with corporate investments and tourism dollars — and the one he actually presides over.“

Mitsotakis has managed to get the world who loves him to disregard the Greek shadows (of which there have always been many and which have not disappeared). In some ways, he is running the country Orban-style while portraying himself as Thomas Jefferson. The media are pretty much under control and Greece went from #58 to #108 on the Freedom of Press Index. No one seemed to care. If Orban had done to refugees what Mitsotakis is doing (push-back’s, etc.), he would probably have been kicked out of the EU by now. And then it turns out that Mitsotakis' government is wiretapping political opponents! So far, Mitsotakis has managed to keep all these serious issues under control but if and when they explode, they will explode in a nasty way. 

And here is the greatest risk - just like Ikarus became over-confident when he saw that he could fly, Mitsotakis is getting a bit over-confident, too. Quite cocky, I would say. When the honor of addressing both Houses of Congress is awarded to you, you live up to that distinction and you don’t use that opportunity to trash your neighbor (regardless how justified Turkey-trashing would be; and it is!). When you sit in the European parliament and listen absent-mindedly to serious criticism from a parliamentarian who quotes from the EU report on Greek push-back’s, everyone would expect you to respond in a serious way to those accusations (which, incidentally, are not accusations but proven facts). When you then get up and say not much more than „Greece is honoring all international treaties and conventions“ - full stop, well, that’s really kind of cocky. 

All of this is a very long way of saying that not everything is as shiny in Greece as it presently seems. Yes, Mitsotakis is a serious leader and he has some serious people in his government. Notably the Minister for Digitalization who is a genius and who has already introduced incredible reforms in public administration. But the sad fact is that underneath the surface are Greece and the Greeks and I am very cautious before I jump to the conclusion that Greeks will really change. Our mutual friend David would tell you that they never will.

The economy is booming. No surprise with all that cash and all those tourists coming in. Unemployment is down to 12% (!) and growth this year will be over 5%! But whenever Greece booms, Greeks discover that the products for which they now have money and which they want to buy are not produced in Greece. The money immediately goes into imports. Tsipras’ austerity had brought the current account deficit down to almost zero. This year, it will be at least 20 BEUR despite all the tourism records. That’s a little over 10% of GDP. Back in 2009, just before Greece had hit sudden stop, the current account deficit was about 15%. I think there is a real chance that Greece will return to its traditional role of being a turntable for money - money coming into the country as debt and leaving it as current account deficit and capital flight. And with everything booming, inflation is going through the roof not only because of energy costs. Simply put - Greece is getting expensive again. Not too bad yet but well under way. And we all remember what happens when Greece becomes more expensive than competitor countries. 

One of the greatest risks that I can see is that Greece faces no serious financial constraints for a number of years. Existing cash reserves are high enough to carry the country through several years and more cash is on its way. Not having financial constraints while cash is flowing into the county is a very dangerous combination for Greece.


Addendum #1

Of course I was being facetious about Tsipras. I agree with those many people who say that Tsipras’ IQ is not very high. It doesn’t appear like he really understood what was happening around him. He was the man with the megaphone and he had great talent to hit on good soundbites. As for the „Volcker of Greece“, the Troika was the Volcker and Tsipras was their proxy. He would shout into the megaphone that he would reject the latest Troika demands only to sign them the following day. He is really a bit of a tragic figure because he took the beating so that his successor could shine (and he was not aware that he was doing it!).

Tsipras is not history yet! The wiretapping scandal has really damaged Mitsotakis credibility and strengthened Tsipras’ megaphone. The new election system makes it virtually impossible for anyone to rule alone, so Mitsotakis will need to find a coalition partner next year. Tsipras will also look for coalition partners. So Greece will face interesting times (again). The only thing which seems certain is that Greece will be less stable going forward (after the election).


Addendum #2

Back in the summer of 2018, Greece was heading for the exit from the Troika program. There was really no way of telling at the time what would happen once Greece stood on its own feet again. Most people were cautious and felt Greece shouldn’t take any risks and, therefore, opt for a Troika standby facility. That also made a lot of sense to me because, that way, Greece would pay only a small commitment fee and nothing more. The alternative (the cash reserve) would mean that Greece would pay interest and receive less interest on the re-investment of those funds. 

Tsipras was the lone wolf. His objective was to go into the 2019 elections with the claim that he personally had freed Greece of all foreign shackles and a standby facility would have required him to sign another memorandum. That was a no-go for Tsipras. In retrospect one can say that entirely for political reasons he took a decision which turned out brilliant for economic reasons. No one at the time would have foreseen how easy it would be for Greece to borrow new money in the markets at near-zero rates.

I love to browse around in the statistics of the Greek Central Bank and Treasury (as well as those of other countries). It is quite surprising what one can find there. For example, since 2010, during more than a decade where everyone thought Greece was excluded from foreign funding, Greece managed to increase its external debt by 195 BEUR (!) to 565 BEUR! That now represents almost 3 times GDP. Argentina is looking good in comparison… Of that 195 BEUR increase, roughly 120 BEUR alone came in during the last 3 years of Mitsotakis’ government!

Greece now has a negative net international investment position of 325 BEUR (i. e. negative international net worth). Since external debt alone is 565 BEUR, I figured that there must be somewhere at least 240 BEUR in foreign assets. As it turns out, the Greek economy reports total foreign assets of 302 BEUR against foreign liabilities of 627 BEUR. I was extremely surprised that the Greek economy would have so many foreign assets. Regrettably, from the Central Bank lingo, I can’t tell what assets those are and who owns them. That would be an interesting area to research!

Whichever way you slice it, those figures - albeit not nominally as large as Italy’s - are huge figures for a country the size of Greece. Wouldn’t you agree? I know one shouldn’t look at such macro figures with a bookkeeper’s mind but my bookkeeper’s mind tells me that, cross borderwise, Greece has a negative net worth of 302 BEUR. And if the foreign assets do not serve as collateral for the foreign liabilities (which I am sure they don’t), foreigners have 627 BEUR at stake in Greece. Not bad for a small country which doesn’t even have a complete land registry yet and where the state is not able to produce a list of all real estate it owns!

That brings me to my favorite subject of Target2. In the spring of 2011, the German economist Hans-Werner Sinn wrote an article that he had discovered an amount of 325 BEUR among the assets of the Bundesbank and had researched what they were. It turned out they were socalled Target2 claims. And since then there has been a debate what Target2 claims are. Are they overdrafts? Loans? Or simply hot air? Well, they are undocumented balances in a clearing system. If Germany has 325 BEUR in claims (the claims are against the ECB), someone else has 325 BEUR in liabilities against the ECB. If the clearing system breaks down (i. e. if the Euro fails), Germany is out of 325 BEUR.

Except, Germany would now be out of over 1,2 trillion Euro because that’s the current level of Bundesbank Target2 claims! Well, that’s like one-thousand-two-hundred-billion-Euros. Or more than a quarter of Germany’s GDP! This come on top of the rescue financing which Germany has been part of in the last decade. If there were no Euro-clearing system called Target2, the deficit national central banks would have to borrow that money in the market (if they could indeed borrow it) and pay interest on it instead of the interest-free ECB liabilities. According to the gospel, any Target2 liabilities were supposed to be secured by first-class securities. Well, they have become unsecured by now.

Returning to Greece. Greece had scared the world because by 2010, their Target2 liabilities had reached almost 150 BEUR. That was the net outflow of money which could not be financed by normal credit. It was again under their proxy Tsipras that the Troika could reduce the Target2 liabilities to 25 BEUR by 2019. An achievement which I would never have thought possible. And where have they gone since then under Mitsotakis? They are currently around 110 BEUR again. If you want to look into Target2 balances in more detail, here is a good link.

What am I trying to get at? Well, if one were to look at Greece with the same critical mind as one looked about 10 years ago, one should really get scared. Budget deep in the red, current account deep in the red, sovereign and foreign debt rising at enormous speed. But no one is worried at the moment. After all, Mitsotakis is a good looking cosmopolitan man who is fluent and extremely eloquent in English. He has a great pitch and he pitches all the time. But one should always remember what the commentator wrote in the NYT recently: "It is the unsustainable contradiction between the country Mr. Mitsotakis insists on pitching abroad — an unimpeachably democratic state whose respect for the rule of law and liberal bona fides ought to be rewarded with corporate investments and tourism dollars — and the one he actually presides over.“

If you look at the above figures of Greece and bear Italy’s figures in the back of your mind (and some other countries), you know that there is only one way for the Euro to survive longer-term and that is the mutualization of all national debts (i. e. Eurobonds). Otherwise, this whole system is going to blow up sooner or later. Which reminds me of a biography I once read about Alexander Hamilton. His point was that there are 2 key prerequisites for a union to stay together: a common army and a common currency with a central bank. Well, he got both. The EU still needs both (whether you like it or not).

Sunday, August 28, 2022

Alexander Clapp Spoils Bullishness About Greece

Alexander Clapp's essay on Greece ("The Rot at the Heart of Greece Is Now Clear for Everyone to See"), published in the NYT on August 22, met with a multitude of reactions. Personally, I thought the essay was excellent and fair but I can understand why the reaction from the Greek side would be less than enthusiastic. One exception to that was The Greek Analyst who published a lengthy thread on Twitter. This was remarkable in as much as The Greek Analyst (73,8K followers) has been extremely bullish on Greece of late.

Since I had been in contact with Alexander Clapp a few years ago, I sent him the following mail about his essay.


Dear Alex,

The key statement in your essay, to me, was the following:

"It is, rather, the unsustainable contradiction between the country Mr. Mitsotakis insists on pitching abroad — an unimpeachably democratic state whose respect for the rule of law and liberal bona fides ought to be rewarded with corporate investments and tourism dollars — and the one he actually presides over.“

That question has been bugging me for quite some time now. I belong to those who were initially overwhelmed by Mr. Mitsotakis: his cosmopolitan demeanor; his superbly eloquent English; the way he handles himself; etc. Watching English interviews with him was always a pleasure. And the trick worked with me because I started believing that a new Golden Age was in Greece’s future. A modernized Western nation where people act rationally, honestly and responsibly. I even wrote a couple of articles in my blog about it.

It started with the push-back’s. There is a Greek journalist at DER SPIEGEL (Giorgos Christides) who really seems to detest the current government and whose articles about the push-back’s were accordingly. So I really didn’t take them too seriously (apart from the fact that I have true sympathies for Greece with regard to protecting EU borders). When the EU published its report on FRONTEX, there were proven facts but I still didn’t get overly excited. And then I watched a session of the EU parliament where Mitsotakis was present. A lady (don’t recall from which party) read him the riot act with innumerable facts from the report. I still did not get excited because I expected Mitsotakis to address each fact in his response. Instead, his response was limited to something like „Greece adheres to all laws and international treaties.“ That, I thought, was arrogant.

Then came his visit to the US and his speech before both Houses of Congress. To use that speech for portraying Turkey as an evil empire (even though it is) was not only displaced, in my opinion, but also arrogant. Those issues should be addressed in private discussions but not as a guest of honor before both Houses of Congress. 

And now we have this issue with the wiretapping. I would have expected Mitsotakis to quickly announce the formation of an investigation committee including international experts and even members of the opposition. His actual reaction I found disappointing.

After Greece’s exit from the program in 2018, I wrote a lengthy article summarizing all my experiences of the crisis and concluding that Greece was now truly on the right track and that, therefore, I wouldn’t continue my blog. 

Of late, I have looked at some of the hard facts of Greece (as opposed to the soft PR of Mitsotakis). I have written about Greece’s massive current account deficit and the staggering increase in foreign debt. While I don’t want to spoil the party of a record tourist season, the hard facts are very disappointing. Greece seems to return to being a turntable for money, money entering the country as debt and leaving it as payment for imports and capital flight.

There is one minister, though, who really commands my respect - Kyriakos Pierrakakis. That man seems to be a digital genius. I wish we would have someone like that in Austria!

When I think of all the billions which will flow to Greece out of the EU Recovery Fund, I really get worried. Will that money be wisely spent or will it be wasted (again)?

I hope you are fine and if you get a chance to drop me a line, I would welcome it.

Best regards.

Sunday, August 21, 2022

Greece's Gross External Debt hits 565 BEUR! (300% of GDP!)

The Greek financial crisis began when foreigners brought new lending to a halt and began calling in existing loans. That is a process which normally starts rather slowly at the first sight of clouds over the horizon but which rather quickly accelerates as foreign financial agents watch the conduct of their competitors and then start doing what they are doing. The culmination of the process is called "Sudden Stop". That is when no one makes voluntary loans to Greece any longer.

It is fair to say that voluntary foreign lending came to a halt in early 2010 (the first memorandum was signed in May 2010). At that time, Greece's gross external (foreign) debt was around 430 BEUR.

"Gross foreign debt" (not to be confused with "sovereign debt") is the total of all monies which have entered the country as debt (as opposed to foreign investment), regardless of the borrower. At that time, Greece's foreign debt was roughly 50:50 with the government and with the banking sector. A small portion was with individual borrowers such as large Greek corporations. 

By the end of the first quarter of 2022 (March 31), Greece's gross foreign debt stood at 565 BEUR. What? That would represent an increase of 135 BEUR in a period where Greece was most of the time restricted by memoranda with the Troika! Well, the number of 135 BEUR is indeed not correct. The actual number is even higher!

In 2012, foreign creditors gave the Greek government a 'haircut' of 100 BEUR, roughly 60 BEUR of which were foreign debt. Thus, the increase of gross foreign debt between early 2010 and March 31, 2022 was actually 195 BEUR! That's about one year's worth of Greek GDP!

The overall interest expense on the total of 565 BEUR of foreign debt is not known to me. If the weighted interest rate were 1%, the annual interest expense would be 5,65 BEUR. If it were 2%, it would be 11,3 BEUR annually.

Interest expense it accounted for in the country's current account. In order for the country overall to pay 5,65 BEUR in annual interest, the current account needs to have a surplus of 5,65 BEUR. If the interest expense were 11,3 BEUR, the surplus in the current account must be in the same amount. Otherwise, Greece would have to borrow from abroad in order to pay interest due abroad (unless there are cash reserves).

In my previous post, I have outlined that Greece not only does not have a current account surplus but, instead, a massive current account deficit which means that Greece has to borrow abroad not only to pay interest but also to finance the rest of the current account deficit. Well, not quite. Greece currently has substantial cash reserves which can be used for foreign payments. 

Whichever way one analyzes the above, those are staggering figures! A gross foreign debt of 565 BEUR represents close to 300% of the annual GDP. There cannot be many countries in the world which have a higher ratio. 

Also, it is a quite staggering development when an economy aims at bringing down foreign debt after a crisis while in actual fact increases foreign debt by 195 BEUR! It certainly raises the question of what happened to all that money? Was it invested prudently and economically or was ist spent?

If this process continues, it won't be long until Greece hits 600 BEUR in gross foreign debt. Perhaps when that staggering number is published, the eyes of creditors will once again start looking at Greece's financials.

Friday, July 29, 2022

Greece - The Dramatic Return of the Current Account Deficit!

This blog was/is essentially a blog about Greece's post-2010 crisis. After the exit from the Troika-program in 2018 and since the assumption of power by the Mitsotakis government, the crisis has turned into a bit of a success story and Greece, today, is on its way towards investment grade. And without a crisis to observe, there was no further purpose for this blog. The surprisingly high current account deficit for May (up 47% over the previous year) prompted me to write again about this issue.

From the beginning in June 2011, the importance of the current account for an economy like Greece's was the major issue of this blog. The current account is quasi the operating cash flow of an economy: it measures money spent outside a country's borders against money received from outside its borders. If more money is spent abroad than earned abroad (deficit), the cash shortfall needs to be covered with funds from abroad (mostly foreign debt). If there is a current account deficit, a country is living beyond its means cross-borderwise. From an accounting standpoint, a current account deficit represents a transfer of domestic wealth abroad or, put differently, a reduction of domestic net worth.

2014 was the best year for Greece's current account (or the worst, depending on one's point of view): the contraction of domestic spending power had contained the growth of imports, exports were beginning to rise and revenues from tourism were strong. The current account deficit was 1,2 BEUR, the lowest in memory (then about 1% of GDP).

The figures below compare 2014 with the linearly extrapolated figures for 2022; i. e. 5 months extrapolated on a linear basis into 12 months). Since the tourist season is not reflected in the extrapolation, the actual 2022 figures may turn out quite a bit better. Still, the overall picture is a valid case for observation.

(in billions of EUR)


The number which jumps to mind is the 24,2 BEUR deficit! The worst deficit Greece ever had was about 35 BEUR in 2008 (then about 15% of GDP) and that eventually lead to the country's illiquidity. From 2014-2019, the annual current account deficit increased moderately. Since 2020, it is exploding and in 2022, it is likely to be about 13%! Given the huge amounts of foreign funding which will flow into the Greek economy out of the EU Recovery Fund, the current account deficit is likely to increase even further.

Inflow of foreign funds is great fun for the domestic economic agents: those funds represent revenues on the part of the recipients which leads to growth and wealth. The higher the inflow, the greater the fun (remember the 2000's?). The only problem is that pain can result once the inflow stops.

It all depends on how the money is spent. If the money is invested in projects of sustained economic value, the inflow will lead to sustained prosperity. If it is spent on short-term consumption, we will see a repeat of 2010 at some point in the future.

The challenge for the Greek economy is to increase domestic value creation so that exports can be increased and, perhaps, some imports substituted. To achieve that would be something that could truly be called a "structural reform". Greece seems far away from that.

Even though the current account deficit is approaching a dangerous level, there is no risk of a near-term financial crisis. Greece has a relatively small amount of interest expense and principal of debt doesn't really start maturing until the early 2030's. And, as mentioned above, money will flow in from the EU Recovery Fund. So there really won't be any major financial constraints during the 2020's. When there are no financial constraints while money flows rapidly, all sorts of memories of Greece's past come to mind.

Wednesday, March 23, 2022

The Perennial Problem of Greece's Current Account

The statistics published by the Bank of Greece go back to the year 2002. During those 20 years, Greece did not even once record a balanced current account (not to mention a surplus). In fact, I remember reading in history books that Greece has not once in its 200-year existence as an independent nation recorded a balanced current account (not to mention a surplus). 

What is a current account and why is it important for a national economy? The simplest description is that the current account represents the cross-border operational cash-flow of a national economy. Operational cash comes into a country as proceeds from exports, revenue from tourism, transfers from the EU, etc. Operational cash leaves a country as payment for imports, for interest on foreign debt, for transfers to the EU, etc.

When the cross-border operational cash-flow is negative, there has to be a 1:1 offset through a positive cash-flow in the capital/financial accounts. This is not a matter of economics but, instead, of mathematics. Again: if the current account is negative, there have to be, on a 1:1 basis, positive capital/financial accounts. If there were no positive capital/financial accounts, there could not be a negative current account. Put differently, a national economy which runs out of foreign currency can no longer import. Below are the Greek statistics since 2002.

During the 20 years since 2002, the Greek national economy incurred a negative cross-border operational cash-flow of 274 BEUR. Put differently, Greece paid 274 BEUR more for imports, interest on foreign debt, etc. than it received from exports, tourism, EU transfers, etc. 

That deficit was financed through a surplus of 45 BEUR in the capital account (e. g. EU subsidies), a 208 BEUR surplus in the financial account (e. g. debt) and another 20 BEUR which the Bank of Greece calls "balancing items", i. e. items which cannot be categorized.

Why is all of that important? It is important because it helps to explain the living standards in the national economy and what they depend on. Many of the capital and consumption goods which Greeks desire must be imported for the simple reason that they are not produced in Greece. In fact, when it comes to consumption goods, a walk through a shopping mall creates the impression that most of those goods are imported. Revenues from exports and tourism are not nearly sufficient to pay for all the goods which Greeks desire to import. Greece needs funds from other sources in order to pay for the imports which Greeks desire. Without those 'other sources', the living standards of Greeks would decline sharply.

As the above table shows, those 'other sources' are principally EU subsidies, foreign debt and some foreign investments. Without EU subsidies, foreign debt and some foreign investments, Greeks would have to accept significantly lower living standards.

The above table shows another 'Greek phenomenon': as domestic purchasing power increases/declines, the current account deficit increases/declines as well. During the heyday of the Euro-party (until the financial crisis), Greek consumers were awash with cash and imported nearly beyond imagination (excessive current account deficits). As austerity was imposed on the Greek economy, Greek consumers were short of cash and the current account deficit declined. 

During the last couple of years, things have improved for Greek consumers and, not surprisingly, the current account deficit returned to very high levels. Not excessively high, but very high nevertheless. That really leads to a disappointing conclusion: despite all the reforms in the decade of the financial crisis, the structure of the Greek economy hasn't really changed. It still has the characteristics of a developing economy, i. e. products which the consumers desire have to be imported and imports lead to indebtedness because there are not enough products/services which the national economy can export.

In short, the living standards of the national economy still depend on: (a) foreigners lending to or investing money in Greece and (b) various types of EU subsidies and financial support programs.

Is that a long-term perspective? Not really, at least not a very good one because it suggests that Greece will always be dependent on foreigners lending to or investing money in Greece. What if foreigners, for whatever reason, would one day stop doing that? 

There is only one way to make the Greek economy less dependent on foreigners and that is to increase domestic value creation. To produce more of the goods and services which Greek consumers desire so that they do not have to import them and to produce more of the goods and services which foreigners desire so that Greece can export them. 

There is no other way! And it is an urgent matter!

Wednesday, June 23, 2021

Greece Is Booming!

When my wife and I last left Greece on December 13, 2019, we had no idea that it would be 1-1/2 years until our return. Well, Corona did that to us. But now, since 3 weeks ago, we are back in Kalamaria, a beautiful suburb of Thessaloniki. And, frankly, it feels like the Greece we returned to is a different country than the Greece we had left.

The first signs that the Greek state was no longer as dysfunctional as it had often presented itself in the past came in February 2020 when Corona started showing up in several European countries. Greece immediately took action whereas most Central European countries pondered the situation and announced that they would take immediate action once that became necessary. With the benefit of hindsight, we now know that this indecisive approach was a big mistake.

The lockdown procedures where rather similar in most countries: prohibition to leave homes except for 4-6 specific purposes. In Austria, for example, there were extended debates about those exceptions leading to substantial delays. And when the exceptions were finally agreed upon, there was really no plan how to control them. Greece, instead, implemented quasi overnight a system where QR-codes had to be obtained for exceptions via SMS. And significant efforts were made to control compliance. I remember that the Greek authorities often announced the number of checks they had made, the number of fines and the total amount of fines. That obviously promoted discipline among the people.

When I told this to my Austrian friends, they said that such was the behavior of a police state. Well, police state or not, when it helps keeping infections and casualties low, Greece was far ahead of most European countries (only some Scandinavian countries were equally successful). So Greece came through the first wave literally as a hero and I could only marvel at that.

By October, the influenza vaccinations were scheduled to begin. Austrian authorities had campaigned for months to motivate people to get influenza shots. The vaccination rate had only been 8% the year before and they wanted to increase that rate to 20% this year. There was only one slight problem: Austria did not have sufficient vaccines! Something had gone wrong with the orders, the authorities explained. And while we were desperately waiting to get the vaccines (by December!), my wife reminded me literally every day that her Greek friends had already been vaccinated. That pained!

As the Corona vaccinations began in early January of this year, Austrians were informed about the national vaccination plan with all of its priorities but there was zero information as to how one could register for vaccinations. Again, my wife told me that her Greek friends were already registering and had received vaccination appointments. That was a very painful period for me. 

In summary, during our 1-1/2 year absence from Greece, I observed from Austria that the Greek authorities handled the situation much better than most other European countries, certainly better than Austria.

When we returned to Greece late last month, a number of things quickly caught my attention. Above all: this was not the country which was expected to be debt slaves for decades and live in poverty and depression. On the contrary, everything and everyone seemed to be booming like in the good old days: overcrowded markets, shoppers all over the place, full cafés and restaurants, overboarding traffic and traffic jams with gasoline prices 30% higher than in Austria, etc. This prompted me to look at some economic indicators which I hadn't done in a long time.

There is no question in my mind that Alexis Tsipras - despite all the chaos which he caused in many areas - accomplished two major things for the benefit of Greece. First, following the (self-inflicted) near collapse in mid 2015, Tsipras had signed practically everything which the Troika proposed without objections. The Troika measures were rather brutal in many ways and I do not believe than anyone other than a leftist politician could have done that (because the leftists in opposition would have torpedoed most of the measures). In sum, however, these measures had positive effects as evidenced by the fact that Greece is now being attested much better competitive ratings than only 5 years ago. And, secondly, Tsipras had refused to enter into a stand-by agreement with the Troika following the termination of the program in 2018. Instead, he opted for the cash reserve strategy and the Troika started it off with a dowry of 15 BEUR.

Since then, the Greek state followed the motto "the time to take up debt is when one doesn't need the money". Today, cash reserves of the state (financed with new debt) allegedly exceed 40 BEUR and another 30 BEUR will come from the EU Resilience and Recovery Fund. Since significant debt maturities will not come until the early 2030s, the Greek state is now completely 'overfinanced' for the next 10+ years and, thus, there cannot be foreign payment problems. Prime Minister Mitsotakis has pursued and even expanded the cash reserve policy - in the last year alone, foreign debt increased by 50 BEUR to 500 BEUR!

Rating agencies are allegedly considering an upgrade of Greece's rating to investment grade. This is very interesting in as much as Greece today has significantly weaker economic indicators than 5 years ago: the debt/GDP ratio now exceeds 200%, the fiscal budget (prior to Corona it had been positive!) is now deep in the red and the current account, which 5 years ago had been almost in balance, registered a deficit of 11 BEUR in 2020, which deficit is likely to increase in 2021. When Greece experienced the sudden stop back in 2010, these indicators were not worse than now.

The fact is, however, that the funds which will flow into Greece in the next few years will be reminisicent of the 'Euro-party' in the 2000's. The Euro-party ended in disaster because the funds were largely misapplied. Optimists argue that this mistake will not be repeated this time around, if only because of the EU's supervision. We will see. The fact is also that Greece now has, for the first time in a long time, a government which includes a significant number of competent and professional individuals. To me, the superstar is Kyriakos Pierrakakis who is responsible, among others, for Greece's digitalization. The man seems to be a magician. I recently read an article which claimed that new digitalization has already saved 23 million working hours in the public sector. There is undoubtedly a bit of propaganda behind that statement but still, there is positive evidence. My neighbor tells me that he can now take care of most of his official business without having to go to public offices. Even though he is not very computer-literate, he can handle most things electronically. And then there is the issue of the Greek land registry. This project had originally been started by King Otto and his 3,000 Bavarian public servants back in the 1830s and hundreds of millions of EU subsidies had been wasted in recent decades. Allegedly, this project is now nearing completion and Greece will have complete digital land registry.

Miracles are unlikely to happen. In daily life, Greeks will undoubtedly continue to live with corruption and tax evasion. However, in those places where it really matters (at the upper levels of public administration, politics, corporate governance, etc.) a trend in a positive direction should be expected. I would not be surprised if this lead to a positive feedback loop and I would certainly not be surprised if foreign investors were to show significant interest in Greece very soon. That would not only bring additional capital to Greece but, above all, know-how.

All of this could suggest that one should invest in the shares of Greek banks. After all, this is where the tsunami of cash will flow in the next years and the business of the banks should be booming. However this will also be the potential Achilles' tendon. The critical issue will be how all that cash is applied, towards profitable investments or towards unproductive investments and/or activities. Time will tell whether economic rationality will drive the conduct of Greeks in the future or not.

Sunday, January 31, 2021

Attractiveness Of Doing Business In Greece (rankings)

My last post discussed Greece's improvement over the last 10 years as regards perceived corruption (an improvement of about 30 spots in the ranking of about 180 countries). In that post I said:

"10 years ago when I had started this blog, one of my major arguments was as follows: Greece ranks the highest in the EU as regards perceived corruption and the lowest as regards attractiveness for doing business (which was the case then). If these tables could literally be turned (i. e. the lowest in perceived corruption and the highest in attractiveness for doing business), then Greece could well develop into the economic hotspot of the Eastern Mediterranean. How have these rankings developed?"

Below is the other important ranking, the World Bank's Doing Business Report for 2020. It measures about 190 countries in terms of their attractiveness for doing business. 



Here, too, Greece's ranking improved by roughly 30 spots. Depending on how one reads statistics, one could even argue by 40 spots. That would be the good news.

The not so good news is that Greece did not improve its position within the peer group (EU member countries). In fact, only the tiny Malta ranks behind Greece at position #84.

It is interesting to note that the significant improvement occurred during the years 2020-12, i. e. during the time when Greece was literally put through the wringer by its EU friends.