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Sunday, August 18, 2019

Champions Of Default

When I started this blog back in June of 2011, we were in the midst of what I would call a "hysteria about default". From the top EU echelons down, the impression was broadcast that a sovereign default was the end of the world and had to be avoided at all cost. In fact, it was exactly the fear of Greece's default which lead to the unfortunate first financing package for Greece in May 2010.

Having been through two sovereign defaults during my banking career, I failed to understand the hysteria. It was a relief to hear the Chief Economist of Citibank say that the major problem was "that the Europeans did not understand that a sovereign default was quite a normal thing" and that there had been dozens of sovereign defaults in prior decades. That assured me that I was not totally wrong with my opinion.

Against the above background, I am now quite pleased to finally have statistical evidence about the frequency of sovereign defaults. The graph below shows sovereign defaults since the year 1800. Greece is not alone with 7 defaults; my home country Austria is right up there with Greece, also with 7 defaults. Spain, Russia, Germany and Portugal follow right behind.

But most important is the recent past. Since 1975, there have been almost 50 sovereign defaults. Each sovereign default was handled 'the normal way': existing creditors restructured their maturities by extending them and lowering the interest rate; official lenders provided the Fresh Money; and the IMF put together a program which was the basis for the agreement of all creditors.

Only Greece was different. Here, the EU elites felt that they didn't need to learn from professionals with previous experience. Instead, they assured themselves that the EU was different and required a different solution. The end result was that, today, European tax payers carry the risk which was previously carried by private creditors. Great showing!

Monday, July 8, 2019

Mitsotakis Clear Winner, Tsipras Not Too Big A Loser And Pollsters Discredited

In January 2015, riding on a wave of unforeseen popularity, SYRIZA registered 36,34% of the vote. In September 2015, after some of the most dramatic and economically damaging months in Greek history caused by SYRIZA, the party - despite broken promises and defections of radical leftists - still registered 35,46% of the vote.

In May 2019, after 4-1/2 years in government, SYRIZA faced broad voter disaffection and registered only 23,76% of the vote at EU elections. They had lost roughly one-third market share (!) relative to 2015. To make matters even worse, ND - who had been kicked out of office by SYRIZA back in 2015 - came out at 33,12% of the vote, almost exactly 10 full percentage points ahead of SYRIZA.

At that point, Alexis Tsipras took the flight forward and called early elections, presumably fearing that the longer they waited, the worse the situation would get for them.

Since the EU elections, media discussion did not even focus on SYRIZA's chances for a recovery. Instead, the discussion focused on the margin by which ND would win (10-12% were the most frequently quoted margins) and whether or not SYRIZA (and Tsipras) might even be sent to the dustbin of history. I do not recall a single poll showing SYRIZA at 25% or more, prompting a headline in the Ekathimerini a day before the election of "Tsipras eyeing more than 25%", essentially suggesting that Tsipras had unrealistic hopes. That commentary by Angelos Stangos included the following paragraph:

"In short, after all the despicable things this government has done under the leadership and guidance of Alexis Tsipras (there should be no doubt on this point), it will not bode well for the country’s future if, say, ND gets 40 percent and SYRIZA gets around 30 percent. This would make the leftists the absolutely unchallenged opposition and would strengthen Tsipras’ position beyond any possible reproach from detractors in the leftist camp. He would even be able to gloat about not suffering a real defeat."

ND getting 40%? Didn't sound unrealistic at all. SYRIZA getting around 30%? What was the man smoking?

Well, SYRIZA ended up getting 31,53% of the vote, 'only' 5% less than at its peak in January 2015. If one were to add the 3,44% which Yanis Varoufakis' party registered (after all, Tsipras and Varoufakis were on the same team back in January 2015), one comes to 34,97% of the vote, only fractionally less than in January 2015.

It is clear that the predictions of SYRIZA's and Tsipras' impending political death were greatly exaggerated. On the contrary, those SYRIZA party members who had believed the polls must have celebrated a victory party on the night of the election.

ND's win with 39,85% of the vote was most remarkable but not a total surprise relative to expectations. The winning margin over SYRIZA of 8,32% was certainly a disappointment to those who expected 10-12%.

And what can one make of that?

After worst-case scenarios before the election, SYRIZA came away from the election still standing. Actually still standing strong. When considering all the (unnecessary) pain which SYRIZA's policies inflicted on the Greeks and particularly when considering the complete disappointment which Tsipras must have been to his religious followers, a loss of 5% in market share is certainly a loss but not a defeat.

ND, in its direct battle against SYRIZA, was not all that successful. It could have obliterated SYRIZA but it did not. ND's remarkable win seems more the result of having obliterated smaller parties.

Yanis Varoufakis, after 4 years as an international media star, has returned to the nitty-gritty of domestic Greek politics. His 3,44% were undoubtedly an achievement which many would not have considered him capable of. Whether Mera25 will indeed be "the only ray of hope in this bleak setting" (Varoufakis) remains to be seen. It would be better for the country if ND succeeded in becoming that ray of hope which many Greeks so urgently wait for.

Sunday, June 30, 2019

Greece Is Flush With Cash!

The Ministry of Finance's Annual Report about Borrowing and Debt for the year 2018 provides very interesting information about the solidity of Greece's public financing.

The bad news is that Greece's public debt now (at December 31, 2018) stands at 359 BEUR or 181% of GDP. Those are numbers which would, under normal conditions, signal a near-term catastrophy.

The good news is that those numbers currently present no problem at all. Very little of that debt will mature in the next few years and 83% of it is owed to the official sectors of other countries. One cannot think of a more stable financier than such official sectors. Last but not least, since the debt owed to the official sectors of other countries comes at extremely low interest rates, total interest payments in 2018 amounted to "only" 6,2 BEUR, which is less than 3,5% of GDP. Such a low ratio of debt service costs would normally represent a solidly financed public debtor.

And as a footnote: the 3,5% of GDP of interest expense just happens to be the same as the 3,5% primary surplus requirement which Greece's creditors have required. Put differently, Greece has an overall balanced budget (if not even a slight budget surplus).

To top off the good news: the Greek public sector is literally flush with cash: the Central Government has 27 BEUR in cash reserves and state entities have another 24 BEUR, bringing the total to 51 BEUR. Those reserves would cover interest payments and debt maturities for many years to come.

Wednesday, May 22, 2019

Greece's Current Account On A Dangerous Path?

Arguably the most important economic variable of the Greek economy is the country's current account. The current account measures how much an economy spends outside its borders compared with its revenues outside its borders. If a national economy spends more outside its borders than it has revenues there (i. e. a current account deficit), it needs to import capital either by way of borrowing or attracting foreign investments. Since the Greek economy does not have a tradition of substantial and sustained foreign investments, any external gap caused by the current account deficit must typically be closed with loans from abroad.

Traditionally, Greek consumers' demand for products has exceeded the supply of products generated by the Greek economy by far, i. e. Greece had to import substantial amounts products resulting in a trade deficit. Greece has the benefit of substantial foreign revenues from services, mostly tourism service. However, the positive balance in services has never been able to completely offset the negative balance in trade. Thus, the Greek economy was always short of foreign capital; it always had to borrow offshore.

The absolute record was set in 2008 when the Greek economy spent 37 BEUR (!) more outside its borders than it earned there, i. e. a current account deficit of over 15% of GDP! Probably a world record among developed economies. In 2008, Greece imported 47 BEUR of 'other goods' (Greek exports other than oil and shipping). This was roughly 3 times the amount of exports of 'other goods'!

The financial crisis limited access to foreign capital and austerity cut down domestic demand, leading to a continuous decline in imported goods and an improvement in the current account balance. By 2015, the current account deficit was reduced to 1,5 BEUR, the lowest level since 2008. Since 2015, imports and current account deficits have increased again, reaching 5,3 BEUR in 2018. The first 3 months of 2019 show a 13% deterioration in the current account balance over the previous year.

To determine whether or not there is a dangerous trend in the making, one can compare imports of 'other goods' in the period January-March since 2008. The numbers are:

2008 11,0 BEUR
2009   9,1 BEUR
2010   9,5 BEUR
2011   8,1 BEUR
2012   7,2 BEUR
2013   7,2 BEUR
2014   7,2 BEUR
2015   8,0 BEUR
2016   8,1 BEUR
2017   8,9 BEUR
2018   9,5 BEUR
2019 10,0 BEUR

The numbers would suggest that there is a dangerous trend in the making: from January-March 2019, imports of 'other goods' were 10,0 BEUR and the trend line suggests that the record of 2008 of 11,0 BEUR will be reached soon. Put differently, Greece is back on a track towards setting records in the import of goods.

The situation is not as dramatic as back in 2008 because exports have increased as well but one has to bear in mind that, in 2019, Greece is on a trend line towards an annual current account deficit in excess of 6 BEUR, which is more than 3% of GDP. When comparing that to the 15%+ of GDP of 2008, it might look like peanuts but peanuts it is not!

A current account deficit in excess of 3% of GDP implies that Greece will have to import capital in excess of 3% of GDP every year. A current account deficit of 3% of GDP also implies that the Greek economy is spending 3% of GDP more outside its borders than it earns there. And, finally, a current account deficit of 3% of GDP can also be interpreted as meaning that Greece lives 3% of GDP above its means cross-border-wise.

Living above its means cross-border-wise is what got the Greek economy into trouble in the first place.

Tuesday, May 7, 2019

Corfu In Decline

The Irish author Richard Pine, who lives on the island of Corfu, wrote this devastating piece in the Ekathimerini: "The destruction of the real Corfu". Pine blames primarily unchecked tourism for what he calls the island's destruction.

Having just spent 10 days over Easter on Corfu, I can confirm the destruction but I am not sure that it is tourism, at least not tourism alone.

There is one word which, in my opinion, describes today's Corfu (particularly, but not only, Corfu-town) best: decadence. Wherever one looks, one sees decline: run-down buildings, roads in terrible condition, huge garbage piles all over the island, etc. In between, of course, one runs into 5-star luxury resorts here or there.

When one asks people in the Old Town of Corfu about this situation, one gets a uniform answer: it is all because of UNESCO which does not allow any structural changes. That may well be the case but I am sure that UNESCO does not disallow the maintenance of substance. In fact, there are a few traditional buildings in the Old Town which have maintained their original character to the fullest extent and, yet, they have been maintained and kept up (banks, for instance).

The impression one gets on the entire island is that its residents simply don't care about the inherited beauty of landscapes and structures. I have come to Greece for over 40 years and I have seen many places, above all villages, which seemed medieval 40 years ago and which are now very nicely maintained towns. The last time I was in Corfu was over 25 years ago and there has been a dramatic deterioration since then.

Our 10-day stay was overshadowed by the shame which my Greek wife expressed about most of the things she saw. That was not, that could not be 'her' Greece, she felt. Sadly, it was.

Sunday, March 17, 2019

Athens - Far Too Large A City?

In a recent commentary, reference was made to the fact that nearly half of the Greek population lives in Athens. I used to think that it was a lot less than that but let's just assume for the purpose of the below argument that this is so.

If the same ratio were applied to other European capitals, here are some examples:

* Paris would have a population of 34 million (instead of 2 million)
* London would have a population of 33 million (instead of 8 million)
* Berlin would have a population of 41 million (instead of 4 million)
* Madrid would have a population of 23 million (instead of 3 million)
* Rome would have a population of 30 million (instead of 3 million)

Etc., etc.

Of all the structural weaknesses of the Greek economy, the undue concentration of the population in the capital of Athens seems definitely one of them. Permit me a naíve question: what are so many people doing in the capital? What are the productive venues they can pursue there?

The definition of the problem is always the easy part, the difficulty begins when one starts looking for solutions. Still, it would seem high time for a Greek government to study alternatives for 'de-centralizing' Greece's population in an economically profitable way.

Thursday, February 21, 2019

Current Account 2018: A Forebearer Of Bad News?

Below are the figures for Greece's current account during 2018 as compared with the previous year (in BEUR).



2018 2017
Revenue from abroad
Exports 32,4 28,0
Services (e. g. tourism) 37,2 33,7
Other income 6,4 6,6
Current transfers 2,0 2,0
-------- --------
Total revenue from abroad 78,0 70,3
Expenses abroad
Imports 54,9 47,9
Services (e. g. tourism) 17,8 15,6
Other expense (e. g. interest) 8,0 7,4
Current transfers 2,5 2,5
-------- --------
Total expenses abroad 83,2 73,4
Net foreign deficit (current account) -5,2 -3,1
Trade balance -22,5 -19,9
Services balance 19,4 18,1
Other balance -1,6 -0,8
Current transfer balance -0,5 -0,5
---- ----
Net foreign deficit (current account) -5,2 -3,1


What stands out are: (1) a very significant jump in exports to 32,4 BEUR, the highest level of exports ever and over 50% above the pre-crisis levels; (2) an even more significant jump in imports to 54,9 BEUR, which comes close to the pre-crisis record imports; leading to (3) a deterioration in the trade balance from minus 19,9 BEUR to minus 22,5 BEUR; and (4) a drastic deterioration in the current account from minus 3,1 BEUR to minus 5,2 BEUR.

Does that sound familiar? Yes, it does!

We remember that Greece got into its foreign debt predicament primarily because of huge current account deficits. Current account deficits which were the result of the national economy's not producing enough of those products which national consumers wanted and which they, therefore, bought offshore. In simple terms: Greece purchased from Germany and Germany provided the buyer's credit. A game where everyone seemed to win, at least as long there was an unlimited supply of buyer's credit.

I have argued for many years the following: if we really want to know if the Greek economy has been structurally reformed, we have to wait until purchasing power returns to the national economy. If the return of purchasing power is matched by significant increases in imports, we know that the structure of the Greek economy has not changed very much.

Greece will continue to import capital for the purpose of financing imports. Economic value creation, jobs and profits will be in those locations where those imports are produced. Job growth in Greece will be slow and the foreign debt load will increase significantly. At least as long as foreigners provide the capital required by Greek importers.