Follow by Email

Monday, March 16, 2020

Corona And The Greek Economy

Corona is a health drama which is already turning into an economic drama as well. Countries will have to spend billions in order to protect their economies from meltdown. Austria, for example, has just approved a 4 BEUR package to support the economy, roughly 1% of GDP. The government has called this "a first step" with the indication that further packages will have to follow. This could well reach the dimension of 5% of GDP or more.

There is no alternative so such spending. There is a seemingly endless number of businesses, large or small, even entire industry sectors, which have lost their economic base: expenses keep accruing while revenues have disappeared. Liquidity crises would speedily lead to insolvencies.

That is not necessarily a threatening scenario because Austria, due to its credit standing, will have no problem raising 5% of GDP in new debt, probably at interest rates close to zero.

But what about a country like Greece? Will Greece be able to raise the new debt which it requires in order to prevent an economic meltdown?

There is one comforting factor. Greece has allegedly built up very significant cash reserves. Some say up to 30 BEUR. If new debt cannot be raised, those cash reserves will have to be used. The only problem is: those cash reserves were meant to be a financial cushion to assure future debt service, not to be spent on the economy. If they are spent on the economy now and if the economy still shrinks, there will be no further cushion for debt service.


ADDENDUM per March 18, 2020
The above-mentioned 4 BEUR package was announced by the Austrian government on March 14 and described as "a first step". Today, only 4 days later, a "second step" was announced: the 4 BEUR was increased to 38 (!) BEUR! We are now talking about roughly 10% of GDP. Since the original budget had called for a slight surplus, we are now talking about a budget deficit of 10% of GDP.

Extrapolating this on to the Greek situation, a 10% package would amount to about 20 BEUR. That would be an enormous challenge for Greece's finances. Extrapolating it on to the USA, it would amount to a package of about 2 trillion USD (as of this writing, the US are discussing a package of 850 BUSD).

Wednesday, March 11, 2020

EUROLEAKS - By Yanis Varoufakis

"On March 14, for the first time, European citizens will be able to take a front seat in the meetings where their future is decided: DiEM25’s #EuroLeaks will take YOU inside the Eurogroup that has no standing in law, but where the most far-reaching decisions about all our lives are made."

Thus spoke Yanis Vafoufakis. Presumably he refers to the meetings of the Eurogroup which he secretly recorded and whose transcripts he will publish on March 14.

EUROLEAKS: Letting light in to how crucial decisions are made (or not) in the EU.

Tuesday, February 11, 2020

Andreas Georgiou - Was It 'Breach Of Duty‘?

The story of Andreas Georgiou has been told many times in the international media because it is such a good story, albeit a very sad one. Georgiou was Director of ELSTAT, Greece's national statistics agency, for 3 years from August 2010 - August 2015. He was commended by Eurostat for having been the first Greek head of statistics who provided what Eurostat considered 'correct figures'. That got Georgiou into trouble with certain quarters of Greek officialdom and he was sued for several alleged crimes, e. g. by-passing ELSTAT's board of directors when reporting statistics to Eurostat, falsifying statistics, slander of predecessors, etc. As far as I know, most cases are still pending final judgment (correction: on the charge of failing to obtain board approval before reporting statistics to Eurostat, the Supreme Court, in June 2018, upheld the previous judgment of a suspended 2-year sentence, i. e. final judgment).

The Greek judiciary's treatment of Georgiou has triggered an international uproar. It seemed so obvious that Georgiou was being persecuted for telling the truth while no one had problems with his predecessors' having told lies. The latter was well described by the Icelandic journalist Sigrún Davídsdóttir in her article "Lies, damned lies and Greek statistics".

Thomas Cool, an econometrician and teacher in mathematics in Scheveningen, Holland, has now brought a new perspective to my attention (Cool uses the name Colignatus in science to distinguish this from his other activities in commerce or politics. See his website).

Colignatus argues that at the heart of the issue is Georgiou's by-passing the supervisory board when reporting figures to Eurostat. To recall: for the year 2009, Greece had submitted a budget to Eurostat indicating a budget deficit of 3,4% of GDP. This was subsequently corrected to about 6% but it stayed at that level until Giorgos Papandreou assumed power in late 2009. The new Finance Minister, Giorgos Papakonstantinou, shocked the world by revealing that the true budget deficit would be roughly twice that level. Eventually, he submitted a provisional figure of 13,4% to Eurostat. All of this happened prior to Georgiou's assuming the job of Director at ELSTAT.

In November 2010, 3 months after assuming his job, Georgiou reported to Eurostat a budget deficit of 15,6% for 2009, i. e. slightly higher than the previously reported 13,4%. He did so without first seeking board approval. Some commentators considered this merely a 'procedural matter', emphasizing that the European Statistics Code of Practice states that the heads of national statistical agencies 'have the sole responsibility for deciding on statistical methods, standards and procedures, and on the content and timing of statistical releases'. I, too, would have considered it as such a procedural matter because the substance of the report was not at issue.

The Greek judiciary has taken a different view: Greek laws were in place and Greek laws were broken, thus, a serious 'breach of duty' had occurred. The courts handed Georgiou a suspended 2-year sentence. Georgiou's appeal is pending (correction: sentence was confirmed by Supreme Court in June 2018).

Colignatus provides convincing evidence that (a) the law under which ELSTAT had been founded earlier in 2010 clearly stated that board approval was required prior to any outside reporting of statistics and that (b) the Statistics Code of Practice in force at the time (and since 2005) did not assign sole authority to national directors of statistical agencies. Colignatus provides rather convincing circumstantial evidence that Georgiou and his counterparts at Eurostat were well aware of this and colluded in the attempt to circumvent such board approval. Viewed from that standpoint, it was a clear 'breach of duty‘.

Colignatus argues that the above 'breach of duty', for which Georgiou is solely responsible, was at the heart of the issue because it then triggered all the other follow-up complaints and law suits. Colignatus further argues that both Eurostat and Georgiou are well aware that a violation of the law ('breach of duty') has occurred which is why they emphasize in their defense that Georgiou has never falsified statistics. This primarily in order to deflect attention from the main issue, the 'breach of duty'.

I have had lengthy exchanges with Colignatus about his position. My initial reaction was that it is rather irrelevant whether or not Georgiou by-passed his board when reporting statistics to Eurostat. The critical issue was (or should have been) whether or not his statistics were correct. Eurostat, as the final authority on statistics in the EU, confirmed (and complimented!) the quality of Georgiou's statistics and that was really all that mattered.

Having pondered the issue at length, I have become somewhat sympathetic to Colignatus' arguments. In a State of Law, laws do matter and if laws are violated, there ought to be punishment. It seems clear that Georgiou violated laws when by-passing his board of directors. Under normal circumstances, his colleagues on the board and at the agency might have considered that as a minor procedural mistake which could easily have been cured by providing post-approval. That, of course, assumes 'normal circumstances'. Circumstances in Greece were not normal at the time; neither at ELSTAT.

Perhaps Georgiou accepted the job at ELSTAT with a bit of naivité. Perhaps he thought he would be welcome there and that he would receive support from his colleagues in their joint effort to provide Eurostat with top-quality statistics. Well, that would have required a very substantial amount of naivité!

A seasoned manager would have known that he was about to enter a wasps' nest where undermining and mobbing would be ever present, and he would have prepared for that. He would have known that he could not afford the slightest misstep because he would immediately be crucified for it. And he would have been extremely cautious about colluding with Eurostat behind the backs of his colleagues at ELSTAT, knowing that his enemies would only wait for such a 'breach of duty' to happen. Apparently, Georgiou was not such a seasoned manager.



P. S.
Colignatus has published a book "Forum Theory and A National Assembly of Science and Learning". The chapter on Greece begins on page 155.

Wednesday, January 1, 2020

2010's: Greece's Toxic Decade

I have been writing in this blog since mid-2011. During this time, I have intensively observed the Greek crisis. When observing such a development step-by-step, when a crisis develops in incremental steps, one can lose sight of the overall development because one gets used to the incremental steps.

On the Website Macropolis, Yiannis Mouzakis summarizes all the incremental steps in one single article: "Learning the lessons of Greece's toxic decade". As the founder of MacroPolis, Nick Malkoutzis, commented on Twitter: "Less of a leisurely trip down memory lane, more of a hair-raising ride on the ghost train".

This is a brilliant article about an absolutely incredible decade of Greece. When reading this article, one wonders how it was possible that Greece returned to a more or less normal condition. If it hadn't been so painful for many people, if it hadn't affected the lives of so many people in a negative way, one might be tempted to conclude that 'It was a helluva ride!"

One might also be tempted to conclude that any society/nation which has gone through such painful upheavals would have learned lessons from that experience and come out of it stronger and more prudent for that reason. Mouzakis cautions about that in his closing paragraph:

"During every single significant event that defined this decade, from the economic collapse to major diplomatic and social issues, Greece’s leaders preferred to release poison into society to help their short-term political goals. It appears that Greeks have yet to flush these toxins out of their system. It is one of the main reasons that we should approach the new decade, which carries more promise for Greece than the last 10 years, with caution."

Sunday, December 8, 2019

Financial Investors And Others

"London road shows prove investor interest", titles the Ekathimerini. "Foreign portfolios view Greek assets as serious investments", the article continues. This is certainly good news for the Greek stock market. To what extent it is also good news for the real Greek economy remains to be seen.

I have argued for a long time that financial investors should not be the primary target as Greece strives to attract foreign capital. Financial investors have only one interest: risk-adjusted yield. A relatively small economy with free international capital flows can very quickly become victim of financial investors. Their money is 'hot money'. It comes quickly but it can also leave very quickly. And when it leaves quickly, it typically leaves chaos behind.

The primary target of Greece's attempt to attract foreign capital should be investors who can transfer technology and know-how; investors who are builders and not speculators; investors who have a long-term strategic vision and not a cash-out mentality. Cosco would be a prototype of such an investor.

I am not sure that road shows in London or elsewhere are the best strategy for the Greek government when it comes to attracting the right kind of foreign investment. Instead, the Greek government should analyze which sectors of the economy hold the best potential for development. Then it should analyze which foreign companies are not only leaders in that sector but also are prepared to take a long-term strategic vision. Again, Cosco would be a good example.

And then the Greek government, instead of arranging road shows in London or elsewhere, should call on the headquarters of the Cosco's of the world, present to their CEOs and take it from there.

Investments in the stock market do not necessarily create jobs. A new plant for, say, pharmaceutical products certainly would.

Tuesday, October 15, 2019

Greek State Budget Out of Control!

The Ministry of Finance has reported disturbing developments in the Greek State Budget: since the beginning of this year, monthly results are clearly in excess of the targets. Below are the data for the last 4 months (in MEUR).


June: +1.954
July: +2.565
August: +3.178
September: +3.012

Given the history of Greece's fiscal excesses, one is likely not to be surprised that, once again, there are excesses. One would only wonder what type of excess it is. An excess over spending limits? An excess over deficit limits?

Surprise, surprise! The above figures are excesses of primary surpluses relative to their targets. Put differently: the creditors had imposed stiff primary surplus targets and Greece is over-performing by far. And this despite the fact that election presents were distributed this year!

This could literally get out of hand going forward. As the economy picks up, tax revenues will increase and surpluses will grow further. The Greek state will soon be swimming in cash.

Lucky Mitsotakis!

Friday, October 11, 2019

Borrow To Improve Your Credit Risk!

On Wednesday this week, Greece raised 487,5 MEUR in short-term debt (13 weeks) at an overall yield of minus 0,02%. A week before, Greece had raised 1,5 BEUR in ten-year money at a yield of 1,5%. What has caused this dramatic increase in Greece's creditworthiness?

The Greek state currently does not need to borrow to finance budget deficits. There is a significant primary surplus, large enough to pay interest on debt which means that the overall budget will at least be in balance, possibly even positive.

Neither does the Greek state need to borrow in order to refinance maturing debt. The amount of debt which matures in the next few years is minimal. Apart from the fact that the Greek state is sitting on a ton of cash in the first place (allegedly upwards of 25 BEUR).

So what is the investors' risk by making new loans to Greece? Virtually none as long as maturities stay within the next 10 years. During this time, Greece has very little debt maturing and the interest expense is very low, too. Given this situation and considering the high cash reserves, the risk of another external payments crisis in the next few years is virtually zero.

So why does the Greek state borrow?

There is an old saying that "banks like to lend money to borrowers who don't need it". Well, there is some truth to it in the case of Greece. As pointed out above, Greece currently does not need money. Greece could use money to voluntarily prepay more expensive debt with less expensive debt where loan agreements permit that or to increase its cash reserves. Even if cash reserves yield no interest income at this time, as long as the debt incurred to build up cash reserves is zero, there is no harm in doing that. Put differently, Greece can increase, at zero cost, cash reserves which, in turn, motivate investors to lend more money to Greece because Greece doesn't need the money and has enough reserves to pay the loans back.

And the moral of the story?

THE HIGHER GREECE'S ZERO-COST DEBT, THE BETTER THE COUNTRY'S PERCEIVED CREDIT RISK AND THE HIGHER INVESTORS' MOTIVATION TO LEND MONEY, PROVIDED THAT THE MONEY IS USED TO BUILD UP RESERVES WHICH, IN TURN, FURTHER IMPROVE THE PERCEIVED CREDIT RISK.

We didn't learn that at university...