Friday, August 31, 2012

The tale of a Greek village

My wife comes from a village in Northern Greece of about 2.000-3.000 people.

When I first visited there in 1977, excitement was under way because an entrepreneur had started a new company to produce textiles. This generated enormous impulse to economic activity in the village which, until then, seemed to have lived primarily on tobacco farming and services. I would guess that the company employed several hundred people. My wife would say, with a bit of Greek exaggeration, that they employed all the people from the village (and many from neighboring villages).

Several years later, I don't recall whether it was before or after the Euro, the company was closed because the owner decided to move his production to Bulgaria. That's when the villagers learned how nice it had been to have entrepreneurs around. For many years, the building sat there empty. More recently, a new entrepreneur has come and I guess he is producing some kind of furniture, albeit with a lot less staff than the textile producer had employed. How it is going since the crisis, I don't know.

Just imagine what would happen to the Greek economy if only one out of every two villages of that size were blessed with an entrepreneur who starts up a new business employing, say, 25-100 people! What should those businesses produce? I haven't got the faintest idea and no "planner" should worry about that too much! I am confident, however, that if each such village were to create special business conditions which make it attractive for an entrepreneur to invest, that entrepreneur would on his own come up with ideas as to what he should invest in.

Suppose Greece implemented a law allowing villages to offer special business conditions to entrepreneurs who create jobs. Call that law "Law 1830" to commemorate Greece's independence. Start a marketing campaign with the motto: "Every village should have at least one 1830-company!"

What should those "special business conditions" be? Well, if I were such an entrepreneur, I would like to know that I can start my business in a hurry, without much red tape, and that I only have to talk with one person, say the mayor of the village, about all that. I would like to know that I can hire (and, when necessary, fire) staff at my own discretion. I would like to know that I can negotiate my wages/salaries completely independently with my staff. If the mayor offered my a nice property at a favorable price, it wouldn't hurt but I wouldn't make it a condition (unless neighboring villages offered me such a deal; then I would have to negotiate). If the government allowed me to defer some taxes/levies during the start-up time, that would be a welcome action. It wouldn't cost the government anything because the new taxes generated by my business would by far exceed that.

And, of course, I would ask myself how I could make money through my investment. To figure that out, however, I would consider as my own, proprietory responsibility and, as an entrepreneur, I would feel totally capable of handling that.

I repeat what I have already said above: "Just imagine what would happen to the Greek economy if only one out of every two villages of that size were blessed with an entrepreneuer who starts up a new business employing, say, 25-100 people!"

My brother-in-law started his own small business in the village about 30 years ago. With his savings from various hard-labor jobs, he purchased his first equipment for earthmoving. The business expanded into the supply of construction materials. As the Greek recycling of foreign debt into domestic liquidity/demand accelerated, his business expanded accordingly: everybody - particularly villages and other public institutions - had plenty of cash and could place a lot of orders for earthmoving and construction. Particularly the 2000s were a Golden Age for my brother-in-law.

When the crisis hit, his Golden Age came to a sudden halt. Luckily, he had always saved and invested (and never borrowed money) so that he could keep his business going, albeit it at a rock-bottom level and, more often than not, he is rewarded with losses for his efforts instead of profits.

My nephew, not even 25 years old, is a bright kid; a real "doer". He doesn't see the tragedy in all of this. Instead, he sees the opportunity.

With energy costs exploding, people in the area have to cut down, among many others, on heating expenses. It gets very cold during the winters in Northern Greece!

My nephew has come up with the idea of marketing in his entire area wood as a source of heat instead of gas/oil. He can either sell fireplaces or build them for customers. And he even sells the wood to them.

There is only one problem with this. The wood he sells, he imports from Bulgaria. The next time I see him, I will have to tell him that he should figure out a way how he could source that supply from within Greece. Maybe he will also expand into the forestry business...

And, then, a lot of people - including the country as a whole - will have benefited from his entrepreneurial intitiative!

Thursday, August 30, 2012

Where is an economic development plan for Greece (and the Eurozone)?

Suppose you were a visitor from another planet and you looked down at the Eurozone from your spaceship. You would see some countries (mostly in the North) which are doing quite well and you would see other countries (mostly in the South) where unemployment rages and economic activity is declining rapidly.

What questions would you ask?

Well, first of all you would ask why this is so. The answer would not be that the Southern countries have such high budget deficits (from the spaceship you wouldn't even see the budget deficits...). Instead, the answer would have to be that the Northern countries are doing something better than the Southern countries. In short, they are more competitive.

Perhaps you would look for the switch "Competitiveness - on/off" and try to pull it. Regrettably, that wouldn't work because there is no such switch. Instead, there are systems (business frameworks) which lead to more or less competitiveness. You would have to conclude that the North has better such systems than the South.

So the conclusion would appear obvious: implement in the South the systems which seemingly work so well in the North. Except that new systems can't be implemented just like that. Once the rules of the free market get out of whack (and they have gotten extremely out of whack between the North and the South), those rules won't cure the problem any longer. It's a bit like hoping that free market forces will correct the downsides of a cartel!

One needs the process of a "managed economy" (not to be confused with a planned economy!) for some time. If one wants to have more or less good employment throughout the Eurozone, one needs to bring the commercial flows, the real economy, back into balance. It's not good enough for Germany to announce that they want to import more from Greece. Germany would first have to concern itself with the question how Greece could produce the products which it is prepared to import.

An economic development plan in a free market environment really doesn't do that much planning. Instead, it sets new incentives so that the plan's objectives come about by themselves. One such incentive could aim, for example, at shifting some of the investments which Germany makes outside the Eurozone to the South of the Eurozone. Obviously, the South would have to provide the business framework so that those investments make sense.

One such instrument would be government guarantees for foreign investment in Greece. A radical new thought? Not really! Countries like Austria or Germany have had, as part of their government programs for international trade promotion, such programs in place seemingly forever. The Austrian company which wants to invest in a foreign country can get government insurance for a very reasonable fee. It can get insurance for either the political risk or the economic risk, or for both. The deductibles are very manageable (in some cases no more than 10%).

Not all countries are eligible for that insurance and I doubt that Greece presently is. But what would it take to make Greece eligible? Not all that much, I would guess. Bear in mind, however, that foreign investors do not transfer their capital simply because they get government insurance. They only transfer it if they see good business opportunities in the country at issue. That is where Greece's responsibility would come into play.

What is the incentive for the Germany's (or for the EU in general) to implement such policies? It can only be in the interest of a Germany to have strong trading partners in the periphery. Weak trading partners stop trading. A case in point: German exports to Portugal declined 14,3% in the first 6 months of 2012. Wouldn't it be a lot smarter for Germany to have manufacturing companies in Greece which need to import machinery from Germany?

To me, what is desperately missing in the debate about the Eurozone is a focus on the real economies of the EZ-countries. Many years ago, the EU had implemented the instrument of structural funds. Their idea was to shift capital to underdeveloped regions so that those could develop and create value on their own. At the end of the day, both parties were expected to benefit from that, and in many cases that happened.

It seems to me that what the Eurozone needs more than anything else is an expanded version of such structural funds. It is no longer a region of Greece which needs to be developed. It is now the entire country which needs that. I hasten to add: particularly in the case of Greece, it is not so much money which is required. Money will flow quickly on its own if there are good investment opportunities. What Greece needs above all is know-how transfer. Know-how of all possible kinds, not only technological know-how. For example: know-how about management, about corporate governance, etc.

In my opinion, if ways cannot be found where the flow of investments within the Eurozone concentrates on those areas where investment is needed the most, the Eurozone will not get out of the financial troubles it is presently in.

Tuesday, August 28, 2012

Special Economic Zones

Having argued tirelessly in favor of Special Economic Zones, I find this piece of news from the Ekathimerini simply sensational!

What did the Chinese do a couple of decades ago? On one hand, they remained steadfast communists but, on the other hand, they recognized that communism alone would not better the lot of their people. So they discovered a wonderful solution: while holding on to communism in general, they allowed "pockets" here and there where some form of capitalism was allowed. Visit China today and the results are staring straight into your eyes!

Greece cannot be changed from A-Z in a short period of time. However, one can start with "pockets" where none of the bad system of "old Greece" is at work and where only the good system of a "new Greece" is allowed. Call them Special Economic Zones. If they work well, their system will rub off on the rest of the economy over the years.

The critical thing is the design of the SEZs. If the design contains compromises or flaws, the effort will become self-defeating.

The design has to be such that, if the SEZs were to be examined by the World Bank for its "Doing Business Report" and Transparency International's "Corruption Index", they would rank among the top-5 places in Europe (Greece as a country presently ranks by far the lowest among EU-countries in these two reports).

To be sure: the idea of a SEZ cannot be "special perks" like unsustainable tax give-aways, etc. It is perfectly sufficient if the idea is to create near-perfect business conditions. Investors who come only because of the perks will leave again once the perks are discontinued. And unsustainable perks always have to be discontinued at some point.

I am not familiar with the details of the SEZs for which Greece has requested approval. One can only hope that they are near-perfect.

Once the SEZs are in place, they have to be marketed. There have to be investment projects on tender all the time. There have to be base case business plan scenarios. And, last but not least, it would not hurt for the government to line up a couple of its best foreign-investor-friends to kick the process off with some exemplary new investments. An atmoshphere must be created that something like a run on investments in Greece develops, sort of like "let's invest now as long as the door is wide open and before is possibly closes again!"

Finally, the biggest hurdle on new foreign investments in Greece must be addressed - the convertibility risk. Greece cannot guarantee its on convertibility risk. All possible avenues should be explored if the EU could find ways to guarantee the convertibility risk on new investments in Greece. That wouldn't cost the EU any money and if many new investments came because of it, the convertibility risk would decline as a result.

And what if the Troika-program worked, after all?

An economy, like a stock market, is very much a psychological thing. Shared negative views are likely to become self-fulfilling prophecies. However, the same forces work in reverse, too.

Consider only the following two facts: (a) by all measures, Greek salaries and wages have come down significantly during the last couple of years; and (b) not too long ago, the Euro was approaching the exchange rate of 1,60 against the USD; some economists saw it heading towards an exchange rate of 2:1. Today, the Euro is trading in the range of 1,20-1,25 against the USD.

Add both factors together and the conclusion can only be that Greece must have become significantly more price competitive relative to third currency countries.

Exports have increased impressively for quite some time now. The sobering thought is that, despite this impressive export performance of late, monthly exports are now barely at levels which Greece had already had in 2007/8, at a time when Greece was more expensive in Euro-terms and much more expensive in third currency terms.

What would it take to have an obsession with exports to take roots? What would it take to have foreign investors return to Greece because they recognize that local labor cost have become much more competitive (and that there is abundant free labor available!)?

My answer is: it wouldn't take all that much. Entrepreneurs do not need to be told what to do. If anything, the government could incentivate exports a bit with special incentives and/or programs. Once entrepreneurs see that there are good new opportunities, they will jump on them by themselves.

It's a bit different with foreign investment because, there, investors are justifiably worried about the convertibility risk. But any risk can be covered. Clearly, Greece itself cannot cover the convertibility risk of itself. But, remember, there is something called the EU! The EU could provide, only for certain types of activities like new foreign investment, a guarantee for the convertibility risk. The cost of such a guarantee? A piece of paper and a few signatures! The more they provide such guarantees, the more investment would potentially flow and the less worrisome the convertibility risk would appear.

Take this example. The media have just reported that, in July, deposits in Greek banks have, for the first time in a long time, increased substantially.  That is generally interpreted as meaning that Greeks have regained a bit of confidence that the new government will succeed and that the Euro will stay around. Let this happen for another couple of months. At some point, many Greeks will start wondering whether they would not be better off to return some of the Euros which they hoard under mattrasses to their bank so that they can earn some interest on them.

Shared positive views can become self-fulfilling prophecies. To kick the process into motion, one would need a few success stories. If they don't happen by themselves, perhaps one can "help" them a bit to happen.

There are still many well-known international investors who are happy with their investments in Greece. A corporation which has the kind of market share which, for example, Heineken has in Greece can't be all that unhappy with Greece. Perhaps Greece could line up some of its still pleased foreign investors and engage them in some form of a publicity play. Let's just dream a little and assume that Heineken would go public with the following announcement: "After 3 years of recession, we see light at the end of the tunnel in Greece. We believe that now is the time to make new investments in Greece, particularly for export to non-Euro Balkan countries!" And if the words were followed by respective action on the part of Heineken, others would take note.

Let's just assume, hypothetically, of course, that there had not been any bad news about Greece in the last couple of years in the media. Would the crisis have become as bad as it is? Why could that not be put to work in reverse?

I remember something someone who suffered from periodic bouts of depressions once said: "I know that the road into the depression is like hell. But I also know that, at some point, I will get out of it again and that nothing is as pleasurable as the road back. So, on my way there I force myself to think of the way back".

I would argue that it is almost a question of mathematics that, eventually, Greece will have hit rock bottom and start to recover. Perhaps soon, perhaps not so soon. But it will be a lot sooner if one started to have some success stories here or there. Success stories have a way of reinforcing themselves and positive views have a way of becoming self-fulfilling.

Spetses - the tycoons' playground

An interesting article about an exclusive island near Athens. Similar scenes can be observed all over Greece, albeit in lesser dimensions.

It escapes my imagination to understand why Greece cannot call its wealthy class to live up to its responsibility. Let me not be petty about it. Let's just assume that we are talking only about people who have, in Greece, material assets in excess of 1 MEUR. Most of those people do not live from hand to mouth. More importantly, perhaps many of those people acquired their assets bypassing the tax system.

Let's not look for scapegoats. Instead, let's just think about responsibility.

It becomes increasingly difficult to explain to voters in the North why they have a responsibility, why it is in their interest, to support Greece financially. It should be extremely easy to convince Greece's wealthy class that they have a responsibility. It should also be in their interest because all of them should worry that, potentially, the economic crisis could lead to political instability (with all sorts of unimaginable consequences for the wealthy class).

I can only speak for Austria and Germany. In these two countries, it is EXTREMELY difficult to make larger asset purchases with unofficial (black) money. One instrument applied is, for example, a cross-check between purchases of real estate and personal tax declarations. As a rule of thumb, someone who has a lot of black money has to resign himself to the fact that he can only spend it safely outside his home country in larger amounts.

There are various ways to call a wealthy class to responsibility (solidarity tax, forced loans to the government, luxury taxes, etc.). The point is that it shouldn't be a witch hunt. Instead, it should be a call to responsibility.

What would it mean to the wealthy class? The wealthy class would simply give back to society a little bit of the huge wealth which their society allowed them to accumulate! In a way, it would be a form of deferred patriotism.

Wednesday, August 22, 2012

Greece's current account: January-June 2012

The table below shows the development of Greece's current account in the period January-June 2012 relative to the same period the year before (in BEUR):

2011 2012
Revenue from abroad

Exports 9,5 10,4

Services (e. g. tourism) 11,7 11,5

Other income 1,6 1,6

Current transfers 3,1 3,2

---- ----------

Total revenue from abroad 25,9 26,7

Expenses abroad

Imports 23,7 21,5

Services (e. g. tourism) 7,2 6,5

Other expense (e. g. interest) 5,9 3,8

Current transfers 2,1 2,1

---- ----------

Total expenses abroad 38,9 33,9

Net foreign deficit (current account) -13,0 -7,2

The improvement continues: the current account deficit declined 45% (!) and the rate of decline has gone on up from 35% back in March! Imports declined 9% whereas exports increased 10%!

Regarding the income/expense relation, Greece as a country is still spending 1.270 Euros abroad for every 1.000 Euros earned abroad. That is a 27% excess of spending over income. This is much worse when only considering the trade account where Greece is importing 2.070 Euros for every 1.000 Euros which it is exporting!

Note: in the month of June alone, the current account deficit delined by an incredible 83%! Interestingly, though, revenues from incoming tourism declined 7% whereas expenses due to outgoing tourism increased 11%. This is unusual because it would imply that the reverse of the desired goal is happening --- it is foreign tourists who should increase their spending in Greece and not Greek tourists abroad.

Previous analyses: March, April, May.

Tuesday, August 21, 2012

Chile as a possible example for Greece?

I know that this post is a dangerous one because I am embarking on the thin ice of praising something which published opinion, for very good reasons, has classified as politically incorrect --- the happenings in Chile during the late 1970s/early 1980s. I take the right to embark on this course because I have lived in Chile during those years.

I have talked about the Chilean situation before in this blog. I recently posted another - somewhat daring - article about it. A commentator asked what it was exactly that was good about the policies of the Chicago Boys in Chile. He suggested that, essentially, all it was was an indirect intervention of the US to protect their investments in Chile. Below is my response to him. 

I did NOT say that the US involvement in Chilean affairs during the 1970s had as its goal to save poor Chileans, nor would I think so. That kind of a dreamer I am not. Of course, the US involvement in Chile had geopolitical objectives --- Allende/Castro were on their way towards turning Chile into a second Cuba (that was their publicly stated objective) and the US, for understandable reasons, had no interest at all to have more than one Cuba in the Western Hemisphere. Protecting US investments in Chile was not a principal objective because the US had no major investments there at the time.

I know I am moving onto thin ice when I say the following, but bear with me.

Pinochet’s bad luck was that of all the zillions of coups in Latin America in the last couple of centuries, his coup was the one which kicked out the world’s first democratically elected Marxist President. With that handicap, the Chilean coup will forever go down into ivory towers as the most brutal coup in the world.

Any coup is one coup too many and any person killed in a coup is one person too many. Having said that, I was amazed how Argentina – where I lived after Chile – could practically at the same time have a bunch of butchers slaughter off tens of thousands of people while the whole world focused on Chile (and ignored the brutalities of a junta in Argentina). And those butchers left an economic mess behind and not a well-functioning economy!

Mind you, Chile – if I recall correctly – has the most constitutional history of all Latin countries. I believe they had had only one coup before and that had been many decades before. Against that historical background, the idea of a coup was a nightmare, even to the military itself.

What is generally not publicized is that, according to the Constitution, there had actually been the obligation to remove Allende from office. Allende had been in fights with the Supreme Court for some time. On 26 May 1973, the Supreme Court of Chile unanimously denounced the Allende government's disruption of the legality of the nation in its failure to uphold judicial decisions, because of its continual refusal to permit police execution of judicial decisions contrary to the government's own measures. According to the Constitution, the President had to be removed from office. The only thing is: after removal, a new election should have been called and the military, as militaries tend to do, forgot about that part. That was the crime of the coup (and the civil rights violations), not Allende’s removal from office!

Now to give you even more of a feeling. Pinochet had been appointed by Allende himself to his post about a year before the coup. The story was that Allende chose Pinochet because he was considered as a weakling. At home, he was under the rule of his tough wife (correct!) and in the military the Head of the Air Force was the power guy. I had met both and I could subscribe to that view.

Chileans had run out of food (except for those close to the Communist Party). It is well documented how housewives would populate the streets of downtown Santiago banging on empty pots and pans. “Do something!” they shouted (meaning the military). The story goes that Pinochet did not have the guts to do anything because, as I said above, a coup was so much against Chilean tradition. It was said that the Head of the Air Force finally gave Pinochet an ultimatum to either do it or to be gone. Within weeks after the coup, Chileans had food again.

Am I supporting the coup? Of course not, but life is full of choices and I can imagine what the choice would have been (in fact, I had talked about this with many Allende followers and they essentially saw it the same way. The owner of the house we rented, a former ambassador of Allende and someone who was pursued by the junta for some time, told me a lot about that). Chile was indeed on its way to become a second Cuba. The political process had lost its self-corrective power. So, if there hadn’t been a coup, Chile today would probably have many similarities with Cuba today (and Allende would probably be glorified for that like Castro still is). Everyone is invited to judge what his/her preference might have been. There was no “third way”.

In the economic area, THE masterstroke of Pinochet & Co. was that they recognized that they didn’t know anything about economic affairs, and that they shouldn’t mess with it. The Chicago-Boys were Chileans who – since the 1950s – had formed a following, principally at the Universidad Catolica, of the Austrian National School of Economy (Hayek, Schumpeter, Mises, etc.). Later, several of them went to study at the University of Chicago where they became favorite students of Milton Friedman (and blind followers of Milton Friedman). The Chicago Boys were brilliantly intelligent people, like many brilliantly intelligent Greeks today. Unfortunately, they based everything on theory and lacked practical experience.

Pinochet delegated ALL economic affairs to the Chicago Boys and promised them, so it was said, air cover for 5 years. They needed that because the radical reforms they introduced would not have been possible in a democracy (I fear).

In short, there is no question that neither the military nor the US were driven by boy scouts motives. The military, of course, wanted Chile to become the kind of country they wanted it to be and the US didn’t want to have another Cuba. But that is not the issue which I raised. The issue I raised was that the Chicago Boys had at their core the objective to improve the lot of ALL Chileans.

What did they do?

They opened up the economy so that Chile could make use of its competitive advantages. First, they defined what they saw as Chile’s competitive advantages and then they made plans to make use of them. Chile, formerly an exporter of only copper and an importer of just about everything else, became an important exporter (which generated foreign currency). Foreign investors brought capital to the country because they considered Chile to be a great place for doing business. They freed the economy of excessive rules and regulations but made sure that there was an overall regulatory structure in place. Milton Friedman would have called that: “They established the rules of the game within which the private sector could operate competitively and fairly”. They privatized a lot, not primarily for financial gain but for acquiring private sector (and particularly foreign) know-how.

Their major blunder was fixing the exchange rate which lead to a massive inflow of cheap foreign funding which was misspent by the private sector on consumption and which caused a crash around 1982. The way they handled that crash was a text book case (that was already handled by the successors of the Chicago Boys). Probably the best bank rescue program I have ever seen! Shareholders and institutional investors lost; depositors and tax payers were protected.

In short, the Chicago Boys gave Chileans the opportunity to develop their own creative powers and talents with very little restraint from government. The new business start-up’s were at a phenomenal rate. Here is how Milton Friedman later described it: "The Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." I subscribe to that 100%!

One of the most eloquent spokesmen of the Chicago Boys was the then still very young José Pinera (a brother of today’s President). In debates about whether or not Chile should exploit its natural resources, at the time when he was Secretary of Mining, he often stated a phrase which, to this day, makes my heart feel warm: “We will use our natural resources. Not to waste or to spend them. Instead, we will use them so that we can invest in the only resource which has eternal value --- our human capital!” That’s what they did. Later, as Secretary of Labor and Social Security, he privatized the Chilean pension system based on personal retirement accounts.

There is absolutely no doubt in my mind that if Greece had a similar economic team in place, with the necessary powers, the same results would happen in Greece. Chileans are characterized by an extreme love, if not passion for their country; so are Greeks. Chile then had a whole generation of extremely well-educated people who were eager to accomplish something; so does Greece. At the same time, Chile had a large part of the population which was “underdeveloped”, so to speak. Not all that educated; not all that familiar with modern times; in short: ideal targets for populists and demagogues. Greece does, too (in my opinion). The trick was that the Chicago Boys could ignore the populists and demagogues and focus on the job at hand instead.

No doubt about it: the original Chicago Boys failed in 1982 and they were replaced by more down-to-earth economic leaders. But they had instilled into the Chileans a sense of self-determination; a conviction that – regardless how small a country was, how remote and how seemingly short of competitive advantages – the conviction that even such a country could succeed internationally if it only put its mind to it.

Compared to Chile then, Greece today is in much better shape. Chile did not have an extremely rich oligarchy. Greece’s oligarchy, instead, belongs to the richest in the world. Much of Chile’s entrepreneurial talent had left for Spain during the Allende years and they led great lives there. One of them (Jorge Cauas) once told me: “We were having the greatest life in Spain but we were all scared of one thing: that Pinochet would call us and appeal to our loyalty and our responsibility to the ‘patria’. We knew that if he called, we couldn’t say no. But we also knew that we would be leaving a great life and return to a life of uncertainty and to a public servant’s salary with little purchasing power, as well as the risk of immediate termination of contract if we failed”.

Jorge Cauas and many others of his kind received the call and accepted the responsibility (Cauas became Pinochet’s first Finance Minister). Not to their disadvantage in the end, I might add.

So ask yourself the following question: what would it take for a Greek leader to appeal to the country’s economic oligarchy, to their loyalty and their responsibility to the Greek ‘patria’? To make their talents and resources (if only a few billion of the many, many billions they have expatriated from Greece…) available for the turn-around of their home country? If you have an answer to this, you have half the problem’s solution.

Monday, August 20, 2012

A radical thought how to turn Greece around

The present Greek government has an absolute majority in parliament. Suppose the three party leaders made the following joint public announcement:

"We recognize that we cannot make the changes necessary to turn the Greek economy around through the political process. We have, therefore, unanimously decided to delegate the responsibility for new economic policies to an autonomous, politically independent institution. That institution will be staffed with experts of national economic management with no consideration to party affiliation. 

The selection criteria for those experts will be their conviction that free market policies, under clearly established rules and regulations, are the most effective way to achieve economic well-being for our society. 

We are taking a bet, if you will. We are taking the bet that such experts - if given the time and if protected from political interference - will achieve what we all want to achieve --- to turn the Greek economy around from a corrupt, crony-driven economy towards a value-generating economy based on market principles. 

Our commitment to that economic team is that we, as the parties with absolute majority in parliament, give them unconditional aircover for the remaining legislative period". 

A ray of hope would browse through the corridors of Paris, Brussels, Frankfurt and Berlin. If that is really to believed, they would say, then we owe it to them to support them.

That new economic team would probably signal the EU-authorities that, in order to achieve results over time, they can't waste their time fiddling over budget deficits every couple of months or so. They would argue that "If our government had the guts to give us aircover for the remainder of the legislative period, then you better follow suit! Either you trust us, or you don't".

Given their qualifications, that new economic team would in all likelihood know from the start what needs to be done. If they didn't, they would only have to read up on other countries which have accomplished similar feats before.

This could never work?

Well, it worked in Chile in the late 1970s. The then authoritarian regime knew it needed economic success  but didn't have the know-how for it. They put their bets on the Chicago-Boys and gave them aircover for about 5 years. The Chicago-Boys, out of their intellectual purity, made many mistakes which ultimately caused significant set-back's (like not paying attention to how the private sector was wasting foreign loans on consumption) but Greece has already learned that lesson.

Here is my own bet: within less than one year, if the new economic team acted credibly, the rest of Europe would start paying positive attention to Greece. They would realize that Greece was on to something new. On to something which offered new business opportunities for foreigners. At the end of the day, foreign capital would, again, flow to Greece voluntarily because private capital never wants to miss out on new, good opportunities.

I bet you everything I own that this would work!

Saturday, August 18, 2012

Is Germany Europe's engine?

The Economist writes that Germany, Europe's engine, is getting tired? Is Germany really Europe's engine?

I would have thought that the US has been the world economy's engine for several decades now. Why? Because Americans consume so much and they buy much of the stuff which they consume in the rest of the world, thereby stimulating economic activity there.

Germans are not known as consumption addicts and they certainly don't import so much more than they export.

I may be wrong but I would have thought an engine is that part of the car which makes the car move. Wouldn't Germany be Europe's engine only if it consumed a lot more and if it bought the stuff they consumed in the rest of the world, or at least in the rest of the Eurozone?

Friday, August 17, 2012

Breaking News! Mars' financial sector headed for collapse!

Unnoticed by the human race, the men and women of Mars had developed a huge economy over the last decades. They were working, working and working; producing, producing and producing; and exporting, exporting and exporting. Exporting to Greece & Co.

As payment for their exports, they accepted sovereign bonds denominated in Euros. Since they had no use for those Euros on Mars, they lent them to Greece & Co. The men and women of Mars had become savers and they also thought that they had become rich.

One day, the Martian banking system started fearing that all those sovereign bonds might default. The Martian government sent an urgent message to the EU Commission telling them to urgently bail out Greece & Co. so that a collapse of the Martian banking system could be avoided. The EU Commission replied post haste:

“That seems to be your problem and not ours”.

The Martians threatened to drive Greece & Co. into default; expel them from all international financial transactions and, essentially, run their economies into the ground. The EU Commission replied, more slowly this time:

“Do what you think is right and what you can be responsible for. Don’t worry about the economies of Greece & Co. We will keep them alive by financing their ongoing needs as a preferred creditor”.

At this point, the Martians realized that they had to act like beggars. They politely requested the EU Commission to bail out the Martian banking sector. The EU Commission replied, again with some delay:

“Ok; we’ll do that. Here are the terms: 99% ownership of the banks and total control over management and business policies. The right to sell off the banks after they have been restructured to anyone of our choosing”.

The first thing the new owners of the Martian banking sector did was to forgive Greece & Co. all their sovereign debt. And the next thing was to work out economic restructuring plans for Greece & Co. as the condition to finance those countries’ ongoing financing needs.

All shareholders of all Martian banks were wiped out. Even all of their bondholders were wiped out. This on the grounds that they were considered as “professional market participants” and should have known what risks they were taking. Luckily for regular Martian savers, a solution was found where regular savers did not lose any money.

Thursday, August 16, 2012

Seeing the erred ways of my thinking... (9)

The other day I had a senior Central Bank official, a friend of the family for over 40 years, as a guest at the house. We talked about the role of the ECB. He educated me and I came away with the feeling that I had been totally wrong in my understanding of how the ECB works.

At issue was the buying of sovereign bonds on the part of the ECB.

My point all along has been that there is a huge difference between the Fed's buying Treasuries and the ECB's buying sovereign bonds of, say, Greece. When buying Treasuries, the Fed only does monetary easing; it does not acquire credit risk. When buying sovereign bonds of Greece, the ECB does monetary easing as well as acquiring credit risk. It was the latter which prompted me to conclude that the ECB should not buy sovereign bonds of problem countries.

As a reserve currency country, the US has its entire debt in a currency which it can print. Thus, there can never be the risk of non-payment. Thus, the Fed will never have to write-off Treasuries.

Greece has most of its debt in a currency (Euro) which it cannot print. Thus, there is definitely a risk on non-payment. Thus, the ECB may have to write-off Greek bonds at some point in the future. Such write-off's would trigger a recapitalization need on the part of the ECB. National Central Banks, its shareholders, would have to come up with that capital and they, in turn, would require a recapitalization from their shareholders, ultimately the tax payers of each country. At that point, the buck has stopped with the tax payers.

I was wrong!

There is absolutely no requirement on the part of the ECB to recapitalize should it end up with a negative net worth after a significant write-off of Greek bonds. There is no economic reason why the ECB could not operate with a hugely negative net worth. My friend told me that there are currently several non-Eurozone Central Banks which operate with a negative net worth. He does cede, however, that a negative net worth on the part of the ECB would cause huge political problems.

To make a provocative hypothetical case: the ECB could buy ALL sovereign bonds of EZ-countries and end up holding several trillion of them. Even if all of those sovereign bonds defaulted and would never get paid, the ECB would survive perfectly well. It would simply show a negative net worth to the tune of several trillion.

The only problem would be that the ECB, with those huge losses, could no longer finance its operating expenses out of earnings. Instead, it would require support for that from governments and that is where politicians would try to get the ECB under their direct control.

Ever since my friend left, I have pondered what he had told me. My traditional banker's brain has tremendous difficulty to understand how it could be that a borrower does not pay its debts but no one suffers a loss?

Moral of the story
One should always be prepared to re-examine one's assumptions and convictions in light of new information. I am trying hard to understand that new light!

The final question
Who in the world takes the losses when the debtors don't pay their debts?

PS: previous posts in this series: P1, P2, P3, P4, P5, P6, P7, P8.

Wednesday, August 15, 2012

Former Chancellor Gerhard Schröder raises Greek spirits

Former Chancellor Gerhard Schröder is vacationing in Greece. Perhaps because Greek islands are beautiful; perhaps because the Greek weather is beautiful; perhaps because he can have a better vacation there than in most other places; or, perhaps - as he suggests - to show loyalty to the Greek people. Let's give him the benefit of the doubt and say it is the latter.

In an interview, he said the following sentence: "Greeks are hard working people who support their families with their hard work. They cannot be equated with all those mistakes which have undoubtedly been made over the years".

Uff, one apparently has to become an Elder Statesman to become able to coin such momentous phrases!

Of course he is right! The whole point is that a very large portion of the Greek population is now getting the very short end of the stick without deserving that at all! Just take the issue of tax cheating. When over half of the Greeks in some form of a working activity are taxed at the source for their income, you already have over one half of the Greeks in some form of a working activity which cannot cheat on incomes taxes.

Of course the Germans know that the majority of Greeks are hard workers, decent and honest people who strive to provide a better life for their families, particularly for their children. I mean, Greek guest-workers have demonstrated that in Germany during a couple of decades and Udo Jürgens wrote his ode to the Greek guest-workers which became most popular in Germany.

To say what Gerhard Schröder said in the interview is the easy part, and it is easy to agree with everything he said. The hard part is to figure out solutions to this problem.

Regarding solutions: Schröder, the man who colluded with his French buddy Mitterand to allow Greece's Euro-entry even though they knew, as they later admitted, that Greece was not qualified ("after all, they are the cradle of Europe and they are so small that they can't cause that much trouble"); Schröder, the man who is responsible - again in collusion with his French buddies - for the undermining of the Maastricht Treaty; Schröder, the man who is now so much involved with Russian leadership/oligarchs that he could easily start an "Invest in Greece"-campaign in Russia --- well, that gigantic symbol of a statesman is rather short on solutions.

An American boss once said to me: "I don't pay you to explain to me what's wrong and why it is wrong. I pay you to come up with proposals as to how we can make it right!"

Tuesday, August 14, 2012

Seeing the erred ways of my thinking... (8)

With so many financial experts involved in the Greek debt problem I would have expected a bit more "financial restructuring creativity". My mistake was that I expected this.

Let me just mention three of the most common instruments used by "financial engineers" when structuring an amount of debt which seems to exceed the borrower's ability to service: (a) move maturities way out into the future; in most cases bullet maturities; (b) work out an interest payment schedule which makes sure that the borrower does not collapse under it but which also makes sure that a reasonable pressure to pay interest is kept in place; structure much of the interest on a variable basis so that the actual interest expense is tied to the available cash; capitalize all the remaining interest for which there is not sufficent cash now; and, finally, (c) take the company private so that no public debt instruments trade on any markets and so that no happenings in the secondary markets can cause problems.

Take a large private equity transaction. At the end of the day, the acquired company (= take-over target) is settled with an amount of debt which has no chance of being serviced/paid in any foreseeable future. The largest item on the company's asset side is typically "goodwill". That represents mostly the price paid for the company above the company's book value. You can consider it as the "market value" of the company; you could also consider it as "hot air". Take that goodwill out of the company's net worth and the company will show an enormously negative net worth.

Suppose the total debt were 100 MEUR. How could that be structured if it is far more than the company can sustain? Below is a structure which, in the go-go times of the 2000s, would have been considered as a conservative structure:

Step 1: make 40 MEUR due in 15 years (bullet repayment) and capitalize the interest during the first 10 years (i. e. no cash flow required for debt service for at least 10 years).
Step 2: make another 30 MEUR due in 10 years with debt instalments beginning after 5 years. Capitalize interest during the first 5 years.
Step 3: call the remaining 30 MEUR a "revolving commitment" valid for 7 years with interest payable quarterly.
Final step: structure the interest rates and maturities in such a way that that the bulk of available cash goes to the lenders.

If you look through that structure, you will note that the company pays back zero principal during the first 5 years. After those 5 years, it will beginn to amortize the loan under Step 2. Since the revolving commitment can be expected to be rolled-over after 7 years, the company really won't have to do any serious repaying of debt until the first 10 years are up.

The private equity investor doesn't worry about what will happen in 10-15 years from now because he expects to sell the company again after 5 years. And then the next private equity firm will take its chance to do the same trick all over again. In most cases, the system only works if, at the end of the day, a useful idiot comes along who buys the company for strategic reasons and pays an enormous price for it because of that. Call it a Ponzi-scheme with some chance for a benevolent ending.

Greece is not a borrower which can be sold. Thus, one has to be a bit more creative when it comes to sovereign debt. However, from a creditor's standpoint, a sovereign country has one huge benefit over a private corporation: the sovereign country can never cease to exist.

How could one have applied some of the above logic to Greece?

First, and most importantly: the burden of interest on the budget could have been contained within reasonable/tolerable limits. One would have worked out a variable interest rate structure to assure that enough "budgetary discipline" remains in place but to avoid that the budget is strangled. Typically, one would have structured the amount of interest payable in cash as a percentage of government expenditures, say 5% of government expenditures (if "wise men" were to conclude that this would be an appropriate percentage). All interest which creditors insist on getting but which cannot be covered within that 5% range would have had to be capitalized (at least for 5 years initially).

Secondly, one would have had to structure a maturity schedule which assures that a long period or "breathing space" is made available to the country to fix its problems. Actually, this was partially accomplished with the February restructuring.

Thirdly, one would have had to take a large portion of the debt and structure it as an Evergreen Bond or a 99-year bond. Thus, those creditors wouldn't see repayment during their lifetimes but they would have the opportunity to unload their risk in the secondary market once some stability returns to secondary markets. Nothing which creditors would applaud but certainly better than any haircut.

Finally, and this should ideally have been the first step: every effort would have had to be made to convert all public debt (except for the Evergreen Bond) into private debt; i. e. repay all public bonds with one or more new syndicated loans in equal amounts from the same creditors which hold the bonds (i. e. not risk change for existing creditors). The small private creditors would likely have had to be paid out in the process. Once the debt is private, there are no longer rating agencies to cause trouble. There are no longer secondary market activities which turn the tables through their speculations. There would no longer be the risk of an uncontrolled default. And --- one would no longer deal with anonymous capital markets but, instead, with institutional investors where the counterparts are people with first and last names with whom one can negotiate.

Moral of the story
If EU-elites had bothered to seek advice from countries in Latin America or Asia which have gone through such processes, they might have done something like the above. But to seek advice is only for those who are not sure that they know everything better in the first place.

The final question
Does anyone still believe that EU-elites will eventually come around to work out "comprehenive debt solutions" or will they continue with the kind of comprehensive solutions which they have applied for over 2 years now? Will they ever understand that there is only one way to deal with sovereign debt: reschedule, reschedule and reschedule again?

PS: previous posts in this series: P1, P2, P3, P4, P5, P6, P7.

Lessons from the lull of August

August seems to be a quiet month for Greece (and for the Eurozone, for that matter). It is being described as the lull before the storm, with the next hurricane being expected to come around in September.

Why is August a quiet month? Undoubtedly, it being a vacation month is part of the reason. But the more important reason is that there are no major decision points in August (except for the August 20 refinancing which has been taken care of). September, on the other hand, will be a month full of decision points.

Wouldn't one lesson from the above be to move decision points way into the future? Moving them into the future doesn't solve any problems, of course, but it provides time which, if used well, can make the solving of problems a lot easier. Problems are best solved during a lull. They are rarely solved during a storm.

Suppose we were still back in January of this year and suppose Greece would have suggested to private creditors that they should take 100 BEUR of their Greek debt and put a moratorium on it for 10 years (i. e. no principal/interest payments for 10 years). I can see how everyone would have screamed "no way!"; "one can't do that!"

Well, what was done instead at the time? Enormous effort was invested and a lot of china was broken by getting private creditors to agree to a 100 BEUR haircut. That hundred billion is gone as far as the private creditors are concerned. No more chance to negotiate all or part of it in, say, 10 years from now. It is gone forever.

Wouldn't it be smart to be practical about the debt problem? The fact is that principal and interest can only be paid if someone lends Greece the money to pay them in the first place. Why go through all those painful motions when there is absolutely no financial gain from them for anyone involved?

Why not take a large amount of Greece's remaining sovereign debt, perhaps 150 BEUR or so, and say: "We put principal and interest on follow-up in 10 years from now. Until then, that debt will just stand there as a 10-year loan with interest capitalized and due at the end of the 10 years. At the end of the 10 years, we will negotiate a new principal/interest structure of the debt outstanding then".

Creditors might scream that, if they agreed to this, they would lose all leverage on Greece to make reforms. That is a fallacy because there is still enough of sovereign debt to play with for leverage purposes. And, actually, one only needs interest payment dates to exercise leverage. The respective clause in the loan agreement would simply state: "Non-payment of interest makes all outstanding debt immediately payable in full".

The trick is to gain time. The even greater trick is to make sure that this time is used well. The carrot at the end of the stick for creditors is that they don't give up anything yet. In 10 years, they have the right to negotiate ALL the debt which is outstanding then.

To make a long story short: when in financial trouble, the idea of repaying debt is a fairy tale. To spend all one's resources on debt repayment possibilities is a waste of time.

The most important thing is to "regularize" debt in whatever form or fashion so that one can enjoy the lull for as long as possible (to make reforms) before the next storm hits.

Look at any sovereign debt restructuring in history. The debt was never lower once the restructuring was completed (unless it was forgiven). It was only "regularized".

I am not familiar with the current debt situation of the State of California but I am sure it would be a good example. I remember that, not too long ago, the specter of bankruptcy circled around California. During quite some time, the state had to pay some of its bills with IOU's. Now, everything seems to be fine. Is California's debt lower today than it was then? I doubt it! So why does everything seem to be fine in California today? Because the state's debt could be "regularized". Its maturities could be restructured in such a way that decision points were moved way into the future.

Knowing how Californians run their state, I doubt that they have solved many problems since the last "regularization". Undoubtedly, we will see a storm again in California at some point in the future. But until then, California enjoys the lull during which it could correct some of its problems.

Sunday, August 12, 2012

Are dreams permitted on a Sunday?

I frequently get criticism that I am naive when I think that there could indeed be a very bright future for Greece. I normally refer to that future as "Greece's becoming the economic tiger of the Eastern Mediterranean".

Do I think that this will ever happen? Well, by now I kind of doubt it. But in order for something to happen, one must be able to envisage it happening in the first place. Let me dream a bit and desribe how it could happen.

Alexis Tsipras is not the majority of Greece. If I recall, he got a little over 30% of the vote. That means that there are another 70% or so. Could it be that Greece has only one Alexis Tsipras? No other Alexis Tsiprases among the other 70%?

There is no doubt in my mind that Alexis Tsipras has what it takes to be perceived by a suffering and disenchanted people as a strong leader who would lead Greece into a better future. His soundbites are extremely seductive!

Here is one of the key phrases I have ever read as regards a possible "mission statement" for Greek leadership:

"We will seek to build a modern and prosperous Greece: a Greece characterised by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos".

The statement comes from the executive summary of the EU Task Force for Greece. I guess Alexis Tsipras could subsribe to that but, as I have explained before, I don't think his ideology would make that possible.

Just imagine, for a moment, that Greece could produce an Alexis Tsipras from the center. A leader who could motivate Greeks exactly like Alexis Tsipras does with his seductive soundbites but who bases his policies on reality and not on wishful thinking. A leader who would generate as much excitement among a majority of Greeks as Alesix Tsipras does with his followers (who are still the minority).

I am reminded of the enormous search process which the Tibetans went through in oder to find the right Dalai Lama. Perhaps it's time for a committee of "wise Greeks" to start a search process for an Alexis Tsipras from the center. There have got to be candidates. After all, a year ago I didn't even know that one Alexis Tsipras existed, not to mention several of them.

Well, that was all dreaming, of course. But dreaming is often nicer than reality...

Saturday, August 11, 2012

Master-Mind meets Master-Race

I treasure The Economist as a product of superior British intellectualism coupled with high-class and distinguished humor. Truly an example of Master-Mind! And I am certainly aware that the Germans have done many things over the last 150 years which allow the conclusion that they might consider themselves from time to time as a Master-Race.

Regrettably, the latest issue of The Economist has a cover story which prompted me to think that Master-Mind is telling Master-Race what to do. A devilish combination!

The Economist published The Merkel Memorandum. In it, the authors suggest that Angela Merkel would be imprudent not to consider Plan B; a plan which encompasses an orderly Euro-exit for Greece.

Master-Mind meets Master-Race!

The Memorandum is quite interesting. It incorporates ideas of Roger Bootle who recently won the Lord-Wolfson-Prize for the best proposal for a Greek Euro-exit. I mean, just the idea that some bored member of the House of Lords would get his kicks out of the idea, sort of between tea and port wine, to hand out a prize for the intellectual exercise of Euro-exit scenarios is worth pondering from a social science standpoint. Does he not have better things to do with his time and with his superior education? And with his inherited money?

If one were really interested in a constructive approach to a possible Greek Euro-exit, one wouldn't have to go overboard and start a public competition for ideas. For a lot less money, one could take a flight to Buenos Aires and get the practical opinions of Argentines about an issue like that.

The sheer intellectual arrogance of this! Master-Mind is thinking what Master-Race should do. Who is at issue here? Master-Mind or Master-Race? Or, permit me the question, could it be that Greece is at issue here? Any idea what the Greeks would want to do or what's best for Greece? Not in this article by The Economist for sure!

Intellectual superiority here or there. Have the Brits not taken a lesson from their past that they do not necessarily have the best track record when it comes to determining Greece's future from tea rooms in White Hall?

I would suggest that if it ever came to a Euro-exit on the part of Greece, it should be absolutely irrelevant for the Greeks to consider what the effects might be in London, Paris, Brussel, Frankfurt or even NYC for that matter. The only thing which should matter to Greeks is what the effects are on Greece!

I mean, just the idea that one would sell as a top-story the breaking news that there should be such a thing as a Plan B! I would have thought that everyone from day 1 of the crisis (by that, I mean early 2010 and even before the first rescue package) would have had plans B, C, D etc. in his pocket before going to a meeting. That goes for EU-elites as well as for Greek leadership. Or could it be that they pursued a strategy of not even preparing for alternatives until those are forced upon them by force majeure? What would they have done if one day a giant bank run had started? (it still could!).

One major reason that we are where we are today is that, quite possibly, everone involved behaved a bit like well-meaning boyscouts: "We will save the Euro; period!"

Professionals, when in crises, go to meetings prepared. They have with them evaluations of all possible alternatives. When asked by journalists what the meeting will be about, they don't make silly comments like: "We will save the Euro at all cost!" They matter-of-factly say to the press: "We have a crisis at our hands and we will evaluate all alternatives to get out of it. That could be a debt rescheduling; ongoing financing or even a Euro-exit. Any more questions?"

At issue here is (or should be!) what is best for Greece. If it is keeping Greece in the Euro, put a price tag to it from the Greek standpoint. If it is Greece's leaving the Euro, put a price tag to that from the Greek standpoint. Evaluate the pro's and con's and take a decision.

Technically, a Euro-exit on the part of Greece is no rocket science: one declares a bank holiday for up to one week to get all the necessary legislation passed. Part of that legislation would be to convert all domestic contracts from Euro into a new Drachma at, say, 1:1 and to freeze bank deposits (with only minimal withdrawals for personal use).

There would only be a logistical problem: how to get new Drachma-cash into the hands of people but that should not be as complicated like planning a landing on Mars. If nothing else, one prints Drachma-checks for a while (there presently is a large market of post-dated checks in Greece).

Greece is presently dealing with a multitude of foreign currencies, like the British Pound, the USD and --- the Euro. All a new Drachma would be is the introduction of a new local currency. The Euro would not disappear! Instead, it would remain one of the foreign currencies which continue to work as they have done before! If people want to continue dealing in a foreign currency like the Euro (perhaps because they have so much Euro-cash), let them do it! Argentines dealt with USD-cash even though the local currency was denominated in pesos.

As regards foreign currency obligations (like the foreign debt denominated in Euros), tough luck for those who hold it. Their borrower no longer has that currency. It now has a local currency instead. A local curreny which is rapidly devaluing and, thus, making those loans much more expensive. If Greece couldn't repay those loans while having the Euro as a currency, it certainly won't repay them with new Drachma! Don't make a lot of fuss over it. Just write the loans off!

Allow me to ask the distinguished The Economist a final question: "Are you familiar with the expression of 'self-fulfilling prophesies'? If yes, why do you engage in such questionable practices?"

Capital markets behave pro-cyclically. That is, they reinforce existing trends with their actions and decisions. Rating agencies do the same. One can now add The Economist to that distinguished group!

Correspondence with an admirer of Alexis Tsipras

I had an exchange with an admirer of Alexis Tsipras in another blog. I had emhapsized the positive aspects of Alexis Tsipras which I had published in this blog but pointed to the, in my opinion, great fallacy in his ideology --- his belief in an even greater role of the state.

He responded to this as follows:

Which (my arguments; ed.)) is precisely what it means and why everybody freaks out (or faints, depending on the gender when Tsipras shows up.

He, or SYRIZA, never said they would increase the role of the state, but rightfully so put the role exactly where it belongs, in "strategic economic sectors" and most importantly "Public ownership and social control of banks". How dare he threaten "big business" with removing the stick behind the door? How dare he threaten the banks with putting financial control over their own and the states finances with the people instead of the sharks in Goldman Sachs? So the puppets start jumping up and down, directed by the puppet masters Merkel, Schauble & Co.

The "privatization" program has a number of things the Troika want Greece to sell off to "repay" the debt. Every single bit of infrastructure vital to an economy is on it, airports, harbours, motorways, you name it. (Not to mention the rest of Corfu which De Rothchild has already expressed an interest in).

Hand these assets over to foreign (read German or German managed!) control, and the country as a nation is enslaved for ever. And it is literally handing them over, as the money from the "sale" goes straight back, with 7% interest, to those who buy it. You simply cannot hold that threat over a country. Well, you can, but then obviously you must expect at least somebody in the country to stand up and say "Nein".

Lets put the pantofla on the other foot for a minute and gauge the reaction if tomorrow somebody would try and force Germany to sell Hamburg and Bremen harbours, all their international airports, Deutsche Bundesbahn, Deutsche post, the Kiel canal, etc. etc. And of course, throw in a few niceties for the rich and famous like a few forests in Bavaria or so. Tanks would roll and boots would march, no doubt about it!

But Tsipras is a dangerous politician for suggestion Greece protects, or takes back, it's vital and strategic assets?

Regarding banks, what he is proposing is only proper order. It is where the ownership and management of ANY financial institution should be, world-wide, with the people who use it. Not with the big time gamblers and speculators as it is now. How dare he suggest no more outrageous self assessed bonuses, no more fiddling at will of interest rates, no more handing out unsecured loans to friends and relations, no more creating of massive private pension pots, no more spending of 250K on golf balls, etc. etc.

In Ireland they have a perfectly working financial system called the "Charter of Credit Unions". Although some have been hijacked by sharks, blatantly against their own rules, in general these institutions works brilliantly, and they work for and with the small guy, at a local level only. They are even run, managed AND owned by the small guy. An absolute perfect example of a financial system under social control. And it works fine. To keep it working fine, it takes proper regulation, sadly missing in the world of finance, and the root cause of the problems everybody is in.
Of course international finance will not allow some rogue politician like Tsipras to shout such a system of the roof tops. It's tantamount to a coup d'etat as far as they are concerned.

On a side note, if the Irish Government at the time had decided to spend about 5 billion on upgrading that credit union system and allowing it "Bank status" while letting the gamblers and gangster go bust, as they deserved, Ireland would never have had a banking crisis to start with. It only became a crisis because of the actions of the completely rotten, corrupt and criminal political system and those in it who combined didn't have a single braincell capable thinking of anything or past the next pint...

My response is below.

Upront, I sympathize with much of what you say. If you read through all my postings on Alexis Tsipras and SYRIZA, you will find that we are not all that far apart.

Here is my problem. Those who are in favor of radical change in a society (to be sure, I am convinced that Greece needs radical change) often get carried away with their enthusiasm. That’s always the tragedy of well-meant revolutions. It can become very rough when dreams fade and reality sets in.

I have become very impressed by those (including you) who have embarked so emotionally on SYRIZA as a potential harbinger of a better Greece. I think particularly Alexis Tsipras has the personal talents to be such a harbinger.

However, such movements can only be successful if emotions are complimented by what I would call some "experienced common sense; or experience in general".

SYRIZA and Tsipras could perform all those marvels of which they speak if Greece were Argentina or Venezuela. In other words, if Greece could exist as a stand-alone economy. Greece CANNOT exist as a stand-alone economy; never ever could since 1832!

Anyone who doesn't recognize and accept that fact from the start is doomed to fail. Anyone who leads Greeks to believe the opposite is extremely dangerous!

Anyone who really has a sincere interest in changing Greece, has to start with honesty to the Greek people. That honesty cannot be a focus on the revival of Greek feelings of ancient superiority; of Greek feelings of always having mastered all difficulties; of Greek feelings to be able to lead a better life when only left alone by foreigners.

The truth is that modern Greece has never been able to do well on its own. Now, you can accept that as a brutal offense from an Austrian. Or, you can think of it as a recommendation by someone who means well. “Know thyself” is what we first learned about Greek culture back in school.

Greece as a society has never really gone through processes which Central European societies went through (Protestantism; Enligthenment, etc.). Instead, Greeks have a culture of being “dominated” by foreign powers, be that the Romans, the Ottomans, the Brits or, now, the Merkel’s of the world.

The result is, in my mind (and bear in mind that I have been married to a Greek for almost 40 years!), that Greece is a society which has never had the chance (or was never forced to) develop on its own its own systems for effective self-government. By that, I mean principally effective public administration and the power of credible public institutions. Please don’t be offended, but I would argue that in many aspects of Greek society and the Greek economy, Greece is still a developing country/economy (but not in terms of the living standard/culture of the upper class!!!).

Once you recognize (and admit!) that, you have a basis for improvement. Then you begin SEEKING advice instead of OBJECTING to it. A very prominent member of the Thessaloniki business community (a Greek!) once told me: “We need two people for ever position in the public administration: one EU-expert who teaches and one Greek who learns”. If that had come from a non-Greek, I would have considered it as an offense. Since it came from a Greek, I considered it as an impressive form of self-recognition.

Alexis Tsipras plays the nationalistic card and reinforces in Greek emotions that Greeks can make it on their own. Forget it! Greeks will be able to make it on their own after they have exploited all possible resources/support from others to learn how to make it on their own (refer to the EU Task Force for Greece).

If foreign funding for Greece were to stop (with or without the Euro), Greece would be knocked back into the 1950’s/60s. Those were the times when the Greek economy could survive because Greeks went to foreign countries to work there so that they could remit their savings back home. To avoid misunderstanding: let me emphasize that Greek guest-workers had probably the best reputation of all guest-workers in Central Europe! And I think they made a tremendous contribution to the increase in Greek living standards then!

If I were a young Greek, I might think that Alexis Tsipras promises that Greece can make it on its own. That is an illusion which HAS GOT TO BE KILLED!

Personally, I am still convinced that Greece, if it adopted the right policies, could become, in the not too distant future, the economic tiger of the Eastern Mediterranean. Why? Because Greece has never even made an attempt to take advantage of its competitive advantages; has never even touched the potential it has.

So, what I am missing in the message of Alexis Tsipras is a recognition of that fact. His message should be: “Look, we have all the potential to become the economic tiger of the Eastern Mediterranean but in order to achieve this, we must seek every support and know-how transfer from foreigners. They know how to do all that. We have to learn from them how to do it on our own!”

To put figures around what I am saying: look at Greece’s Balance of Payments. You will see that Greece, without funding from abroad, is a dead duck in the water. Leave your emotions about Greek will and pride on the side; that’s a fact!

I don’t see that realization in the pronouncements of Alexis Tsipras and neither do I see it in your comments. But without a recognition of that and without the measures which would come as a consequence of that recognition, I would share the opinion of a very good friend of mine in Greece, which is: “Greece will never change. Greece will return to the Drachma (he predicts) on Friday night, January 11, 2013. Then a re-emergence into sunlight in a 1960 format, i.e. cheap tourism and, hopefully, a streamlined agricultural system which could turn the current 40% domestic food deficit into covering all domestic needs - and provide some export activity”.

Freedoms of product/capital flows are not always fair for everyone!

Two of the four EU-freedoms are the freedoms of product and capital flows. Wonderful freedoms! Are they freedoms which serve the principles of fairness in an economy?

Is it understood that whenever some Greeks import SUVs, what happens in reality is that the foreign debt of ALL Greeks is increased for the benefit of those who can afford to import SUVs?

Is it understood that whenever some Greeks withdraw their savings from banks (either to hoard them under pillows or to transfer them abroad), the foreign debt of ALL Greeks is increased for the benefit of those who have savings?

The Greek economy depends to a large extent on funds flows from abroad. The trick is: funds flows from abroad come to Greece either via the state as a borrower or via banks as borrowers. When the state is the borrower, it is clear that ALL Greeks are liable for that debt. When banks are the borrowers, it is de facto clear that - if worse comes to worst - ALL Greeks will be liable for their debt.

Wouldn't it be the most natural thing to take measures that those policies which serve the interests of some members of society (at a cost to ALL members of society) are reigned in?

The answer to that would be import restrictions (such as special taxes on certain imports) and capital controls. Wow, I can already hear the uproar from free trade enthusiasts that this would be a return to the stone age of commerce! I can hear how that would be a violation of EU-treaties! Actually, I am a free trade enthusiast at heart and, actually, I am a believer in the observance of treaties.

It wouldn't be a return to the stone age of commerce! I would simply simulate the situation which Greece was in before the EU-freedoms and before the Euro. Everything which was imported then was taxed so high that those who could afford to import were making their fair-share contribution to society via taxes.

Am I recommending a return to no-free-trade-policies? No way! But I AM recommending some breathing space. Breathing space for an economy to regain its bearings.

There is simply no chance for an economy like that of Greece's to regain its own bearings when two killer-apps (freedom of products and capital flows) are eating away at the economy's substance! No economy in the world can survive if its production and its financial capital are withdrawn!

Ideally, free market forces would accomplish that. Greece would deflate so much that production and capital return. Well, I invite free market dreamers to think that way; it won't happen. Those who are really interested in free markets long-term (like I am), first have to create the conditions that free markets can work effectively for society as a whole!

One has to temporarily put the two killer-apps of the Euro-system on hold in the case of Greece!

Now, here is a conditio sine qua non if one were to pursue a policy as suggested above. It would have to be clear that those are only temporary measures to allow the Greek economy (via infant-industry-protection) to eventually reach its own competitive level. If that were not assured, it would indeed be a return to the stone age of commerce!

Thursday, August 9, 2012

Seeing the erred ways of my thinking... (7)

I begin with a flashback to 1992.

Ross Perot was running for President as a third candidate. He was a smart man who had articulated the reasons why the U.S. had a dinosaur economy based on consumption. The North American Free Trade Agreement (NAFTA) was under discussion then. Perot predicted that NAFTA would generate a "giant sucking sound" (jobs leaving the U.S.). Those jobs would be gone forever. Thereafter, "we all sell each other hamburgers and buy Chinese crap and South Korean cars and televisions".

I was mistaken to think that Greek political leaders, but above all EU-political leaders, would have considered that something similar might happen in Greece with the Euro. Alright, I forgive them for not thinking about it before the fact. But I would have never thought that, later on, they would not have noticed that "giant sucking sound" of imports and loans being sucked into Greece and domestic production being decimated.

Finally, I would have thought that EU-leadership would have noticed, once the Greek crisis erupted, that the Greek economy had de facto become a zombie-economy of services. To paraphrase Ross Perot: an economy where people sold each other souvlaki at inflated prices and paid for it with money borrowed abroad.

Had they admitted the right diagnosis, I would have expected them to make the following announcement: "Severe imbalances of product and capital flows have developed between the Core and the Periphery leading to the cross-border debt problem of today. We have to implement policies and incentives within the Eurozone which will lead to a reversal of this process. We will incentivate companies in the Core to shift some of those investments which they would make outside the Eurozone to the Periphery of the Eurozone. The Core will be incentivated to buy more of the products which the Periphery will then produce".

Much has been said about Greece's being by nature more of a services economy than a production economy. If one accepts that as an unalterable fact, then one has to accept that Greece will by nature return to being a poor economy.

A service economy can only survive if enough services are provided to customers outside the country to generate the foreign funding necessary for the import of production goods. Could Greece exist purely as a service economy? Theoretically, it could. In practice, very unlikely.

Moral of the story
Economics 101 is normally the course where one learns about things like the above. If one has never passed through Economics 101, it would be sufficient to apply common sense to a country's Balance of Payments.

The final question
Why in the world don't EU-politicians start now to think about the lessons from Economics 101? It certainly is not yet too late!

PS: previous posts in this series: P1, P2, P3, P4, P5, P6.