Saturday, November 24, 2012

Greek debt. Or is it equity?

The level of Greece's debt would be irrelevant under two conditions: (a) the debt would never mature and (b) it would carry no interest. That debt would then be considered equity.

The mindset of lenders is totally different from the mindset of equity holders. Lenders get nervous when the creditworthiness of the borrower deteriorates and the ability to service debt declines. Equity holders get nervous when their company loses market share, when their company runs down investments. Lenders, when they get nervous, try to get their money back. Equity holders, when they get nervous, think about new business growth strategies.

In 1996, when Apple was going downhill and Steve Jobs was brought back into the picture, a lender would have wanted to call back his loans as long as there was still enough cash there. An equity holder should have invested as much as he could before Jobs made Apple the most valuable company in the world.

The mindset of equity holders has been totally absent from the Greek debt discussions to date. This is so much more of a problem because it should be clear to the lenders that at least a good portion of their loans has meanwhile assumed the character of equity. Put differently, they should protect their investment and make it grow.

The much-discussed austerity program may have been right or wrong in its implementation but there can be no doubt that a state of the size of the Greek state, particularly when it is so inefficient, must be downsized. When Steve Jobs took over Apple (again), the first thing he did was to cut out all divisions/departments which he thought were doing superflous things (even though they were doing them well). Thousands of employees lost their jobs.

BUT: parallel to this austerity, Jobs embarked on a major growth drive and bet the company on new products. Had the iMac not been successful, Apple might not exist today.

What has been desperately lacking from all 'plans for Greece' to date is, parallel to the necessary austerity, a growth strategy in the private sector. In the recent past, there have been very positive reports about the Cosco-investment in Piraeus and about Unilver's and HP's decisions to invest in Greece. Please note: those are just three names!

Some learned people are calling for the EIB to spearhead a growth initiative in Greece. I beg your pardon? Do these learned people not know that the EIB is a bank and not an investor? The EIB will indeed lend the money but there will be no EIB-lending if there are no investors with good projects in the first place.

I have been arguing from the beginning of this blog that what Greece needs is a long-term economic development plan for the private sector. A plan which will lead to a situation where not only Cosco, HP or Unilever decide to make investments but, instead, where a multitude of investors recognize the good business opportunities which Greece offers.

Who should put together that plan? Well, ideally Greece itself. The Greek population will only support a new long-term economic development plan if they feel that it comes as a result of Greece's initiative (as opposed to foreigners' orders). However, Greece would be well advised to draw on (or rather: to demand!) all possible resources which the EU offers for the development of such a plan.

A couple of years ago, an 11-year old sent a letter to Mr. Papandreou proposing his (very cute) plan how to solve Greece’s problems (published in the Ekathimerini). A year ago, McKinsey came out with their Greece Ten Years Ahead report proposing 500.000 new jobs and 50 BEUR new GDP within 10 years. I am sure that many other good ideas reside in Greek brainpower.

I wouldn't rely totally on an 11-year old and I wouldn't rely totally on McKinsey. But, for heaven's sake, can't Greek brainpower get their act together and work out a long-term economic development plan for the private sector which will make lenders very happy to have become equity investors?

What's the matter with Greece?
Greece needs growth, not austrity!
(actually, the second heading should read, in my opinion: "Greece needs growth as well as austerity!")


  1. First a good news story

    In 2011/12 McK's identified generic pharma as a candidate for growth.

    In 2010 the EIB made a €25M loan to Pharmathen Hellenic for precisely that purpose!! In 2009, Pharmathen employed 517 people, by 2011 they had 804!

    On this loan there's no intermediary bank - Pharmathen Hellenic set up Parmathen SA to handle the transaction, so I assume the cash flowed. And the way its setup it even gets to sidestep some EU directives.

    I'd not previously known of this apparently highly successful, privately owned - brother & sister Vassilios Vastos & Nellie Vastou - Greek enterprise. Google finds nothing in the English language Greek Media.

    But as another old proverb goes - "Man who says something cannot e done should not interrupt man doing it."

    The Pharmathen Board reminds me of Cosco's board, it's stacked with domain experts. The website is better than most, easy to navigate, informative and not overloaded with glitz and glamour.

    IMO this is better than Cosco/HP, and Unilever - its real, it's happening, and it's 100% Greek!

    The EIB normally issues a press release when it makes a loan, but on this one I can't see one. There's no apparent involvement from the government or commercial banks, maybe that's why its been kept quiet - they'd only want a slice of the action.


    1. I am often wondering: where do you get all your detailed information from? Can you share secret with me?

    2. A Milton Erickson devotee told me I have an innate ability to join dots, a good memory, an eye for detail (which can result in me losing sight of the big picture). An inquisitive and questioning nature, and an abnormal ability to concentrate. She suggested I'd make a good spy.

      When I read or hear something I think I ask 3 questions - did I already know that, if not then a) do I doubt its veracity or b) would I like to know more. If a) or b) then I do a search - and I do it now, not later, otherwise I'll forget to do it :)

      Love of words, hence of the law. A background in IT means I'm comfortable with the technology. I use Google's advanced search to narrow searches. I subscribe to many RSS feeds - bloomberg, spiegel, ekathimerini, even Durden and Richter's blogs :lol:

      I use some software 'tools' to facilitate searching & saving. I guess if you don't know them they could be thought of as Canutely King's Secrets:)

      Firstly and most importantly Click.To. Here's a PC Advisor Review

      Example of use - Assume I'm reading a Grant Williams newsletter (in a PDF I got in the mail) and I see "We’re looking at really slow growth [in China},” said Ed Hemmelgarn, founder and chief investment officer of Shaker Investments. So I ask myself, who are Shaker Investments, and who's this Hemmelgarn dude, when did he say that, and in what context. So I highlight "Shaker Investments", do a Ctrl/C, the Click.To toolbar pops up and I click on the Google button - my browser wakes up and I see Search Results for Shaker Investments

      Without Click.To, I probably wouldn't do the search. I trust Grant Williams and I'm only marginally interested in knowing about Shaker or Mr Hemmelgarn. But because Click.To makes it easy, I do the search. While I was in Google I clicked on News, and in the result list there's a link to International Bank Conference in Baku because it mentions that a Mr. Fouad Shaker made a speech there. So now know a lot more about Azerbaijan - eg FDI in Baku is up 15% in 2012 - and now you that too.

      Secondly - Autocopy browser extension - there are versions for Firefox, Chrome and Internet Explorer (I use Firefox). Search for "Autocopy «your browser name»". It copies what I highlight (select) in the browser to the clipboard - and when it does, the Click.To toolbar pops up without the need to do the Ctrl/C. And its useful when copying, say a chunk of text from Forbes magazine into a blogpost at Griechenland. There are windows programs that will also do this - but I've never found one I like, they get in my way.

      Thirdly - I use a clipboard extender, basically they allow you to retain the most recent N items you copy to the clipboard. The one I use is part of a Pay4Me swiss army knife product (Shelltoys) which you probably don't need - I get it to retain 100 items. If you search for clipboard extender you'll find some. Ditto seems to be popular - when I looked at it for a friend I didn't like it, too complicated for me. I'm not sure what my friend is using. But he often uses things I would never use - he likes bells and whistles, I like simple. You might need to try a few before you find one with which your comfortable.

      Fourthly - Evernote, its my scrap book - it was one of the early ones, now there are dozens of similar products. I have no idea if they are better than Evernote, because it retains data permanently I;m not inclined to changing it. It works good enough for me. I probably only use 10% of its features.

      Cheers CK

    3. Almost forgot - if you want me to do some "research", just send a few keywords.

      I don't like videos, I much prefer the written or spoken word. I sometimes download talking head videos and extract the audio - did that with your Bill Rhodes videos. I have some voice to text software from MS & IBM research labs. I'm hoping one day I'll be able to make transcripts of talking head videos... Unfortunately the sound quality of most videos is awful, even on the original broadcast, especially satellite Pay4Me TV - grhhh.


    4. CK

      Wow! That will require some digesting and practicing on my part. Thanks a lot!

  2. Some troubling thoughts.

    Following the HP/Autonomy writedown I'm concerned about the Cosco/HP deal - Cosco is here to say, but I'm not so sure about HP.

    HP allege they were defrauded by Autonomy and as a consequence they have written its value down by $8.8 billion (I think they paid 14 billion). In June they wrote $8 billion off the value of the EDS acquisition.

    In mid 2011 the HP CFO advised the then CEO, Léo Apotheker, against proceeding with the Autonomy deal, he ignored that advice. In a subsequent board meeting the CFO advised the full board that it was a bad deal (the CFO didn't warn Apotheker, presumably to prevent a pre-emptive strike). The board also chose to ignore the CFO's advice and voted unanimously to proceed with the Autonomy deal.

    Apotheker had previously excluded the CFO from M&A due diligence processes, presumably the board also agreed to that. Thus the CFO's advice contained nothing about fraud, it was based on analysis of public domain data, intuition and maybe some undocumented inside information from unnamed sources :wink:

    Apotheker and his Technology Czar, Shane Robison - the man who WAS in charge of due dilgence and the chief evangelist for the Autonomy deal - resigned shortly after the deal was signed, and before the fraud allegations surfaced. There's something in that makes me go - Hmmmm...

    The current CEO, Meg Whitman, who was a member of the above mentioned board, has, to her credit, given responsibility for future M&A due diligence to the CFO.

    And to her credit the CFO, Cathie Lesjak a 24 year HP veteran, didn't resign when her CEO and board ignored her advice, she 'hung tough' as they say. A smart woman with courage should run for the California Governorship.

    in 2009 Meg Whitman ran for Governor. She spent more of her own money than any other political candidate ever spent on a single election in American history. In the prior 28 years she hadn't voted in any elections. She failed to get elected, so she took a seat on the HP board and became its CEO - Hmmmm...

    The EDS acquisition failed for the usual reason, and as many predicted it would, culture clash. The EDS division has lost market share, as has the old HP home grown services arm.

    If I had a role in corporate IT purchasing today (as I did in the 80's & 90's, when I bought truckloads of HP boxes and services), then I'd be very wary of buying HP. They are losing market share in a declining market (desktops, servers and laptop) and so far their ventures into smartphones, tablets and cloud computing have failed - miserably.

    There may be more to come on the Autonomy front, it looks very murky to me - including corporate dirty tricks, on which Apotheker has prior form.

    And HP's balance sheet doesn't look too flash either

    Cosco needs to get more runs on the board (deals on the books). If HP goes into Chapter 11 then its desktop, laptop & printer product lines could fragment with each going to a different buyer (if any), and of course they'll lose more market share. These are the product lines that would fill the containers and ride the trains. Such a scenario would be like giving 10 free kicks to the "I told you so" crowd. Time is the worry - again!

    Larry Ellison might give them $8M for Autonomy :wink: CSC, IBM or Accenture might bid for EDS. But you don't ship software or consultants in 20' containers :)


  3. And finally - is the Apple turnaround a model for Greece?

    For Greece, Leo Gerstner's turnaround of IBM might be a better model. In her review for Forbes magazine of Gerstner's Who Says Elephants Can't Dance?, Lisa diCarlo tells us

    [Gerstner] was a virtual recluse when it came to interviews and public appearances -- he doesn't try to hide his disdain for the media -- so his words offer a rare opportunity to hear his point of view. of the benefits of saying so little publicly is that you never have to take anything back. No mea culpa.

    Gerstner describes the turnaround as difficult and often wrenching for an IBM culture that had become insular and balkanized. After he arrived, over 100,000 employees were laid off from a company that had maintained a lifetime employment practice since its inception in 1889. I wonder if Apple has even employed 100,000 people, cumulatively, since its inception in 1976.

    I say IBM might be better because Apple was reduced to an almost empty shell before reinventing itself. But IBM had a large corporate customer base for its main & mid range computers, and a lot more people dependent on its continued existence than Apple has ever had. Not just within IBM but amongst its customers and their customers & clients... The social security systems of many (most ?) countries rely on IBM systems, as do many banks and airlines. Without IBM the NYC subway couldn't even issue tickets, let alone operate signals. Apple have struggled to progress beyond personal products. Sure being without your iPad is annoying - but consider what happened to NYC when its Subway took a hit from Super Storm Cathy.

    Obviously Greece cannot reduce itself to an empty shell, although some would probably say its trying its best to do so. It must do what IBM did, rebuild from within based on available resources and talent. One thing that Gerstner did was to strip IBM of the internal silos that were focused on competing with one another - I can well remember those IBM silos - they drove customers nuts, away in drives or both. I get the impression that there's quite a lot of that sort of thing within the Greek bureacracy.

    I recommend Gerstner's Who Says Elephants Can't Dance?. Before joining IBM, Gerstner knew nothing, nada, zilch, rien about computers, he came from tobacco/food manufacturing (RJR Nabisco). After IBM he went to the The Carlyle Group, a big private equity firm. He probably still doesn't know the difference between a memory chip and a chocolate chip cookie.

    As well as looking to the high flyers, and publicity seekers; we must also seek out those who are doing it, getting on with the job, implementing the tough decisions. Quiet achievers like Vassi & Nellie Kostas, and the likes of Tim Cook, Lou Gerstner and Cathie Lesjak.


    Aside : The idea that Apple was turned around by Steve Jobs single-handedly is a myth. Yes he was vitally important (as was his wealth) but without Cook, Ives & Laurene Jobs, Apple would probably have become yet another Next. Those three were vital in turning around Steve Jobs' obsession with perfection - take a look at his record at Next.

    Jobs should get credit for listening and being prepared to lower his expectations to 'best possible' rather 'absolute perfection'. By the time Jobs returned as CEO in 1997 much of the firing and restructuring had been done by his predecessor Gil Amelio. Anyway Apple was never more than a skiff. compared to the battleship that Gerstner turned on dime.


  4. What to do about Greece. Well, let's see:

    A) Make sure the law is making not issuing legal receipts by shopkeeper fiat painful to shopkeeper and impossible for the shopkeeper friendly police officer to force you to pay. Up to now if you didn't get a receipt you should have returned the goods and cancel the transaction. This is obviously impossible if you are in a restaurant or a bar. Once you have eaten returning the goods was impossible. So if there was a dispute and the police was called you had to pay and wait for the receipt in the post (just like the proverbial check). Keep in mind that in Greece the police officer's loyalty is to his friend the shopkeeper, not the state or the law. Especially outside Athens. By legally making the transaction without the receipt a gift it makes impossible to avoid issuing it. This is vital in places like bars (no receipts at all) or the Island of Hydra (ditto)Because large retail geographical or business areas are completely outside the system large wholesale sections(all Hydra food market for example) are also outside, creating a vast net of politically powerful tax evaders. With some lack it is over.
    So, check

    B) Reduce the power of lawyers by removing the legal necessity to use them on every trifling transaction


    C) Remove from the corporate tax code the concept of purpose of business (See previous comments of mine)

    D) Put all taxes on behalf of third persons in the budget.
    Check I think

    E) Put all discretionary funds (ειδικά ταμεία) of the various parts of the state apparatus under budget control, not under ministerial or other potentate control.These were funds collected in various indirect ways and spent with the minister's or other potentate signature, completely outside budget procedure

    F) Make sure that the only way for the vast majority of contacts with the state is done through the KEP apparatus or the web. Only lawyers and accountants should be able to deal with the all the other state entities. That will disarm the basic weapon of the bureaucrats: their ability to say no at the point of entry. Anyone who has come into contact with the Greek state knows that if the bureaucrat in front of you does not want to do its job he/she will prevaricate until closing time, sending you up or down stairs, asking for photocopies etc. Once the papers are legally in the system though this is impossible.This is why the KEP concept is been attacked.

    G) Not all privatizations are created equal. Privatizing airports is vital, because whenever RyanAir made direct connections between an island and European cities the tourist season in the island in question was extended for 4 months, with a colossal jump in profitably. In the island of Kos this went on for a season and then the mayor started a fight with the airline and so no flights now. My suspicion is that Ryanair is not paying the regulation bribes. So privatize airports to make sure traffic flows uninterrupted. A 4 month extension in the island tourist
    season will help a lot.

  5. J) Allow, for real, supermarkets to sell drugs and petrol. This will reduce the hold over the economy of two of the most egregious offenders: the refinery/oil distribution cartel and the pharmacy boards in every prefecture that regulate drug sale and distribution.

    I) Finish the major roads to break the hold of the political system over wholesale trade, a major reason for the high and inelastic prices in Greece.

    K) Make every civil servant personally responsible for finding the laws, regulations etc that affect his job. The present system where some nefariously defined central entity must pass down the necessary information is a recipe for prevarication. You may have the regulation printed in the Government Gazette in your hands and the person behind the counter can legally claim that he/she has no obligation to do something as no circular about the regulation has arrived. Some circulars never do. See also F)

    L) Make it easy to enforce court decisions against the state. Make civil servants personally responsible for executing court decisions.

    M) Make impossible for the state to be able to act against property (eg block bank accounts) without judicial overview.

    N) Speed up the justice system by making appeals possible only if the higher court accepts and not routinely judging all cases up to the Supreme court equivalent. Make sure that if a certain percentage of decisions from a certain court are reversed on appeal then the lower court judges will face stiff disciplinary action.

    O) Complete bank privatization to stop political distribution of credit.

    P) Change the law so that licenses that are granted by local bodies can also be granted by ministries and the entity requesting the license can choose at will between local and central.
    Hopefully competition will brake the local cartels and license kingdoms.

    Q) Stop the payment of local taxes through the electricity bill. This has created a situation where the local hotshots get the money without being blamed for high charges and they can push them much higher than otherwise. This almost guaranteed cash flow is behind most of municipal corruption. The need to push voters to pay their taxes will discipline financially most local authorities.

    R) Making access to court more difficult for people suing companies for various projects that the disagree with. This can easily be done by forcing courts to punish trivial lawsuits, like the monastery that blocked a major wind turbine 10 km away. The law exists but it never applied.

    S) Break the legal monopoly of the communist controlled union of loading-unloading workers in the Athens Wholesale Markets. This is a vital component of the high, inflexible prices in Greece.
    Check I think

    T) Ditto for the Piraeus port (mainly) and the ship crews. Otherwise no cruise ships.

    The above (non checked) are necessary for the country to take off. Talks of plans are irrelevant otherwise because the statists that now control Greece will use them to bludgeon anybody who tries to make money. That's behind the dearth of plans: the people who can do them don't want to and the people who want to are blocked from making them.Change the above (and a few that I might have missed) and growth will probably materialize out of thin air. Examples about Apple or whatever are illuminating but besides the point.

    I have deliberately ignored the most political ones like changing the electoral system which are far too obvious and so too political to be realistic.

    The good news: the housing market seems to be reacting in the direction of rational behaviour. I have met people that moved house because the old house was energy inefficient, not the rent
    high, behaviour unthinkable a couple of years ago.