Thursday, November 22, 2012

Time for an ultimatum?

I picked up the following tweet from Prof. Yanis Varoufakis earlier today:

"The time has come for Athens to declare in favour of IMF's position: OSI now + an investment stimulus via EIB. Or no deal. If not now, when?"

Readers of this blog will know that I have stated from the start that Greece should have gone directly to IMF and that I consider it as Mr. Papandreou's (who allegedly wanted to do that early on) greatest fault that he caved in to EU-authorities. It's a bit different today because IMF/EU are allegedly not seeing eye-to-eye at present. While it would be fair for Greece to "declare in favor of", to alienate the EU could be chancy because it could be perceived as attempting to divide and conquer. So that strategy is more a matter of the right form than of the correct substance.

"If not now, when?" - I have also argued all along that the relationship between Greece and its creditors must be on eye level. So far, Greece has, to a large extent, acted like an order taker. Thus, to give eye-level-conduct a shot would appear sensible at this time.

I take exception to the either/or nature of Prof. Varoufakis' proposal ('either this, or no deal'). It all depends what Prof. Varoufakis means by OSI. If he means a haircut on official debt, then Greece would probably go into history as the first debtor country which has put an ultimatum to foreign creditors to take a loss or else go fly a kite. If Prof. Varoufakis believes that Greece has, in the last 3 years, already destroyed its reputation beyond repair anyway, then one more blow to it won't make much of a difference.

In principle, nothing is ever beyond repair and with specific regard to Greece: if Greece were to indeed make it from what is today perceived as a 'failed state' to a modern and well-functioning economy, then it will probably get a place in the hall of fame because I doubt that there is another country in the First World that has ever had to make such an extreme turn-around. That hope, however small the probability of its coming true is, should definitely not be jeopardized.

At this point, the OSI should be a mixture of the following: staying maturities of official debt for 10 years; reducing the interest rate on official debt to close to zero for 10 years; and having the ECB pay out to Greece the (immoral) profits it has made on trading Greek bonds so far. If that combination is put together cleverly, the resulting debt relief would probably be substantially higher than any haircut which could today be explained to the electorates of the paying countries.

To be sure: any comprehensive solution which is agreed upon must also be 'public-relations-friendly' to the electorates of the paying countries!

As regards the proposed investment stimulus via the EIB, any investment stimulus is urgent. Clearly, the EIB is the best suited official institution to drive such an investment stimulus but I do point out that the EIB generally only does large (mostly infrastructure-related) projects. What Greece needs just as badly as new large projects are a multitude of middle-market investments by the private sector. Ways and means have to be found how private investors can be incentivated to invest in Greece.

Final comment: the ultimate proof of success is when private investment capital flows voluntarily. I have written before about the Cosco-investment. More of late, Unilever has taken a major investment initiative in favor of Greece and this machine-translated article describes what HP is planning for Greece.

So here you have 3 major investment decisions in favor of Greece of late. Can you imagine the positive momentum which would develop for the whole country if such news came in the order of once-a-week?


  1. Since June the EIB has made lines of credit available to Greek Banks to finance SME's - €1.4B through to 2014. The fact that the Greek Banks are not disbursing the funds (I read somewhere that there's only been only one loan of a few million) probably says something about the competency of Greek Banks and/or Greek Entrepreneurs. The EIB imposes rules - if it didn't, it would lose its AAA rating and have to pay more when it borrows - which it would pass on via higher interest rates...

    In mid 2007 (i.e. before the onset of the current crisis) the EIB advanced a 25M LoC to the PanCretan Cooperative Bank to help SME's. It would be interesting to know how much of that was taken up, on what was it spent etc - but that will never be known.

    In Jan 2012 the EIB's micro-investment arm provided a €6M LoC to PanCretan to finance self employment initiatives (EU's equivalent of Grameen?) - I wonder how that's going.

    Sure, in the grand scheme of things the amounts are small, but like Greece's EU structural funds they are means to promote growth - which everyone says is lacking - yet they remain unspent and unlent.

    There's a proverb that goes 'you can lead a horse to water but you can't make it drink'. Maybe something similar happens in Greece, when there are conditions such as 'No, you can't use the loan to buy a Porsche Cayenne" then low interest EIB funded loans remain unlent.

    Are 'ordinary' Greeks aware of these facilities, I don't find much in the Greek English language media about these EIB initiatives, but there's plenty elsewhere - Russia, Turkey, India, Taiwan, even Indonesia.

    Varoufakis blogged about the EIB LoC, but he conflated it with one of his rants against the ECB, so it got cast in a negative light.


    1. Regarding the 'making the horse drink the water': the Governor of Austria's Central Bank once phrased it differently: "It is very difficult to help someone who doesn't want to help himself".

  2. In complex political & economic problems like the Greek mess somebody must be very careful of people's motives. Ideally we must have a look in their bank accounts, but this is a bit difficult. However directorships etc are pretty useful to gauge real motives. For example former politicians working for Goldman Sachs are pushing a certain line in support of the bank's bets in the markets. In other cases it is trickier, but not impossible if the past is carefully examined. It is obvious that there is an international political alliance that wants to injure or break the euro so that the dollar does not lose its preeminence. G. Papandreou obviously belonged to that group, so his huge swath of advisers/friends/family riends etc belong to it as well. Y. Varoyfakis belongs (or at least he thinks he does google Varoyfakis Papandreou as separate words) to this group, so his motives are in my book suspect.So let us investigate the saying of the man with a hostile lawyer's eye. Let us assume that this ultimatum is given to the troika. First of all, the past indicates that it will not work. Mr. Venizelos tried something similar when he took over as Finance minister, and we all know what happened. S. Berlousconi first got the ECB and J.C. Trichet to buy Italian government bonds and then broke the deal by reversing agreed reforms. He was summarily fired. Let us now assume that in the next Eurogroup the ultimatum is given. I agree that the EU cannot afford a Greek exit from the Euro, which will seriously weaken the currency.However the minute the Greek minister unleashes the salvo a banking panic will follow in Greece. This panic can only be stopped by ECD intervention. Obviously, as per S. Berlousconi, the ECB will demand resignations, so the ultimatum will be reversed. I'd give a maximum of a week for the veto's
    existence. The truth of the matter is that Greece cannot go back to the drachma without EU agreement, for 3 reasons:
    a) people do not really want to lose their Euros. So a banking panic will ensue. This is impossible to avoid and only the ECB can stop it. No government can survive such an event.
    b) Printing drachmas is impossible without the DeLaRue 4 or similar. However in order to buy and operate the printing press a permission from the International banking Union in Basel is required (after the illegal N. Korea dollar printing on a previous version of the press). Do you think that it will be forthcoming without ECB agreement?
    c) In order for Greece to operate financially the drachma must reenter the currency exchange system. Without ECB agreement?
    Without return to the drachma being possible any ultimatum is stupid. Now let us assume for a minute that Y. Varoufakis does not know about b which requires experience with central banking. However only an idiot will ignore the risk of panic or assume that we can join the exchange system at will. In any case, Greece has gone through several near panics in the last year. So Y. Varoufakis is disingenuous. Oh there will be lots of finely tuned arguments, especially the beloved in Greece marxist arguments that deliberately ignore realities on the ground. But the truth of the matter is simple: such an ultimatum will only promote the interests of the dollar/drachma gang to which Y. Varoufakis belongs.
    And a last comment to Canutelyking: it is true that you can take a horse to water but you cannot make it drink. However Greek horsemen, if a horse behaves in such a way, sell it to the gypsies for a pittance who rope it next to a spring and leave there to collect it a month later. If the horse doesn't drink it dies. It always drinks eventually. This is from personal experience. My family comes from highly rural background and this method, unthinkable to the race horse breeding rest of Europe, always works. Now this guy Draghi looks swarthy to me...

    1. I have once told Prof. Varoufakis, in a private email exchange, that Greece would already be a better place today if only he used his impressive brainpower to propose solutions for Greece (instead of only for the Eurozone). His answer was that he wouldn't know where to begin because the Greek economy has been in terminal condition since the 1970s. As interesting as I find many of his proposals for Brussels, it is simply unacceptable to me that he wouldn't make any constructive proposals for Athens. When someone has over 40.000 followers on twitter (and most of those seem to be followers in the biblical sense), he carries a responsibility to not only arouse people AGAINST something but, above all, FOR something. And by that I mean something constructive instead of applying game theory to the future of Greece.

    2. Well now we know why Y. Varoufakis holds such positions. This biblical thing nails it.He needs the adulation of his court and the crowds of his court need their myth. This is cynical but this is how most politics work. I wouldn't bother trying to reason with guys like that. They feed on their political power and everything else is irrelevant. They are the reason political confrontations are inevitable in human societies.
      It is also characteristic of a certain type of Greek that think that Greece is a horrible backwater that holds them back and they need to try to civilize it. Usually these Greeks are immigrants in English speaking countries and more rarely to France. There are reasons for this: Greeks and Anglosaxons have conflicting social conventions and this can lead to problems.
      As for not knowing where to start, never believe such arguments. True, Greece is a mess, but the mess has ideological, legal and political underpinnings that can be attacked.
      a) One that will never happen: a sustained campaign by major political powers and the press announcing that Greece is to become a proper capitalist country. Using the c word explicitly
      will destroy a taboo and seriously damage the Byzantine/Ottoman ideology of the Greek political class.
      b) An obvious one is the electoral system. Globally corruption is high in countries with multi-member constituencies (Greece,Japan) and low in first-past the post systems( UK, US) Now first past the post is impossible in Greece for historical reasons. However the German electoral system of 50% first past the post and 50% proportional representation is a good compromise that will decapitate the local political machines that run Greece. That is why it was bitterly fought when proposed a couple of years ago. I also suspect that one of the reasons Mr. Samaras wanted to remove Mr. Papadimos was to stop any talk about this reform happening.
      c) I have talked about the institutional organization of corruption in Greece. However I have not described the enforcement mechanism. It has two basic components.One are the various trade
      and professional associations. Belonging to the appropriate one is almost inevitable. Even if you don't, you have legal responsibilities exactly as if you did.This approach guarantees that you are legally forced to participate in the corruption scheme. However this begs the question: how is it proved in court that you do business such that a law that applies to say godsmiths apply to you as well? Well here comes the Internal Revenue. In order to start any business in Greece you must declare the business purpose. The taxman has a 5 cm thick book that catalogues every
      business activity known to man, a real masterpiece of analysis and organized work (contrary to the story that nothing works in Greece all state activities necessary to protect the political
      system function perfectly)If you declare more than two or three diverse ones you don't get a Company registration number, ie you cannot legally trade. So from day one you are trapped. Now if this business purpose trick is removed it will immediately mean that the associations that run the corrupt schemes in your line of business do not have an easy legal way to force you to comply.
      This will reduce corruption dramatically.
      Now a) is impossible b) is difficult but c) can be done. Please stop this myth about not being able to do anything.

  3. Prof. Varoufakis should explain why Greek Banks have not lent the funds the EIB has made available and why EU Structural Funds have not been spent. I sometimes get the impression that he thinks the EIB is an aid agency, which syllable of BANK does he not understand. And why are we even talking about him, as KK said he's a solution free zone.

    Since 2009 the EIB has advanced over $2B to Greek Banks to lend to SME's - I ask again are 'ordinary' Greeks aware that this money is available and if so then why are they not taking advantage of it.

    I don't really believe they would all want to spend it on Porsche's. Its my suspicion that most of them don't know the money is available, and that's a failing of the Greek media - who I guess have their vested interests too.

    Asmussen on events leading to 2007

    In that moment of temptation, Germany became something like a mirror image of Iceland and Ireland and Greece and, for that matter, the United States. Other countries used foreign money to fuel various forms of insanity. The Germans, through their bankers, used their own money to enable foreigners to behave insanely. LOL

    Estonia, which is digging its way out of its financial black hole without any bailout, has received no LoC to assist its SME's.

    Perusing EIB loan lists is depressing - e.g 85M to Germany for Cloud Computing - I can think of several German IT firms who should be doing that already - SAP for a start! And why not Siemens - instead of paying bribes to corrupt politicians.


    1. Regarding events up to 2007, here is another definition which I found quite descriptive:

      "Greece, alas, after it joined the European Union in 1981, actually became just another Middle East petro-state — only instead of an oil well, it had Brussels, which steadily pumped out subsidies, aid and euros with low interest rates to Athens".

      Thomas L. Friedman, NYT (July 19, 2011)