Thursday, February 27, 2014

The Future of Elleniko

I just read in the Ekathimeri that there is likely going to be only one bidder for Elleniko --- the Lamda Development Group. Not being familiar with this group, I looked up their website.

Frankly, everything in this website looks very impressive and professional. Off the bat, a very suitable investor for a unique development project like Elleniko. Except, I then read that Lamda is a member of the Latsis Group. I am not familiar with the Latsis Group but I take it it is controlled by one of the Greek oligarchs.

Why is it that this creates a bit of a taste in my mouth? Why is it that I immediately start thinking about Greek cronies? About possible intransparencies? About possible back-scratching?

If the German Quandt-family (BMW) were to make a bid for a large development project, no one would have any second thoughts about it. It is too bad that Greece is in a situation where one immediately has second thoughts when well-known families engage with the state in large projects!

Tuesday, February 25, 2014

News About Cosco!

I have written quite a bit about the Cosco investment in Piraeus which, to me, could be a prototype of foreign investments which are good for the Greek economy. However, I have to admit that my views met with more objections than agreements. On balance, the objections rested on the argument that Cosco was nothing other than introducing Chinese sweat shop standards into the Greek economy.

Here is an article published by Bloomberg about the current situation at Cosco. It paints a very positive picture of the Cosco investment. Obviously, there are two sides to every coin and I am sure that many Greeks will paint exactly the opposite picture of the Cosco investment. I hope they will and I hope they will post their views so that a debate can take place.

Wednesday, February 19, 2014

Greece's Current Account - The Miracle Has Happened!

When I started observing the Greek situation in 2010, I wouldn't have bet one Eurocent on the likelihood that Greece would record a current account surplus within a decade; at least. That might have been the most lucrative bet in the world. Now, only three years later, the Bank of Greece has just released the statistics for 2013 (in BEUR):


2013 2012
2013 2012
Revenue from abroad

Exports 22,5 22,0
1,9 2,0

Services (e. g. tourism) 27,8 27,5
1,6 1,6

Other income 3,5 3,8
0,3 0,3

Current transfers 7,7 5,1
0,8 0,3

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

Total revenue from abroad 61,5 58,4
4,6 4,2

Expenses abroad

Imports 39,8 41,6
3,2 3,0

Services (e. g. tourism) 11,0 12,4
1,0 1,1

Other expense (e. g. interest) 6,4 5,4
0,4 0,3

Current transfers 3,1 3,6
0,2 0,3

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

Total expenses abroad 60,3 63,0
4,8 4,7

Net foreign deficit (current account) 1,2 -4,6
-0,2 -0,5

Trade balance -17,3 -19,6

Services balance 16,8 15,1

Other balance -2,9 -1,6

Current transfer balance 4,6 1,5

---- ----

Net foreign deficit (current account) 1,2 -4,6


1)  An optimal improvement is when revenues go up and, simultaneously, expenses go down. That's what happened in Greece's current account and that's why the improvement relative to 2012 (a deficit of 4,6 BEUR was turned into a surplus of 1,2 BEUR; a turn-around of 5,8 BEUR within 12 months!) is so large!
2) I could make quite a few more comments on the details, like I have always done in previous analyses of the current account, and I could point to some weaknesses. But who wants to spoil a party when the party really deserves congratulations?

Hats off!

Tuesday, February 18, 2014

Olympic Games permanently Near Olympia?

This is a wonderful article by Nikos Konstandaras. He suggests that, instead of travelling from city to city, there should be a permanent Olympic site and that the best place for it would be near ancient Olympia. I will not comment on the historic, emotional and idealistic aspects of this proposal; only on the economic ones.

A permanent site near Olympia would be a bonanza for the Greek economy (assuming that the cost of it would be shared by the Olympic world and not carried by Greece). In all likelihood, there will be Olympic Games in a hundred years from now, so that would be an 'investment which is needed' (instead of an investment for the purpose of spending money) and it would be a recurring investment as long as the Games take place.

If all countries could agree that a permanent site is a good idea and that Greece would be the right place for it, things would be easy. Presumably every country would agree that it is a good idea but probably no country would agree to award the 'gravy' associated with the Games to only one country. So, this proposal must be considered as an illusion.

But what a nice illusion it is!

Thursday, February 13, 2014

Voters & Judges --- Are They Allowed To Do That?

In 1848, the Habsburg monarchy faced revolution from within. Citizens, disgusted by authoritarian rule, went on the streets. Emperor Ferdinand I. observed the protests from a balcony in the company of his Chancellor Count Metternich who was detested by the masses. The following dialogue between Ferdinand and Metternich was recorded:

Ferdinand: "What are all these people doing down there? They are so noisy!"
Metternich: "They are making a revolution, Your Majesty".
Ferdinand:  "But, are they allowed to do that?"

Were the judges in Karlsruhe allowed to rule on the OMT as they did last week? Were the Swiss allowed to vote as the did last Sunday?

Clearly, they both were allowed. If one deprived them of these constitutional rights, one might as well abolish the constitution. Many EU-elites were upset by the judges' and the voters' decisions. I can understand that; they certainly throw a wrench into the plans of these EU-elites.

Greeks should be encouraged by that. Greece may be a puppet of the Troika; Greece may no longer feel sovereign. I can sympathize with such feelings. However, there is still no EU law which determines which way Greek voters have to vote.

Obviously, voters have to be fully informed about the possible consequences of their vote. As far as I could tell, the Swiss voters were very well informed, as they always are when plebiscites are held. Thus, the Swiss must have known that their vote could potentially have very negative consequences for their economy and their living standard. If they voted for that, they will have to live with it.

Judges don't have to be informed about the possible consequences of their rulings; their job requires them to know that. The Karlsruhe judges essentially killed the OMT for the time being. Strangely enough, markets have not fallen into panic over that so far. Will that continue? The economist Andrew Watt wrote in a recent article the following: 

"Imagine the uproar if – to construct an extreme,  hypothetical example – a European-wide plan to counter tax evasion were to gain unanimous support in the European institutions, but be rendered inoperable because the Luxembourg constitutional court, on a 5-4 verdict, considers it incompatible with the country’s constitution’s provisions on property rights. The Luxembourg Constitution dates from 1868. I am not a legal expert, but it seems plain to me that Europe cannot function in this way".

He's got a point!

Sunday, February 9, 2014

Greece --- Time To Learn From Cuba?

I have published at least half a dozen articles in this blog arguing in favor of Special Economic Zones (SEZ) in Greece. Here is the last one. My major point is that one cannot change an entire country in a reasonably short time frame. Thus, one should establish 'pockets' in the economy where foreign investors find everything they desire right away. If those SEZ work well, they would over time rub off on the rest of the country.

I have also mentioned Cuba a couple of times in articles about Greece. When the Soviet Union collapsed, Cuba lost the foreign funding on which its economy depended. Cuba found a replacement for this foreign funding through Venezuela, but that was not enough. In consequence, even the communist Cubans had to recognize that foreign investment is the only type of foreign funding which does not carry interest and does not have to be repaid (other than grants or gifts). Canadians made massive investments in Cuban tourism.

I am now stunned by the latest information out of Cuba --- that last communist country has decided to open a Special Economic Zone! The idea is to attract foreign investment. The hopes are "to get foreign investment for the production of drugs, biotechnology, renewable energy, agriculture, industry, tourism, real estate, telecommunications, information technology and infrastructure". Well, it seems they have covered all areas... "What the zone is intended for is to create a special climate where foreign capital is going to have better conditions than in the rest of the country", Cuba's Foreign Trade and Investment Minister is quoted as saying.

When reading details about the planned SEZ, I came across several points which I think are less than prudent. I have always argued that SEZ should not offer undue 'perks' (Cuba is planning to offer exemptions from "tax on the use of the labor force", property tax and local sales tax). Friends whom one buys with money will also leave for money, and that is particularly valid for some foreign investors.

While some financial incentives may be unavoidable to be competitive, the focus of a SEZ must be on offering absolutely the easiest way to do business in all regards. If the Greek government wanted to know what the key criteria for attracting foreign investment are, I would recommend that they study the World Bank's "Doing Business Report". They could find all the criteria which are important to foreign investors right there.

So, the recipe is actually quite simple: establish an SEZ and structure it in such a way that it would earn top ratings in the Doing Business Report. Then work out contracts to be offered to foreign investors whereby these contracts must not only serve to please foreign investors but they must also ascertain that Greece gets out of foreign investment what it desires.

Friday, February 7, 2014

Speech By Governor of Bank of Greece

"My presentation will be structured as follows. I will begin by discussing the origins of the euro-area crisis. Next, I will describe the adjustment that has taken place within the stressed countries. With Greece at the epicenter of the crisis, my focus will be on what has happened in my own country. I will then turn to some related issues, notably, the reasons for the deep economic contraction in Greece and the problem of debt-sustainability. Finally, I will discuss changes that are being made to the euro-area’s institutional set-up and their implications for the single currency’s future" - read full text here.

"Revenge" Of The German Constitutional Court?

In an article which I posted 18 months ago, I argued that the German Constitutional Court (GCC), if it felt played by German politicians, could 'revenge' itself by passing the OMT issue on to the European Court of Justice (ECJ) for a ruling. Well, the GCC has now done exactly that. Was it a revenge?

Personally, I think only very competent legal minds should opine on this issue because it is so complex. Not being such a legal mind, I refrain from voicing legal opinions. Two things surprise me, though.

One reaction is that the ECJ is likely to condone the OMT. That surprises me. After all, I presume that the members of the ECJ are legal experts like those of the GCC and if German legal experts found it so difficult to rule on the subject, why should it be easier for EU legal experts? On the other hand, the ECJ seems to have no intent to procrastinate: they have announced a ruling on March 18. So they must think that the issue can be handled with reasonable speed.

The other surprising reaction is that the GCC's decision is viewed to represent a major surrender of German sovereignty. I used to think that one of the EU principles was that EU law supersedes national law. Why would this be different in the case of the OMT? In the extreme sense, if a positive ruling on the part of the ECJ were in conflict with the German constitution, Germany would have to amend its constitution; wouldn't it? That would be interesting to watch.

Bottom line: if I felt 18 months ago that the GCC's passing the issue on to the ECJ would be a revenge, I today think that it is more an issue of helplessness.

Thursday, February 6, 2014

Greece's 1st Bail-Out --- Promises, promises???

The publication of internal IMF documents from May 2010 (I have commented on one of them before) has created quite a stir in the media. First, the confirmation that quite a few countries had opposed the 1st bail-out, and for very good reasons, too, and then the alleged commitment by France, Germany & Co. to maintain their Greek exposures. MacroPolis published this excellent summary.

From the beginning, I have been amazed at the naivité ('incompetence' is so harsh a word...) with which the Greek external payments crisis was handled. No surprise that so many Latin countries voiced their objections. After all, they have a lot of experience with external payments crises!

An external payments crisis is quite different from a domestic financial crisis (at least in a local currency country). When Germany bailed out its HypoRealEstate, that was a domestic issue which could be handled by Germany alone. An external payments crisis means that a country (not only the state; the entire country) is running out of money which it cannot print. The Greek state ran out of Euros and since the Euro was/is not only a foreign currency but also the domestic currency of Greece, the external payments crisis automatically became a domestic crisis as well.

In an external payments crisis, all external liabilities of the entire country (i. e. not only those of the state) must be brought under control. Typically, this is done via a rescheduling of a country's entire foreign debt. The EU chose to refinance the foreign debt of Greece with tax payers' funds and the EU only brought the state's debt under control; not the debt of banks, of corporations and others.

To accept for face value the statement of a country's 'chair' at the IMF that the banks of his country will keep their Greek exposures would be a cause for dismissal in any bank's credit traininig program! Such commitments must be contractually binding (i. e. signed by all creditors) and they must also include, in addition to keeping existing exposures, a commitment to keep trade lines open.

Who is to blame? Both sides, the Greek side as well as the EU side. I know for a fact that PM Papandreou had more than one meeting with William "Bill" Rhodes, the former Citibank Vice Chairman and grand seigneur of managing external payments crises where Rhodes advised Papandreou what needed to be done in Greece's situation back in 2010. And the EU side? Well, the EU elites were just so self-possessed with their arrogance that they refused advice from those people who knew and they preferred to display their incompetence.

In retrospect, one has to give a lot of credit to PM Papademos. He knew that he needed the best advice; he asked for it; he chose the renowned laywer Lee Buchheit and he smoothly accomplished the largest private sector involvement which the world has ever seen. Hats off!

Monday, February 3, 2014

Re-Visiting May 2010

In a moment of boredom, I looked up the original Economic Adjustment Program for Greece of May 2010. Just to remind myself what the original plan had been.

Off the bat, I noticed that all numbers are in percentages instead of nominal figures. That's a cute technique to make future plan/actual comparisons difficult if not impossible. For example: GDP growth for 2014 was projected at 2,1%. Who knows? Maybe a miracle happens and GDP growth will turn out to be 2,1% in 2014. Everything ok? Of course not! This projected growth was based on the assumption that cumulative GDP declines in the previous 5 years would only be about 7%. Had the latter turned out to be true, things would be quite well in Greece today.

All divergencies from plan are attributed to using the wrong multiplier but how does one set the right multiplier? Can one do that without an indepth analysis of an economy's underlying structure and strength? Let me try an analogy.

Take two fireplaces. One is full of real wood and the other one has only artificial wood. Both are burning well. The former is burning well because there is a large glow of burning real wood. The latter is burning well because a pipe feeds gas into it. If one throws a bucket of water at the former, the fire will go down but, after the initial shock, the glow will rekindle the fire. In the latter case, the water will kill the flame.

What I am getting at is the productive capacity and potential of an economy. Put differently: Was Greece's economic fire of the 2000s the result of buring real wood or rather the result of having a good gas pipe? If it was the latter, no wonder that the flame went out.

I googled "greece productive capacity", hoping that I would find some statistics about it. I found some papers arguing general terms like 'Greece does not have much of a productive capacity' but I did not find any hard facts about what it is that Greece produces and what Greece could produce more of. What a shame! Here is a quote from John Maynard Keynes' book "The Economic Consequences of Peace":

"It is for those who believe Germany can make an annual payment amounting to hundreds of millions sterling to say in WHAT SPECIFIC COMMODITIES they intend this payment to be made and in WHAT markets the goods are to be sold. Until they proceed to some degree of detail, and are able to produce some tangible argument in favor or their conclusions, they do not deserve to be believed".

Preceding that statement is a most detailed analysis of the German economy's capacity to pay after WW1 and how that capacity could be increased. That is the sort of analysis which I would like to see about the Greek economy. One could easily take Keynes' analysis as a blueprint.

Sunday, February 2, 2014

Emerging Markets - Greece On A Larger Scale?

Having lived in Chile/Argentina from 1980-87, the current outflow of capital from emerging markets feels like the re-run of a movie seen a long time ago. Today's story is virtually the same as it was then, namely:

First, something happens in an emerging market which conveys to foreign capital the confidence that risks are low and returns are high (in Chile, at the time, it was the Chicago-Boys taking over economic management; in Argentina, it was their mental relatives; and in both countries the exchange rate was fixed to the USD). Next step: an avalanche of foreign capital hits the emerging market. Next step: incomes and asset prices in the emerging market go up. Next step: much of the increased (artificial) wealth is spent on consumption of imported goods instead of investment, driving the current account balance into dangerous, negative levels. Next step: something happens (like the discovery of the negative current account balance; or the fear of Fed tapering) which makes foreign capital doubt that risks are still low and returns still high. Final step: foreign capital is withdrawn but, regrettably, much of it is no longer there.

This is the story of Greece! In Greece, it was the EU membership but, much more dangerously, the EZ membership which gave foreign capital the confidence that risks were low and returns high. What happened was the reverse of a personal depression. In a personal depression, the road into it is like a highway to hell but the road out of it is like a trip to heaven. Greece experienced the capital-inflow-period as a trip to heaven and is now experiencing the deep depression.

Is the above development like a universal law which cannot be escaped? Of course not. The easiest way to escape is for a government to control capital flows, on the way in as well as on the way out. However, capital controls are perceived as the Greatest Sin in today's world.

One might want to look at Switzerland. That country, relative to its size, has probably the largest capital inflows in the entire world. And yet --- the Swiss don't go berserk with that capital. Perhaps that is because the Swiss are boring people. Or perhaps that is because the Swiss know that nothing comes from nothing.

So perhaps that is the choice: either control the amount of food which comes on the table or educate the guests in the restaurant that, at the end of the day, there is no such thing as a free lunch.

Greece Will Be Rescued! (again)

SpiegelOnline reports that German Finance Minister Schäuble is working on a third rescue package for Greece. The numbers mentioned range between 10-20 BEUR. Great news! With that kind of a rescue package, a wonderful future for Greece will be assured!

Coincidentally, the 95-year old former top German banker Ludwig Poullain published an article where he vehemently argued that Germany should exit the Eurozone. Not only does he call the Euro a 'shroud over the economies of the periphery' but he also argues that the Euro, because it is cheaper than a new DM would be, slows down innovation on the part of German industry (because it is too easy for them to export). Hans-Olaf Henkel will be happy to have found a prominent ally.

So, the front lines in the debate are clearly marked. One side says that the system, however inadequate it may be, must be preserved at virtually all cost. And the other side says let's create a new system which is adequate.

The EU as a whole would be better off if there could be an open discourse, based on arguments and free of prejudices, about these two sides.

Saturday, February 1, 2014

"Im Memory of May 2010" - IMF

On May 9, 2010, the IMF sent an Office Memorandum to its board accompanying its recommendation for approval of the Greek rescue package. Below are some interesting quotes from that memo.

* "The Chinese and Swiss Chairs emphasized that growth will eventually determine Greece's ability to manage its debt burden".

* "The exceptionally high risks of the program were recognized by IMF staff itself".

* "IMF staff admits that the program will not work if structural reforms are not implemented".

* "IMF staff acknowledges that the program will certainly test Greek society".

* "Several Chairs (Argentina, Brazil, India, Russia and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement".

* "The Swiss ED forcefully echoed the concerns about lack of debt restructuring in the program".

* "IMF staff pointed out that debt restructuring has been ruled out by Greek authorities".

It is interesting to note that the only European country departing from the EU party line ("Greece is merely a crisis of liquidity") was the non-EU member Switzerland. Were only those European countries free to speak their voice which were not EU members?