Wednesday, August 20, 2014

Greece's Current Account - Trends Since 2011

Below are the trend-figures of Greece's current account, each year for the period January-June (6 months); in BEUR.


2011 2012 2013 2014
Revenue from abroad

Exports 9,5 10,4 11,1 11,4

Services (e. g. tourism) 11,7 11,6 11,0 12,5

Other income 1,6 1,9 1,7 1,8

Current transfers 3,1 3,6 3,9 4,2

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

Total revenue from abroad 25,9 27,5 27,7 29,9

Expenses abroad

Imports 23,7 21,5 19,3 20,5

Services (e. g. tourism) 7,2 6,5 5,4 5,6

Other expense (e. g. interest) 5,6 3,5 3,5 3,2

Current transfers 2,1 2,0 1,9 1,7

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

Total expenses abroad 38,6 33,5 30,1 31,0

Net foreign deficit (current account) -12,7 -6,0 -2,4 -1,1

Trade balance -14,2 -11,1 -8,2 -9,1
Services balance 4,5 5,1 5,6 6,9
Other balance -4,0 -1,6 -1,8 -1,4
Current transfer balance 1,0 1,6 2,0 2,5

---- ---- ---- ----
Net foreign deficit (current account) -12,7 -6,0 -2,4 -1,1

These figures are an analyst's dream: revenues consistently go up; expenses consistently go down; net result consistently improves. What else could a dreamer want?

The above figures do not really reveal where the weakness is. One has to look into the details of the exports. The above exports include oil, shipping and 'other goods'. It is really those 'other goods' which reflect whether the Greek economy manages to increase its output for the sale in foreign countries. Below are the 'other goods' included in the above export totals:

2011 2012 2013 2014

Other goods 6,2 6,6 6,8 7,0

To put this into perspective: during the January-June period of 2008, Greece's best export year before the crisis, the export of 'other goods' was 6,5 BEUR. Yes, there has been some improvement since then but only very little.

Euro Contingency Planning

"The possibility of Euro break-up is now being discussed openly.

The negative consequences of some scenarios are so severe that we sincerely hope that such final outcomes will be avoided – there is a strong imperative on Europe to find a solution to avoid the worst outcomes. Even so it behoves treasurers to be briefing themselves on the issues and possibilities. 

Working together the ACT and Deloitte have produced a briefing note on Euro contingency planning. Planning for unprecedented possible outcomes is not easy but steps can be taken right away and this briefing will serve as a checklist of aspects to review and consider"

ACT / Deloitte Briefing on Euro Contingency Planning.

Greece - Where Did All the Money Go?

"Many billions of euros flowed into Greece over the last 30-odd years and one cannot help but wonder where all that money ended up going and how it was spent" --- asks Alexis Papachelas in this commentary. Well, so difficult the answer is not, at least not in general terms.

From 2001-10, a net amount of 283 BEUR flowed into Greece as debt (foreign debt increased from 121 BEUR at Y/E 2001 to 404 BEUR at Y/E 2010). The amount of equity, i. e. foreign investment, which flowed into the country is neglible. EU subsidies which flowed into the country are included in the current account.

Of the 283 BEUR which entered the country, 197 BEUR turned around and left the country as current account deficits. Here, however, it is important to note that the 197 BEUR is a net figure, being the net of inflows and outflows. When looking at the inflows/outflows separately, the numbers become quite staggering.

The inflows, i. e. revenues from abroad, were 510 BEUR. Not a piece of cake for an economy the size of Greece's. They consisted of export revenues (146 BEUR), tourism (268 BEUR), other income (34 BEUR) and current transfers (62 BEUR). EU subsidies are included in the latter.

Now to the staggering outflows, i. e. expenses abroad. A total of 707 BEUR left the country in the form of imports (446 BEUR), payment for services (131 BEUR), other expenses (96 BEUR) and current transfers (35 BEUR).

So where did all the money go? 197 BEUR out of the 283 BEUR which entered the country as debt went back to foreigners, be they exporters to Greece, providers of services for Greeks or whatever. Obviously, if over-/underinvoicing took place in Greece's foreign trade, a good portion of that money went into foreign private accounts of Greeks.

That leaves 86 BEUR unaccounted for (283 BEUR minus 197 BEUR). Well, they stayed in Greece, at least initially. They either disappeared in the budget deficit and/or ended up as liquidity in the Greek money market. The money which ended up in the money market could be traced back to borrowers but what some of those borrowers did with the money is undoubtedly untraceable. Presumably, some of it ended up where it was not supposed to end up.

The money which disappeared in the budget deficit would theoretically be traceable. In practice, one would find that it did not only go to wages/salaries and pensions but also into public orders/works. Now, where the latter money ended up, that would be interesting to know. Some of it undoubtedly went to the delivery of public works but a lot of it presumably ended up where it was not supposed to end up.

Does Greece have something to show for the huge amount of money which flowed into the country from 2001-10? I would think yes. There are new infrastructures all over the country; cities and villages today look a lot more 'developed' than 15 years ago. Whether what Greece has to show is worth 283 BEUR, well, that question can obviously not be answered in the affirmative. As I tried to explain above, far to much money ended up in places where it should not have ended up and too little of it went to places where it would have been wisely invested.

Saturday, August 16, 2014

Swiss Lessons for Greeks...

My wife's sister is visiting from Greece and we travelled to Switzerland for a few days to visit our son in Zurich. It didn't take my wife's sister too long to figure out that Switzerland is a very wealthy country. She asked me to explain to her why this was so and, since she is a first-grade grammar school teacher with no knowledge of economics, she asked me to explain it in simple terms.

I set out in a roundabout way and explained that Switzerland was a small country where the mountains made up much of the territory and only left limited space for agriculture. That Switzerland really doesn't have any natural resources. That the Swiss, a highly skilled and industrious people, make up for that by importing raw materials, processing them and exporting finished products. That, in the process, they manage to be Europe's record holder in terms of trade and current account surplus --- which makes them wealthy.

My sister-in-law cut me short and said: "Oh, they are doing the opposite from us Greeks. We export raw materials and import finished products".

Not bad for a first-grade grammar school teacher with no knowledge of economics. Not bad at all!

Ambrose Evans-Pritchard Proposes the Lira for Italy. And a Drachma for Greece?

Ambrose Evans-Pritchard dropped a bit of a bombshell when he proposed in this article that "Italy must bring back to lira to end depression" ("Italy must look after itself. It can recover only if it breaks free from the EMU trap, retakes control of its sovereign policy instruments and redominates its debts into lira, with capital controls until the dust settles"). His supporting argumentation is, as always, powerful. What goes for Italy, does it also go for Greece?
This is AERs most important point: "I do not wish to revisit the stale debate over why Italy kept losing labour competitiveness against Germany for a decade and a half, except to say that it proves just how hard it is to bend Europe's deeply-rooted cultures to the demands of a currency experiment".

Sadly, exactly this point had been made almost 5 years before the launching of the Euro, at a time when the experiment could still have been avoided. Prof. Ralf Dahrendorf, later Lord Dahrendorf, one of Europe's great liberal thinkers of whom one would have expected total support for the planned common currency, said in an 1995 interview with Der Spiegel the following: "The common currency project drills the countries to German behavior, but not all countries want to behave like Germans do. For Italy, periodic devaluations are much more useful than a fixed exchange rate and for France, higher government expenditures are more meaningful than a rigid adherence to stability criteria (which are, above all, an advantage for Germany)".

That 'cultural' argument, to me, carries more weight than any technical argument which economists may come up with.

The key difference between Italy (and France) and Greece is that Italy (and France) has huge industrial potential: "We forget that Italy used to run a trade surplus with Germany in the pre-EMU days. The north Italian industries were viewed as formidable competitors, whenever the lira was weak. It is an incontrovertible fact that Italy’s 14-year disaster coincides with EMU membership. This does not prove causality. It suggests that EMU set off a very destructive dynamic for Italy's particular circumstances, and is strong evidence that EMU now prevents the country from breaking out of the trap. In a damning report, it was shown how Italy's productivity growth and competitiveness faltered each time it pegged its currency to Germany over the past 40 years. It roared back with each devaluation".

So Italy is clearly a case where existing potential is being damaged by the common currency. France probably, too. 

I am not sure that one can make that case for Greece as well. Greece never had any substantial industrial potential (and, in the case of Greece, I am thinking of middle-market manufacturing and not of big industry). If some form of industrial potential needs to be built up, Greece may have a better chance to accomplish that with the Euro than with a local currency. 

Some of my Greek friends argue that Greece will eventually have to return to the Drachma and the old way of doing things: cheap tourism, shipping, a fair measure of moving up in the economic value creation chain and, of course, money printing. Anything else, so they say, does not fit the Greek culture.

Maybe yes, maybe no. On the other hand, one has to consider that Greece, in the last years, has made an enormous investment, or rather sacrifice (austerity, reforms, etc.), into a cultural change; a better life with a common and hard currency. 

Off the bat, I would argue that attempting to change a culture with the instrument of a common currency is an experiment which I wouldn't bet my money on. But, then, I would have thought 4 years ago that Greeks would never be prepared to bear the cost associated with the 'drill to German behavior'. Today, I am surprised and stand corrected. Greeks are always good for surprises. Who knows? Perhaps Greece will, indeed, manage to eventually use the common currency for its benefit and not only for its suffering?

Friday, August 15, 2014

Olympic Errors Since Greece Joined the Eurozone

"In a sense the 2004 Olympics mirrored Greece’s Euro membership: A progressive vision that was undone by a lack of foresight and poor, bordering on criminal, management. Greek taxpayers, who were largely the victims rather than perpetrators, are the ones footing the bill 10 years later. Nobody else has accepted any responsibility for what went wrong. For Greek taxpayers there are no gold medals, juicy public contracts, fat salaries or fame. As a result of others’ failings, they cannot even see a finishing line in sight. This more than anything else tarnishes the legacy of the Athens Games".

This is the conclusion of a brilliant article by Nick Malkoutzis in Macropolis. Contrary to most commentaries, it does not make the 2004 Olympics the prototype of Greek failings (except for the event itself). Instead, it puts the Olympics into the context of time; the symptom of something rather than the cause of it. "The Athens Games epitomised the structural problems - such as poor political management, lack of transparency, inadequate planning and fiscal irresponsibility - that bedevilled the country for many years before it finally buckled in 2009. They arrived after Euro entry, when austerity was set aside and purse strings were loosened, backed by cheaper but unsustainable debt".

There are times when individuals seem to lose their senses and there are times when entire societies seem to lose their senses. How they lose their senses seems to be a cultural thing. When the Germans lost their senses in the 20th century, they tended to become violent and evil. When American financial players began to lose their senses by the late 1990s, they fired up the bubble only to be followed by the sub-prime bubble. When the Greeks began losing their senses with the arrival of cheap money after Euro entry, they focused on what they do best --- enjoy life to the fullest. 

If I had to pick a society where I could not imagine that they would ever lose their senses, I would have to pick the Swiss. The Swiss just don't seem to be capable of ever getting carried away with something. Whereas an Islamic terrorist might lose his mind when he arrives in heaven and sees the 71 virgins, a Swiss arriving in heaven might first of all count the virgins to make sure that they number 71. Perhaps that is their Protestant culture; perhaps it is something else. 

I wonder what Greek leadership would have said if, back in 2000, someone had told them that, over the next 10 years, a total of 300 BEUR of cheap foreign money would be showered upon the country. While they would presumably have been very happy about that, I would think that at least the serious people among them would have been concerned what such a tsunami of cheap money could do if its application is not steered in the right direction.

The trouble with capital flows during the build-up of a bubble is that they do not come all at once. They come in stages with increasing amounts at each stage. And every time a new stage is successfully ignited, it reassures the players that everything is fine and dandy. The 2004 Olympics were a huge such stage; a stage so huge that some people might have thought that this would be the end of the line in Greece's ability to attract more cheap money for undefined purposes. Instead, it only accelerated the process: "The Athens Games fitted into a broader pattern of the time, when the magnificence of the “grand projects” of the period obscured the finer, but crucial, detail".

On one hand, the entire Greek society benefitted from that tsunami of cheap money. When 300 BEUR are showered upon an economy the size of Greece's in the 2000s, the trickle-down effect makes sure that at least some of it lands in the most remote corners of society. On the other hand, even if wage/salary earners doubled or tripled their wages/salaries and even if pensioners doubled or tripled their pensions, they won't become multi-millionaires because of it, certainly not within 10 years. That's not the big money.

If one could look at all Greeks who have a net worth of, say, one million Euro or more today and if one could compare their combined net worth of today to the combined net worth they had 10 years ago, one would probably find that the increase in net worth accounts for a very large portion of the debt which Greece built up during these years. That's a guess of mine but I would bet money on it!

What Greece has seen since the Euro is a huge transfer of wealth to the country from abroad. Why is sovereign debt a transfer of wealth? Because all the money which the state borrows the state spends and to the extent that the state spends its money domestically, it generates income for private economic agents within the country. That might still have been ok if the private income triggered by the state's spending had been evenly distributed. The truth is that the bulk of that income went to a minority of the population.

When all is said and done about Greece's current misery, one could paraphrase Churchill and say: "Never in history have so many paid for the wealth of so few!"
In a sense the Olympics mirrored Greece’s euro membership: A progressive vision that was undone by a lack of foresight and poor, bordering on criminal, management. - See more at:

Thursday, August 14, 2014

Greece - No Country for Old(er) Men?

"If they don't have a job and they have to wait so long for a pension, what are they doing in the meantime? They are at serious risk of poverty!"

This is what a senior economist at the OECD pointed out about Greece's 'older men' (say above 50) in this WSJ article. And a Greek psychiatrist added that, 'in Greece, with its macho, traditional culture, unemployed men are at risk of depression, alcoholism and domestic violence'.

That probably is not all that different from 'older men' in similar situations in well developed and rich welfare states like Germany or Austria. The difference is probably that in countries like Germany or Austria, 'older men' do not lose their jobs as quickly as they did in Greece's depression and, above all, they are not as many as in Greece. Also, the state offers more than only unemployment benefits: there are things like re-training programs, etc. And, of course, there are early retirement schemes.

Still, if 'older men' lose their jobs in Germany or Austria, they are going through similar miseries as described above, financially and emotionally. Financially, because their house may not yet be paid off and their children may still be in education while the income is now down to a fraction of what it was before. Emotionally, because they still feel in full physical and mental strength while reality tells them they have become useless (if not worthless). I can tell because I lost my senior management job at the age of 52 due to a corporate restructuring. The fact that I could find an even better job within 6 months, I attribute to the luck of having been the right person in the right place at the right time. Without that luck, things would have been tough. Those 6 months were not pleasant months!

As the article suggests, Greece's 'older men' are unlikely to get the problem behind them within 6 months. Instead, they are likely to never work again. One of my neighbors in Thessaloniki and very good friend is a case in point.

He is an architect by profession and spent his entire career with one employer doing interior designs for the household appliances which they sold (kitchens, bathrooms, etc.). He lost his job at age 57 due to the crisis. This is how he explains his frustration: "What did I do wrong? I always thought I had done everything right in life. I was a very dedicated, committed and hard-working employee for my employer. I was always loyal to my employer. I did not partake in any Euro-party. Instead, I lived a very responsible life and supported my family. I have no debts. And now I am getting punished!"

An outplacement specialist would probably tell my friend that he is seeing things too negatively out of the moment. That, instead, he should be thinking about all the unique strengths and capabilities he has and that, eventually, these strengths and capabilities would lead to a future far better than the past. That he should see this phase not as a punishment but as an opportunity to start a new and better life, instead.

Well, I might use that trick on an enemy but I could not talk to my friend like that for the simple reason that, for all practical purposes, it would be a lie. There is literally no hope for him to ever find another employment suiting his strengths and capabilities again. I think he doesn't even receive unemployment insurance. He says he is now 1-1/2 years away from his pension but he is worried that he might not get the pension in the full amount because, he says, the Bank of Greece speculated some pension money away.

And in the meantime? Well, it's not the end of the world just yet. There is some real estate which he inherited and his wife inherited real estate as well. Not a huge fortune but something. There are obviously savings at the bank. And then he is being asked by previous customers, once every so often, to do a 'private job' for them. Interestingly, he tells me that even though he has no official income, he still has to pay income taxes. Since he owns their apartment as well as a car, he is deemed to have a certain amount of income. Well, that's got to be a Greek specialty! In all the 7 countries which I lived in, one paid income taxes on income which one had (and not on income which one was deemed to have but did not have).

It's good that some good news are popping up about Greece here or there these days but when one looks into the details of the situation, many, many Greeks have a miserable future ahead of them.

Wednesday, August 6, 2014

Piraeus Bank, Marfin Group, Bank of Greece --- Will Something Hit the Fan?

Back in May of this year, I had stumbled upon deals surrounding the Piraeus Bank and the Marfin Group. This was triggered by the announcement that Piraeus had successfully raised 500 MEUR in capital markets with the follow-up announcement that Piraeus would invest half of that, 250 MEUR, into the Marfin Group. That did not make sense at all to me and I looked further into the subject. I should add that I had absolutely no knowledge about Piraeus and/or the Marfin Group before then. My research provoked the following articles: 

Piraeus Bank, Marfin Group --- And the Real Greek Economy
One Helluva Way To Increase Bank Equity!

My general conclusion at the time was that the dealings between Piraeus and the Marfin Group were a 'smelly affair'; that the Marfin Group itself and its principal were extremely 'smelly'; and that a bank which gets involved in smelly deals with an extremely smelly group and its smelly principal starts smelling itself. A subsequent analysis of the Piraeus Bank suggested to me that the bank was pursuing smelly accounting practices.

Little did I know then that I might have been looking at what has the potential of becoming one of the greatest scandals of Greece's high finance with the former Governor of the Bank of Greece at its center. The article below provides most interesting reading! 

George Provopoulos: The most powerful man in the country a few months ago, now asuspect in a bank probe.