Monday, April 25, 2016

The Return Of The Past

The Greek bail-out debates are returning.

Frances Coppola writes in Forbes that "neither the European creditors nor the IMF are fundamentally interested in restoring Greece. What they disagree over is how much sustenance Greece needs to stay alive enough to pay them back. They are all vampires".

Mohamed A. El-Erian writes in Social Europe that "Greece can overcome its economic troubles only if it modifies its approach. Specifically, Greece and its creditors must agree to a credible debt-reduction program that would support the domestic reforms needed to re-invigorate Greece's growth engines and places its internal obligations in line with its capabilities".

The tenor of such commentaries is (and always has been) that it is the responsibility of others, primarily Greece's European partners, to put together a program and provide the money so that Greece returns to prosperity. El-Erian states that "Greece's European partners have nothing substantive to show for the billions of euros they have lent the country".

I am somewhat prejudiced by my banking career. I have never witnessed a situation where a borrower who hit a crisis and was kept afloat by lenders, and who didn't make it - where that borrower would accuse the lenders that they have nothing to show for all the money they lent. Normally, it is the party in trouble which feels primarily responsible for getting itself out of trouble and which is proud to show something for the money which it was lent.

Would Greece's problems be over as soon as its sovereign debt is reduced to the Maastricht level of 60% and tenors and interest rates are adjusted to market? 60% of GDP would represent a debt load of about 110 BEUR. Assuming market rates of 2-3%, that would represent an annual interest expense of 2,2 - 3,3 BEUR. If that were all that is needed to get Greece going again, I would strongly recommend to do that tomorrow.

I suppose the argument is that as soon as Greece's debt situation is regularized and as soon as the debt is viewed as sustainable, confidence will return and foreign investors will start making investments in Greece. Maybe yes, maybe no. I doubt it. Of course, foreign investors - or investors in general - are unlikely to invest when financial collapse appears imminent but the absence of fears of a financial collapse alone is unlikely to make foreign investors - or investors in general - invest money.

It simply cannot be the lack of money which explains the lack of investment. There is plenty of Greek financial wealth stashed away offshore which could - at least partially - return to Greece for investment. There are plenty of foreign companies which ought to be interested in taking part of a Greek economic rebound.

If I had to pick one catch-all cause for the lack of investment in Greece, I would call it the 'insufficient attractiveness of Greece as a place to do business'. By that I not only mean excessive rules, regulations, administration, tax laws, etc. etc. Above all, I mean an overall positive climate for private enterprise.

Churchill once said that "some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon". There may be many Greeks who see private enterprise the way Churchill did but they certainly don't seem to be in the government.


  1. "I have never witnessed a situation where a borrower who hit a crisis and was kept afloat by lenders, and who didn't make it - where that borrower would accuse the lenders that they have nothing to show for all the money they lent. Normally, it is the party in trouble which feels primarily responsible for getting itself out of trouble and which is proud to show something for the money which it was lent."

    And here is the flaw of your comparing a country with a human being. In this case, the way that the lender will come out is dictated by the lender. Unless, you STILL think that the goverment can legislate without first get the approval of the lenders.

    Prem Watsa, has invested in the greek banks. As he recently said "the losses we took in Greece is of historical proportions, but we are confident in the recovery".

    And now something else to consider. This is not the first time Greece goes bankrupt nor the first troika that goes to Greece and does the exact same thing. And here's the catch. Greece always recovered, but without the troika legislating.

  2. What does Mohammed El Erian know about investments!

  3. In 2010, the IMF, proposed immediate debt restructuring. The Europeans, played deaf. The defense of the germanophiles then, was "the Europeans weren't ready for such a crisis and thus, in good faith, they didn't heed the IMF".

    In 2016, the IMF repeats that the greek debt is unsustainable as it is. As a matter of fact, in the leaked phone calls, the IMF team regarded as realistic a 1.5% target for primary surplus, instead of the 3.5%. We are now in the situation of going after the 3.5% and at the same time, Germany (always in good faith), regards that debt is not a problem for at least some years.

    The one who doesn't learn from history, is bound to repeat the same mistakes. There is a breaking point, after which, a population isn't prepared to take it any longer. This has occured in the past. It may occur again.

    As for the positive investment climate, currently is at 29% corporate tax and with the threat of the drachma always visible on the horizon and closing in faster, the more your push the people.

  4. I leave this here, for the future, when you will be writing about the next greek memorandum and how Greece can't seem to meet the targets.

    Former Finance minister Papadopoulos (retired for many years from politics and one of the few that are considered to have tried to improve certain things):

    "The preemptive measures of 3,6bln that the goverment agreed upon with the troika, demonstrate that the unprecedented methods of political deceitfulness, blossom not only in Greece, but also in Esperia (the West). It is well known to the people involved, that this figure is insufficient and will increase, while the agreement is a cowardly, yet necessary, 4th ,but not last, memorandum."

  5. ΝΤΡΟΠΗ!!!

  6. The 2 gents are competent economists (a contradiction in terms?), but they talk about the economy of a developed country with a functioning market economy. Greece is none of the two, neither was it in the last many decades. So until such time when they forget expressions like "restoring Greece", "re-invigorate Greece's growth engines", "return to sustainable growth", it is just so much bull. To the average Greek it signals a return to the "growth" of 2009. The features they talk about will have to be build, not re-build, they were never there. It is nation building, and I do not think it can be done within the protected environment of the EZ.
    You mention the lack of investment financing, true?
    Many of my Greek friends ask me "where are the money Juncker promised us?", they think that Juncker should give Greece the EUR 700 BIO (or their fair share thereof). I am at a loss for an answer that will satisfy them, because they do not understand the concept of investment. 200 projects have been approved for financing under the Juncker Plan, none of them Greek. No doubt the projects have gone through the normal procedures of idea, feasibility study, proposal with agreement, master schedule, budget and technical specification. Further with budgets for future operation and maintenance.
    The typical Greek project evolves in the following way. A young engineer goes to his uncle (the mayor) and say:
    "As you know I wish to engage this girl in the next city 60 kilometers away from here. Her father has a construction firm but no work, and I am unemployed. Now, if you were to commission a motorway from here to her home, then her father could get the contract and employ me as Chief Engineer on the project. In that case I would not be a burden on your household anymore, I could even contribute to your household".
    Is the Juncker Plan the only investor? The EIB is begging for good projects, foreign banks too. Alas, modern investors are unlikely to invest in the love of a young Greek engineer, not very romantic.

  7. Since there's nothing much new to say, I looked in the archives

    thus on April 16th 2010 we have:

    "Yesterday was a humiliating day for Greece and Europe," said Alexis Tsipras, leader of the leftwing Syriza party, as he tussled with Papandreou during a fiery debate in parliament. "You don't have the popular mandate to allow the IMF to come in," he countered, amid fears that its intervention would inevitably lead to tougher cost-cutting measures.

  8. Setting aside concerns over the impact of Greece's creditors strict fiscal targets on domestic demand, and assuming that attracting FDI is the healthy horse that will pull along the cart, the fact is that creating the sort of environment to which investors will be attracted (e.g. public sector reform, tax incentives, regulatory overhaul, etc) costs money, especially when it involves a fundamental restructuring of the state that is necessary in Greece. I'd agree that there is a deficit of ideas and a lack of willing in SYRIZA but, on the other hand, the creditors have never been prepared to accept anything less than a comprehensive bailout programme.

    Also, Mr Kastner, for whom I have a lot of respect, also appears to have fallen for the (popularly German) fallacy that an indebted state doesn't differ from an indebted individual/entity.

    1. If a state is indebted in a currency which it cannot print it is quite similar to an indebted individual/entity. Except that the individual/entity can go bankrupt under bankruptcy laws and states cannot because there are no bankruptcy laws for states. Please argue against it if you disagree.

      When the US borrows in USD or Japan in Yen, it is totally different, of course.

    2. Really, Klaus. What you put forward as a minor difference -- the legal right to declare bankruptcy -- is actually at the core of the problem. No company would be forced by its bank lenders to continue in business when clearly it had little hope of financial recovery.

      Put in simple language: this is not about banking. It is about politics and power. You appear unable to grasp this, whereas most other commentators are very aware of it.

    3. Oh yes, I do understand that this is about politics and power. In fact, politics and power seem to be the only factors which Tsipras & Co. are interested in. And as the experience of 2015 has shown, they are prepared to gamble the whole country to pursue their own interests in politics and power.


  10. There seems to be an element of absurdity here.

    No doubt Greece is a dreadful place to do business. Dreadful.

    But this shouldn't exonerate the Eurozone's obvious structural flaws (acknowledged today by, er, just about everyone), nor the failures that the serial bailouts of Greece have been.

    I mean, for crying out loud, what is the point of trying to restore competitiveness by reducing wages and pensions, when at the same time you undermine it by increasing taxation for businesses? It's absurd. The creditors need to get their act together.

    It's obvious that the third bailout will fail, just like the previous ones have failed. The targets are unachievable, the economy is still tanking. In the end there's gonna have to be a fourth bailout. Assuming there's still gonna be a Eurozone by the time that happens, the chances are pretty high that Greece defaults. It half-transpired last summer. Then it's going to be up to the Germans to decide what happens next.

    1. "Then it's going to be up to the Germans to decide what happens next."

      "The Germans" may have already decided. They move towards the extreme right. Not really that they are unique in Europe in this respect, although so far they were less then others, obviously.

      Right towards the more xenophobic right, by the way, at this point in time. The initially anti-Euro party 'Alternative for Germany' has chased it more polite academic and economical nationalists out by now. During the last two local elections they had a jump-start above into above 10 percent. Creating a bit of troubles. Steadily increasing. At this point in time it's 15% slowly rising. Before it was 14%, let's wait and see.

      From my own nitwit position just as the post 9/11 Islamophobia, the endless tunes on the Germans and their faults, meaning: dominating and exploiting all other Europeans especially the South seems to have worked wonders in comparable ways Islamophobia did in others. In other words whatever type of Europeans with ethnic roots in the larger ME may have felt somewhat forced to support the struggle against "the West" there in no doubt comparable ways.

      Now lets wait and see to what extend the ones that always felt there was a comparative German economical face, some type of economical neo-colonialist exploitative entity taking over Europe reminiscent of the Nazis, will make the earlier phantom awake and rise again. Admittedly I always feared this could happen. In both cases really.

  11. Well, I wasn't expecting that by the time I wrote my previous comment that the third bailout would have already failed.

    Oh dear. So what now? Last year the Europeans nearly drove Greece out of the Eurozone and Tsipras capitulated. Is he prepared to go one step further this time?

  12. Below is a comment by Alexis Papachelas in today's Ekathimerini:

    "Greece’s biggest problem is that growth will never come, no matter how many reviews are successfully completed, with this government and this cabinet. Many ministers are openly hostile to entrepreneurship and investment and the deep state is waging its own guerrilla war against them, even against investments that have the government’s blessing at the highest level."

    That reinforces the point which I had tried to make.

    1. Yes, an anti-Left comment by an anti-Left newspaper. Yawn. It reinforces no point, other than you seem determined not to understand the reality of the situation and are clutching at straws.

  13. If it was only the government the problem would not be big. It's the population as a whole, profit is a dirty word (unless it is your own), and without profit no investment. That is what living from other people's money for decades create. Europe has, with it's omissions, contributed to the Greek dream that it is possible, it is now up to Europe to show Greece that it is not sustainable. Tough job.

    1. Funny you should mention this... Last year, I wrote an article about the economic plan which Yanis Varoufakis had published in May of 2015. Here is an excerpt:

      "The document takes pains to never mention words like 'profit' or 'profitability'. Instead, one reads about 'maximizing the value of underlying assets' or how 'asset values should increase by more than the account amount spent on modernization and restructuring', about 'boosting the value of the assets according to the probability of future privatization', etc. The fact is, however, that the value of an asset is driven by its real or anticipated profitability. So what we have here is an erratic Marxist emphasizing profitability and that makes the document revolutionary."

      Yes, I guess the word 'profit' is not in the dictionary of the current government.

    2. Yes but they applauded with hysteria when the Eurostat stated we closed with 0,7 growth in 2015.

      They have no clue what they want. Bring back Samaras or ND asap. Finalize the damn memorandum get the evaluation and privatize everything.


  14. I remember your article very well, and remember thinking: Here we have a nation where half of the population abhors profit and the other half pay lip service to the notion while profiting from the sheep (including YV). What a weak nation.

  15. Klaus, please fill me in here. If we can put our prejudices and views on the players to one side for a moment:

    Do you agree that the new ‘stacked austerity’ measures make no practical sense, neither for Greece nor for its creditors?

    And if so,

    Why would you not support Tsipras in resisting these measures?!

    1. Your dialectic is clever because it makes it almost impossible for me not to say that I support Tsipras. Clever indeed!

      My response is this: whatever is happening now, be it of practical sense or not, is the direct response to and responsibility of the reckless conduct of Tsipras/SYRIZA in the first half of 2015. For reasons right or wrong the Quadriga said "we have had it with you; sign and implement, or not". Tsipras/SYRIZA chose to sign and they are now being held accountable.

      Do I sympathize with the bind Tsipras and SYRIZA are in now? Yes, I do. Perhaps I even feel a bit sorry for them. But then I have to check myself and say "hey, you had it coming; now you have to deal with the mess you created".

    2. I agree with you Mr. Kastner, with the only difference being is I do not feel sorry for them (syriza) nor do i feel sympathy for them. They got elected based on lies and we the population of Greece, were fools to believe them or at least believe they can do something alittle bit better. They achieved nothing from their original rhetoric and now have created an even bigger hole than before they started. I would prefer straight out honesty of what needs to be done and it now quite clear. The fact remains is the population will pay a big price for misconceptions. I know this is not a place to make such a statement, but i would like to see them hang.

      They were in the parliament before being elected as the government. They had no idea what was truly at stake? Facts are facts. You negotiate based on facts.

      The only thing which is positive for my opinion on Syriza is that i dislike Quadra as much as they do. But at least they (quadra) discuss based on facts.

      For the 2nd set of measures for an emergency, this is a pathetic request from Quadra. And from the hearsay i hear there is even another 2,5 bil in measures coming by Sept, on top of the 5,4 and 3,6 billion euro in measures.

      Where does quadra even believe these measures and funds can come from?

      Even if they increase all taxes to 50% - 60%you only push more people into the black market? Unless this is there ultimate goal which may lead to something else. I truly believe that Quadra do not want Greece to grow, they simply want the figures to assure they get the money they seek. They do not care what kind of a society is created.


  16. Tsipras (or rather the Greek people)learn the hard way that words and actions DO have consequences. Will we see the Dynamic Duo (YV and Tsipras) on next years t-shirts?

    1. We wait for the Germans and others to learn the hard way that words and actions have consequences. So far, they have escaped a suitable punishment for their arrogant and foolish approach to management of the eurozone crisis.

  17. For the Euro engine to work smoothly, all parts must be compatible and synchronised.

    That does not only apply to a common ccy and banking system. I guess there may be an implicit assumption that you cannot have a United States of Europe with some governments being conservative and some communist.

  18. Since it may be relevant within the near future, let's look at the potential interest rates of the Greek state. I find the scenario of a debt of 60% of GDP and rates of 2-3% hard to imagine, but, I can see at least 3 scenarios.
    -Greece leaves the EZ (time out) with negotiated debt forgiveness of everything above 60% of GDP. In that case I would expect the interest rate to be as today, 8-9%, until such time that reforms have been introduced and started working.
    -Greece default unilaterally on their debt above 60% (or in total). In that case they do a cold turkey a la Argentine.
    -That Greece should end up with a negotiated debt of 60% of GDP, 3% interest, and inside the EZ, I find unlikely. It would mean that Europe had accepted Greek Eurobonds by default. It would most likely mean the instant collapse of the EZ.

    PS. There is a challenge for Greek logic should they wish to borrow on the markets again. All Greeks have agreed that most of the debt is odious, illegal etc. The reason being that the lenders knew that Greece would/could not pay it back. They will now, after a default, have to find reasons why the lenders should lend them even more money, preferable at negative interest rates.

    Klaus, I should like your (and others) take on it.


    1. I think the only chance for Greece to return to low interest rates (say 2-3%) is if investors become convinced again that their loans carry the implied support of the EZ. That, of course, would not be the case if Greece returned to the Drachma.

      2 years ago, in the spring of 2014, Greece placed 2 or 3 bonds at rates around 5%. There was great demand. Why? Had Greece become a better risk? No! Instead, the investors had become rather sure that they were actually buying a Eurobond and not a Greek bond.

      If the Greek state were forgiven all its debt, things would improve quickly not because of the saving of interest expense. Instead, because the markets would know that quite a few years would have to pass until the 60% limit is reached again and in the meantime there would be a lot of happy lending and spending.

      Whatever the case, it is really unknown territory which the creditors are treading in. The 5th anniversary of the McKinsey Plan is coming up. It was a 10-year plan so by now half of it should have been completed. I think everyone would be a lot better off if they focused their attention on real economy issues à la McKinsey Plan instead of abstract debt issues.