Sunday, December 8, 2019

Financial Investors And Others

"London road shows prove investor interest", titles the Ekathimerini. "Foreign portfolios view Greek assets as serious investments", the article continues. This is certainly good news for the Greek stock market. To what extent it is also good news for the real Greek economy remains to be seen.

I have argued for a long time that financial investors should not be the primary target as Greece strives to attract foreign capital. Financial investors have only one interest: risk-adjusted yield. A relatively small economy with free international capital flows can very quickly become victim of financial investors. Their money is 'hot money'. It comes quickly but it can also leave very quickly. And when it leaves quickly, it typically leaves chaos behind.

The primary target of Greece's attempt to attract foreign capital should be investors who can transfer technology and know-how; investors who are builders and not speculators; investors who have a long-term strategic vision and not a cash-out mentality. Cosco would be a prototype of such an investor.

I am not sure that road shows in London or elsewhere are the best strategy for the Greek government when it comes to attracting the right kind of foreign investment. Instead, the Greek government should analyze which sectors of the economy hold the best potential for development. Then it should analyze which foreign companies are not only leaders in that sector but also are prepared to take a long-term strategic vision. Again, Cosco would be a good example.

And then the Greek government, instead of arranging road shows in London or elsewhere, should call on the headquarters of the Cosco's of the world, present to their CEOs and take it from there.

Investments in the stock market do not necessarily create jobs. A new plant for, say, pharmaceutical products certainly would.

Tuesday, October 15, 2019

Greek State Budget Out of Control!

The Ministry of Finance has reported disturbing developments in the Greek State Budget: since the beginning of this year, monthly results are clearly in excess of the targets. Below are the data for the last 4 months (in MEUR).

June: +1.954
July: +2.565
August: +3.178
September: +3.012

Given the history of Greece's fiscal excesses, one is likely not to be surprised that, once again, there are excesses. One would only wonder what type of excess it is. An excess over spending limits? An excess over deficit limits?

Surprise, surprise! The above figures are excesses of primary surpluses relative to their targets. Put differently: the creditors had imposed stiff primary surplus targets and Greece is over-performing by far. And this despite the fact that election presents were distributed this year!

This could literally get out of hand going forward. As the economy picks up, tax revenues will increase and surpluses will grow further. The Greek state will soon be swimming in cash.

Lucky Mitsotakis!

Friday, October 11, 2019

Borrow To Improve Your Credit Risk!

On Wednesday this week, Greece raised 487,5 MEUR in short-term debt (13 weeks) at an overall yield of minus 0,02%. A week before, Greece had raised 1,5 BEUR in ten-year money at a yield of 1,5%. What has caused this dramatic increase in Greece's creditworthiness?

The Greek state currently does not need to borrow to finance budget deficits. There is a significant primary surplus, large enough to pay interest on debt which means that the overall budget will at least be in balance, possibly even positive.

Neither does the Greek state need to borrow in order to refinance maturing debt. The amount of debt which matures in the next few years is minimal. Apart from the fact that the Greek state is sitting on a ton of cash in the first place (allegedly upwards of 25 BEUR).

So what is the investors' risk by making new loans to Greece? Virtually none as long as maturities stay within the next 10 years. During this time, Greece has very little debt maturing and the interest expense is very low, too. Given this situation and considering the high cash reserves, the risk of another external payments crisis in the next few years is virtually zero.

So why does the Greek state borrow?

There is an old saying that "banks like to lend money to borrowers who don't need it". Well, there is some truth to it in the case of Greece. As pointed out above, Greece currently does not need money. Greece could use money to voluntarily prepay more expensive debt with less expensive debt where loan agreements permit that or to increase its cash reserves. Even if cash reserves yield no interest income at this time, as long as the debt incurred to build up cash reserves is zero, there is no harm in doing that. Put differently, Greece can increase, at zero cost, cash reserves which, in turn, motivate investors to lend more money to Greece because Greece doesn't need the money and has enough reserves to pay the loans back.

And the moral of the story?


We didn't learn that at university...

Thursday, September 26, 2019

Lucky Mitsotakis

According to the State Budget Execution Bulletin, the Greek state (not to be confused with the wider grouping of the Greek general government) registered a primary surplus of 2.906 MEUR for the period January-August 2019 (8 months). The budget estimate for the period had been a negative 272 MEUR. Thus, the Greek state overperformed to the tune of 3.178 MEUR (that's over 3 BEUR!).

Given that the Greek state had annual interest expenses between 5-6 BEUR in recent years, it looks very likely that the state will be able to pay all interest expense out of its own revenues in 2019. In other words, an overall budget surplus.

At the same time, the Greek state has accumulated cash reserves to the tune of 25-30 BEUR out of the last tranche of the latest program and from new borrowings. Since Greece does not have major debt maturities in the next few years, these cash reserves guarantee that Greece will not have a sovereign debt problem for a number of years.

This is an extremely solid financial situation! Fanatic supporters of the new Prime Minister might be tempted the credit Kyriakos Mitsotakis with this result. Well, not even a magician could have achieved such results in less than 3 months.

I could go on and on explaining why SYRIZA was a terrible government for Greece but I have to say this: no other government than a Tsipras-led government could have accomplished that Greece today is viewed as a stable (politically and economically) member of the Eurozone and of the EU. Tsipras accomplished that by performing an incredible somersault. Essentially, he agreed to every screw that the EU put upon him. Perhaps it helped that he started enjoying being viewed as the darling of international elites, which undoubtedly he has become. Unwittingly, he made it possible for his successor to embark on a growth strategy for Greece.

If any government other than a Tsipras-led government had attempted to do the same thing as Tsipras has done, Tsipras would have mobilized the masses on the streets and the result would have been terrible for Greece.

Thus, Tsipras has become sort of a tragic figure. He has done everything no one else could have accomplished and yet, someone else will get the praise for it. And that someone else is Kyriakos Mitsotakis. Lucky Mitsotakis, one could call him.

It is not often that a new political leader inherits a situation where most of the dirty and painful work has been done by his predecessor. The situation is a bit comparable to Germany in 2005 when chancellor Gerhard Schröder was voted out of office for having legislated too many tough reforms (Agenda 2010). Angela Merkel succeeded him as chancellor and, for several years, she could collect the praise for results of reforms undertaken by her predecessor who paid for that with his career.

One should be so lucky as Mitsotakis! He inherited a state budget which is operationally cash-positive and huge cash reserves. Mitsotakis will not have to spend any of his time negotiating new rescue loans for the simple reason that he doesn't need any new cash. Since 2010, Greek governments had to spend much of their time negotiating rescue loans, thus leaving less time for more productive things like making growth plans for the future.

Mitsotakis now has plenty of time to focus on growth plans and growth measures for the future. He was lucky to inherit a perfect trampoline. He will be judged by how high he can jump with it.

Saturday, August 31, 2019

Manipulating Adults In The Room

The official trailer of Kostas Gavras' new movie "Adults in the Room" is out (the movie itself will be released on September 28). The movie is based on the book with the same title by Yanis Varoufakis.

There is one statement by Varoufakis in the trailer which displays the gigantic manipulation of Greek public opinion which was his trademark throughout:

"The rescue plan was to save the German and French banks. Their colossal debt was transferred upon the Greek people."

Yes, the rescue plan was to save German, French and very many other banks. But the colossal debt of Greece was not transferred upon the Greek people. That colossal debt had already been with the Greek people. What happened was that the risk from that colossal debt, previously carried by German, French and very many other banks, was transferred from those banks upon the tax payers of the lending countries.

ADDENDUM per 02.09.2019

The question has been raised in the comments in which countries those banks which had purchased Greek bonds were located. The graph below provides some clarification:

ADDENDUM per 02.09.2019

Below is a review of the above-referenced movie:

Venice Film Review: "Adults in the Room"

Sunday, August 18, 2019

Champions Of Default

When I started this blog back in June of 2011, we were in the midst of what I would call a "hysteria about default". From the top EU echelons down, the impression was broadcast that a sovereign default was the end of the world and had to be avoided at all cost. In fact, it was exactly the fear of Greece's default which lead to the unfortunate first financing package for Greece in May 2010.

Having been through two sovereign defaults during my banking career, I failed to understand the hysteria. It was a relief to hear the Chief Economist of Citibank say that the major problem was "that the Europeans did not understand that a sovereign default was quite a normal thing" and that there had been dozens of sovereign defaults in prior decades. That assured me that I was not totally wrong with my opinion.

Against the above background, I am now quite pleased to finally have statistical evidence about the frequency of sovereign defaults. The graph below shows sovereign defaults since the year 1800. Greece is not alone with 7 defaults; my home country Austria is right up there with Greece, also with 7 defaults. Spain, Russia, Germany and Portugal follow right behind.

But most important is the recent past. Since 1975, there have been almost 50 sovereign defaults. Each sovereign default was handled 'the normal way': existing creditors restructured their maturities by extending them and lowering the interest rate; official lenders provided the Fresh Money; and the IMF put together a program which was the basis for the agreement of all creditors.

Only Greece was different. Here, the EU elites felt that they didn't need to learn from professionals with previous experience. Instead, they assured themselves that the EU was different and required a different solution. The end result was that, today, European tax payers carry the risk which was previously carried by private creditors. Great showing!

Monday, July 8, 2019

Mitsotakis Clear Winner, Tsipras Not Too Big A Loser And Pollsters Discredited

In January 2015, riding on a wave of unforeseen popularity, SYRIZA registered 36,34% of the vote. In September 2015, after some of the most dramatic and economically damaging months in Greek history caused by SYRIZA, the party - despite broken promises and defections of radical leftists - still registered 35,46% of the vote.

In May 2019, after 4-1/2 years in government, SYRIZA faced broad voter disaffection and registered only 23,76% of the vote at EU elections. They had lost roughly one-third market share (!) relative to 2015. To make matters even worse, ND - who had been kicked out of office by SYRIZA back in 2015 - came out at 33,12% of the vote, almost exactly 10 full percentage points ahead of SYRIZA.

At that point, Alexis Tsipras took the flight forward and called early elections, presumably fearing that the longer they waited, the worse the situation would get for them.

Since the EU elections, media discussion did not even focus on SYRIZA's chances for a recovery. Instead, the discussion focused on the margin by which ND would win (10-12% were the most frequently quoted margins) and whether or not SYRIZA (and Tsipras) might even be sent to the dustbin of history. I do not recall a single poll showing SYRIZA at 25% or more, prompting a headline in the Ekathimerini a day before the election of "Tsipras eyeing more than 25%", essentially suggesting that Tsipras had unrealistic hopes. That commentary by Angelos Stangos included the following paragraph:

"In short, after all the despicable things this government has done under the leadership and guidance of Alexis Tsipras (there should be no doubt on this point), it will not bode well for the country’s future if, say, ND gets 40 percent and SYRIZA gets around 30 percent. This would make the leftists the absolutely unchallenged opposition and would strengthen Tsipras’ position beyond any possible reproach from detractors in the leftist camp. He would even be able to gloat about not suffering a real defeat."

ND getting 40%? Didn't sound unrealistic at all. SYRIZA getting around 30%? What was the man smoking?

Well, SYRIZA ended up getting 31,53% of the vote, 'only' 5% less than at its peak in January 2015. If one were to add the 3,44% which Yanis Varoufakis' party registered (after all, Tsipras and Varoufakis were on the same team back in January 2015), one comes to 34,97% of the vote, only fractionally less than in January 2015.

It is clear that the predictions of SYRIZA's and Tsipras' impending political death were greatly exaggerated. On the contrary, those SYRIZA party members who had believed the polls must have celebrated a victory party on the night of the election.

ND's win with 39,85% of the vote was most remarkable but not a total surprise relative to expectations. The winning margin over SYRIZA of 8,32% was certainly a disappointment to those who expected 10-12%.

And what can one make of that?

After worst-case scenarios before the election, SYRIZA came away from the election still standing. Actually still standing strong. When considering all the (unnecessary) pain which SYRIZA's policies inflicted on the Greeks and particularly when considering the complete disappointment which Tsipras must have been to his religious followers, a loss of 5% in market share is certainly a loss but not a defeat.

ND, in its direct battle against SYRIZA, was not all that successful. It could have obliterated SYRIZA but it did not. ND's remarkable win seems more the result of having obliterated smaller parties.

Yanis Varoufakis, after 4 years as an international media star, has returned to the nitty-gritty of domestic Greek politics. His 3,44% were undoubtedly an achievement which many would not have considered him capable of. Whether Mera25 will indeed be "the only ray of hope in this bleak setting" (Varoufakis) remains to be seen. It would be better for the country if ND succeeded in becoming that ray of hope which many Greeks so urgently wait for.

Sunday, June 30, 2019

Greece Is Flush With Cash!

The Ministry of Finance's Annual Report about Borrowing and Debt for the year 2018 provides very interesting information about the solidity of Greece's public financing.

The bad news is that Greece's public debt now (at December 31, 2018) stands at 359 BEUR or 181% of GDP. Those are numbers which would, under normal conditions, signal a near-term catastrophy.

The good news is that those numbers currently present no problem at all. Very little of that debt will mature in the next few years and 83% of it is owed to the official sectors of other countries. One cannot think of a more stable financier than such official sectors. Last but not least, since the debt owed to the official sectors of other countries comes at extremely low interest rates, total interest payments in 2018 amounted to "only" 6,2 BEUR, which is less than 3,5% of GDP. Such a low ratio of debt service costs would normally represent a solidly financed public debtor.

And as a footnote: the 3,5% of GDP of interest expense just happens to be the same as the 3,5% primary surplus requirement which Greece's creditors have required. Put differently, Greece has an overall balanced budget (if not even a slight budget surplus).

To top off the good news: the Greek public sector is literally flush with cash: the Central Government has 27 BEUR in cash reserves and state entities have another 24 BEUR, bringing the total to 51 BEUR. Those reserves would cover interest payments and debt maturities for many years to come.

Wednesday, May 22, 2019

Greece's Current Account On A Dangerous Path?

Arguably the most important economic variable of the Greek economy is the country's current account. The current account measures how much an economy spends outside its borders compared with its revenues outside its borders. If a national economy spends more outside its borders than it has revenues there (i. e. a current account deficit), it needs to import capital either by way of borrowing or attracting foreign investments. Since the Greek economy does not have a tradition of substantial and sustained foreign investments, any external gap caused by the current account deficit must typically be closed with loans from abroad.

Traditionally, Greek consumers' demand for products has exceeded the supply of products generated by the Greek economy by far, i. e. Greece had to import substantial amounts products resulting in a trade deficit. Greece has the benefit of substantial foreign revenues from services, mostly tourism service. However, the positive balance in services has never been able to completely offset the negative balance in trade. Thus, the Greek economy was always short of foreign capital; it always had to borrow offshore.

The absolute record was set in 2008 when the Greek economy spent 37 BEUR (!) more outside its borders than it earned there, i. e. a current account deficit of over 15% of GDP! Probably a world record among developed economies. In 2008, Greece imported 47 BEUR of 'other goods' (Greek exports other than oil and shipping). This was roughly 3 times the amount of exports of 'other goods'!

The financial crisis limited access to foreign capital and austerity cut down domestic demand, leading to a continuous decline in imported goods and an improvement in the current account balance. By 2015, the current account deficit was reduced to 1,5 BEUR, the lowest level since 2008. Since 2015, imports and current account deficits have increased again, reaching 5,3 BEUR in 2018. The first 3 months of 2019 show a 13% deterioration in the current account balance over the previous year.

To determine whether or not there is a dangerous trend in the making, one can compare imports of 'other goods' in the period January-March since 2008. The numbers are:

2008 11,0 BEUR
2009   9,1 BEUR
2010   9,5 BEUR
2011   8,1 BEUR
2012   7,2 BEUR
2013   7,2 BEUR
2014   7,2 BEUR
2015   8,0 BEUR
2016   8,1 BEUR
2017   8,9 BEUR
2018   9,5 BEUR
2019 10,0 BEUR

The numbers would suggest that there is a dangerous trend in the making: from January-March 2019, imports of 'other goods' were 10,0 BEUR and the trend line suggests that the record of 2008 of 11,0 BEUR will be reached soon. Put differently, Greece is back on a track towards setting records in the import of goods.

The situation is not as dramatic as back in 2008 because exports have increased as well but one has to bear in mind that, in 2019, Greece is on a trend line towards an annual current account deficit in excess of 6 BEUR, which is more than 3% of GDP. When comparing that to the 15%+ of GDP of 2008, it might look like peanuts but peanuts it is not!

A current account deficit in excess of 3% of GDP implies that Greece will have to import capital in excess of 3% of GDP every year. A current account deficit of 3% of GDP also implies that the Greek economy is spending 3% of GDP more outside its borders than it earns there. And, finally, a current account deficit of 3% of GDP can also be interpreted as meaning that Greece lives 3% of GDP above its means cross-border-wise.

Living above its means cross-border-wise is what got the Greek economy into trouble in the first place.

Tuesday, May 7, 2019

Corfu In Decline

The Irish author Richard Pine, who lives on the island of Corfu, wrote this devastating piece in the Ekathimerini: "The destruction of the real Corfu". Pine blames primarily unchecked tourism for what he calls the island's destruction.

Having just spent 10 days over Easter on Corfu, I can confirm the destruction but I am not sure that it is tourism, at least not tourism alone.

There is one word which, in my opinion, describes today's Corfu (particularly, but not only, Corfu-town) best: decadence. Wherever one looks, one sees decline: run-down buildings, roads in terrible condition, huge garbage piles all over the island, etc. In between, of course, one runs into 5-star luxury resorts here or there.

When one asks people in the Old Town of Corfu about this situation, one gets a uniform answer: it is all because of UNESCO which does not allow any structural changes. That may well be the case but I am sure that UNESCO does not disallow the maintenance of substance. In fact, there are a few traditional buildings in the Old Town which have maintained their original character to the fullest extent and, yet, they have been maintained and kept up (banks, for instance).

The impression one gets on the entire island is that its residents simply don't care about the inherited beauty of landscapes and structures. I have come to Greece for over 40 years and I have seen many places, above all villages, which seemed medieval 40 years ago and which are now very nicely maintained towns. The last time I was in Corfu was over 25 years ago and there has been a dramatic deterioration since then.

Our 10-day stay was overshadowed by the shame which my Greek wife expressed about most of the things she saw. That was not, that could not be 'her' Greece, she felt. Sadly, it was.

Sunday, March 17, 2019

Athens - Far Too Large A City?

In a recent commentary, reference was made to the fact that nearly half of the Greek population lives in Athens. I used to think that it was a lot less than that but let's just assume for the purpose of the below argument that this is so.

If the same ratio were applied to other European capitals, here are some examples:

* Paris would have a population of 34 million (instead of 2 million)
* London would have a population of 33 million (instead of 8 million)
* Berlin would have a population of 41 million (instead of 4 million)
* Madrid would have a population of 23 million (instead of 3 million)
* Rome would have a population of 30 million (instead of 3 million)

Etc., etc.

Of all the structural weaknesses of the Greek economy, the undue concentration of the population in the capital of Athens seems definitely one of them. Permit me a naíve question: what are so many people doing in the capital? What are the productive venues they can pursue there?

The definition of the problem is always the easy part, the difficulty begins when one starts looking for solutions. Still, it would seem high time for a Greek government to study alternatives for 'de-centralizing' Greece's population in an economically profitable way.

Thursday, February 21, 2019

Current Account 2018: A Forebearer Of Bad News?

Below are the figures for Greece's current account during 2018 as compared with the previous year (in BEUR).

2018 2017
Revenue from abroad
Exports 32,4 28,0
Services (e. g. tourism) 37,2 33,7
Other income 6,4 6,6
Current transfers 2,0 2,0
-------- --------
Total revenue from abroad 78,0 70,3
Expenses abroad
Imports 54,9 47,9
Services (e. g. tourism) 17,8 15,6
Other expense (e. g. interest) 8,0 7,4
Current transfers 2,5 2,5
-------- --------
Total expenses abroad 83,2 73,4
Net foreign deficit (current account) -5,2 -3,1
Trade balance -22,5 -19,9
Services balance 19,4 18,1
Other balance -1,6 -0,8
Current transfer balance -0,5 -0,5
---- ----
Net foreign deficit (current account) -5,2 -3,1

What stands out are: (1) a very significant jump in exports to 32,4 BEUR, the highest level of exports ever and over 50% above the pre-crisis levels; (2) an even more significant jump in imports to 54,9 BEUR, which comes close to the pre-crisis record imports; leading to (3) a deterioration in the trade balance from minus 19,9 BEUR to minus 22,5 BEUR; and (4) a drastic deterioration in the current account from minus 3,1 BEUR to minus 5,2 BEUR.

Does that sound familiar? Yes, it does!

We remember that Greece got into its foreign debt predicament primarily because of huge current account deficits. Current account deficits which were the result of the national economy's not producing enough of those products which national consumers wanted and which they, therefore, bought offshore. In simple terms: Greece purchased from Germany and Germany provided the buyer's credit. A game where everyone seemed to win, at least as long there was an unlimited supply of buyer's credit.

I have argued for many years the following: if we really want to know if the Greek economy has been structurally reformed, we have to wait until purchasing power returns to the national economy. If the return of purchasing power is matched by significant increases in imports, we know that the structure of the Greek economy has not changed very much.

Greece will continue to import capital for the purpose of financing imports. Economic value creation, jobs and profits will be in those locations where those imports are produced. Job growth in Greece will be slow and the foreign debt load will increase significantly. At least as long as foreigners provide the capital required by Greek importers.

Saturday, February 9, 2019

Andreas Papandreou In The Context Of Juan Domingo Perón And Bruno Kreisky

Prof. George Kassimeris of the University of Wolverhampton wrote this article about Andreas Papandreou, Greece's first socialist Prime Minister who would have turned 100 this month. I have to take Prof. Kassimeris' opinion at face value because my own knowledge of Andreas Papandreou and his policies is superficial, at best. Thus, intuitively (and not scientifically) I always associated Papandreou with 2 other political figures who have left their marks on their respective societies.

Juan Domingo Perón came to power in Argentina in 1946 and left a legacy for his country which is still alive today, 45 years after his death. Perón was a 'caudillo' (the gentleman equivalent of a 'macho'), a natural leader. Today, he probably would be classified as a populist. Perón, with the clever assistance of his wife Eva, could manipulate people's minds and seduce people's hearts. Perón's genius was to discover a simple truth: if, in a developing country, one aims to achieve a democratic majority, the most promising target group are the underprivileged. Not any particular kind of underprivileged but, instead, ANY underprivileged. And certainly in underdeveloped economies, there will always be multitudes of people who feel underprivileged. Perón coined a term for his underprivileged, the 'descamisados" (the shirtless ones) which, in retrospect, can be viewed as a genial marketing gimmick. There was no objective definition of what identified a shirtless one. Instead, a shirtless one was one who felt underprivileged for whatever reason. In marketing terms: that broadened the target group.

In the first decades of the 20th century, Argentina was among the world's 10 largest economies, the peso was considered like a reserve currency and Buenos Aires was often called 'the Paris of the rest of the world'. Argentina was truly a rich country and yet, millions of Argentines were truly shirtless. Progressive policies aiming at an evening out of wealth and incomes, providing social security and strengthening a middle class were certainly called for. Classic politicians have to struggle to achieve parliamentary majorities for their progressive policies. A 'caudillo', on the other hand, rouses the shirtless ones with fiery speeches. And Perón was the best among the many 'caudillos'. Progressive policies evolving from rational debate and parliamentary majorities generally have a fair chance of improving society overall. The manipulation of a 'caudillo' is much more prone to economic failure. The 'caudillo' Perón assumed government in 1946 of one of the richest countries in the world and when he died in office almost 20 years later (with one short interruption of governing), Argentina was considered a failed state. If Argentina is considered a failed state even today, the roots of that would go back to Perón who truly changed the paradigms of society.

Bruno Kreisky became the first socialist Chancellor of Austria in 1970 and he remained in that position (much of the time with an absolute majority) until 1983. Although of rather unattractive physical appearance, Kreisky magnetized people with his mind, his mouth and his mimic. He could explain complicated things in simple ways which everyone understood and he could articulate his views in such a way that it was easy to agree with him. Whereas Perón was a 'caudillo', Kreisky was referred to as the 'Sun King'. Having been rather revolutionary in his youth while coming from a family of industrialists, Kreisky had the ability to communicate comfortably with workers as well as with industrialists. He won the support of intellectuals and artists. Kreisky often replaced the term 'my government' with 'my team' ('team' was a revolutionary term back in 1970!). Kreisky proudly described his team as a collection of supreme competence and he promised that 'Kreisky and his team' would modernize Austria. Before I ever saw Kreisky on TV for the first time, I had been warned that he was a 'dazzler of the worst kind'. I definitely was not going to fall for his dazzles but, still, it did not take long for me to start enjoying being dazzled by Kreisky.

Like Perón, Kreisky set out to improve the lives of the underprivileged. He was a champion of nationalized industries (of which Austria had many at the time), of protecting the economy from too much (foreign) competition, of the Welfare State. Never in the history of Austria were so many social benefits spread throughout the population as during Kreisky's reign. When the conservative opposition warned that Austria was headed for bankruptcy if the state borrowed so much money to finance social benefits, Kreisky told the workers of Austria's largest (nationalized) steel company: "A few more billion in debt cause me less sleepless nights than a few thousand more unemployed." The workers cheered and that sentence is referred to even today whenever there are economic clouds on the horizon.

Why did Austria not go bankrupt? For one simple reason: Kreisky had indeed some competent people in his team whereby the key player was Hannes Androsch who became Finance Minister at the age of 29. As regards mind and mouth, Androsch was nearly on par with Kreisky. As regards physical appearance, Androsch was a movie star compared with Kreisky. As regards charisma overall, I would rate Androsch higher than Kreisky, particularly his appeal to the younger generation. While raised with socialism in his milk, by profession Androsch was a certified public accountant. In short: he understood numbers. He argued that, if the nationalized steel company had substantially higher production costs than foreign competition, this might offer some benefits in the short term but for the long term it spelled trouble. When Kreisky argued that Austria should devalue to become more competitive, Androsch held against that devaluation always leads to higher inflation. Against Kreisky's fiercest opposition, Androsch pursued a 'hard Schilling policy', i. e more or less pegging the Austrian Schilling to the Deutsche Mark. The resulting financial discipline pervaded the economy and was the major reason why Kreisky's free spending intentions could not lead to a financial crisis. Androsch forced the economy to begin the adaptation to international competitiveness. Joining the EU in 1994 was the second step and joining the Eurozone was the final step. Having managed these 3 steps successfully, Austria became one of the wealthiest countries worldwide but that might not have happened without successfully completing the first step.

How would I compare Andreas Papandreou with Juan Domingo Perón and Bruno Kreisky? In terms of leadership traits, similarities with both but a lot more similarities with Kreisky than with Perón because Papandreou, like Kreisky, was an intellectual and Perón was not. Where did they differ? Kreisky appointed a competent Finance Minister and allowed him to exercise his power where Perón and Papandreou did not (or had they done so, the question is whether they would have allowed the Finance Minister to exercise power). One could go so far as to argue that if Kreisky had not had Androsch as his Finance Minister, Austria would have, economically, followed the trend of Greece. There is no way to prove that but one could argue it.

I consider the year 1981 as one of the most crucial years in the history of Modern Greece because two events, each historical on its own, came together and they reinforced one another in such a way that at the end of the process which they initiated was Greece's bankruptcy in 2010.

One event was Papandreou's coming to power as the kind of charismatic, populist leader described above. The most important ingredient for implementing Papandreou's policies/visions was money and the Greek state's access to money, particularly in foreign markets, was limited due to Greece's perceived economic and currency risk. The other event was Greece's joining the EU because that brought, directly or indirectly, the money needed for Papandreou's policies/visions. Directly in the form of EU subsidies; indirectly as a result of Greece's increased standing as a borrower thanks to EU membership. Not only the state but all Greek banks found it easier to raise money offshore to finance a spree of domestic (mostly) consumer financing. The most fatal long-term aspect of EU membership was that the EU brought to Greece the famous 4 freedoms (free movement of products, services, capital and people). I have argued repeatedly that Greece was not ready and/or not equipped to handle 2 out of those 4 freedoms: free movement of products and capital. The radical increase on the domestic demand side as a result of Papandreou's policies could not be satisfied by Greece's supply side, neither in terms of quantity nor in terms of quality or price. Logically, the increased purchasing power would shift towards imports. Under normal conditions, external financing constraints act as a check on import explosion. EU membership loosened the external financing constraints and it is only natural that Greek consumers would prefer imported products of high quality and low price when such products where not even available in Greece or, if yes, at lower quality and higher price. At the level of Greek consumers, Papandreou and EU membership were a blessing. At the level of the national economy, Papandreou and EU membership initiated Greece's path towards eventual economic disaster. A national economy which is not yet ready for international competition will suffer extraordinarily if the borders are opened too quickly, particularly when open borders not only bring new products from abroad but, at the same time, the loans to pay for them. The products are quickly consumed but the loans remain. Parallel to that, domestic manufacturers fail as a result of foreign competition. They go bankrupt or are nationalized by the state (in which case public sector employment increases).

To sum up: the stage for eventual economic disaster was set under Papandreou (already back in 1993, Yanis Varoufakis described the Greek economy as being in a state of terminal decline), facilitated by concomitant EU membership. The Euro put a turbo on that development by expanding an increased flow of foreign debt into a tsunami of foreign debt (more than half of Greece's foreign debt was contracted from 2001-10). A one-sided blame on Papandreou/PASOK would be one-sided, indeed. The other large party (ND) was equally responsible because when they were in power, they only copied Papandreou/PASOK instead of correcting a wrong development and with their reckless financial conduct from 2004-09 they put the final nail into the coffin of the Greek economy.

The cases of Perón, Kreisky and Papandreou show how one person, literally alone, can shape the destiny of a country for a long time because such leaders can set in motion a long-term shift in paradigms. Shifts in paradigms are welcome (or even necessary) when they replace negative or wrong paradigms of the past. Kreisky correctly explained to Austrians that the fetish of balancing the budget can be bad for the economy when it is a fetish, but the paradigm shift was that Austria didn't balance its budget for the next 45 years and accumulated high debt. If, as Prof. Kassimeris argues, Papandreou replaced the nationalization of resentment with the nationalization of pride, that was most positive for society except when it leads to a paradigm shift towards a "search for national grandeur bringing about economic stagnation, double-digit inflation, a bloated public sector with colossal deficits."

Kreisky stands out in the group of 'caudillos' or 'Sun Kings' for having chosen a self-imposed check on one's follies by appointing a competent Finance Minister and giving him power, even power to oppose Kreisky' intentions. Now, almost 50 years later, Austria still benefits from the paradigm shifts which BOTH, Kreisky and his Finance Minister, had brought about albeit it in different ways. Perón and Papandreou did not self-impose checks on their follies which led to paradigm shifts which, like in the case of Austria, are still felt today. Only that they are felt in a negative way.

Thursday, January 31, 2019

Minimum Wage vs. Minimum Income

PM Tsipras' intention to increase the monthly minimum wage to 650 Euro has triggered debate. I think the debate is about the wrong issue.

As someone who is often blamed by readers for being a neo-liberal, I propose the following: anyone who champions a market economy as the best system for generating wealth must recognize that there will always be people who don't succeed, for one reason or another, in such a market economy. Perhaps temporarily, perhaps permanently. Given that, it is mandatory for a society of the First World to make sure that there is a sufficient safety net for those who cannot succeed, temporarily or permanently. No one in a First World country should fear potentially being totally left out in the cold. I emphasize the term First World country because such countries definitely have the resources to provide for a safety net. Obviously, a safety net should be in place everywhere but where there are no resources, there cannot be benefits.

Examples of such a safety net would be Hartz IV in Germany or Sozialhilfe in Austria. These systems must not be confused with the concept of Basic Income. The latter proposes unconditional basic income for everyone. Hartz IV or Sozialhilfe, on the other hand, assure that those who require protection are protected but not the others.

Society, through the democratic process, needs to determine the extent of the safety net, i. e. the minimum amount of income those who do not succeed in a market economy should receive to maintain a satisfactory existence. Sozialhilfe, I believe, sets that amount at 850 Euro per month, Hartz IV, I believe, is lower than that.

And now to the connection between the safety net and a minimum wage. If Sozialhilfe stands at 850 Euro, it is clear that market forces will automatically set the working wages above that level. There has to be an incentive for working in order to avoid incentives for not working.

As I said, whether or not a minimum wage of 650 Euro is adequate for Greece is a matter for the democratic process to determine. However, to have a minimum wage in any amount for people who work without having, at the same time, a safety net for people who cannot work is not defensible.

Tuesday, January 15, 2019

Interest Expense In the Drachma Age vs. Interest Expense In The Euro Age

With all the challenges/problems which the Euro brought for Greece, there were also benefits which are often overlooked. One of the principal benefits was the significant reduction in interest expense. One way to measure the burden of interest expense is to put the latter in relation to the financial resources available to pay interest, i. e. tax and other government revenue. In theory, one could argue that every billion which is saved on interest expense would enable the government to make a billion of investments elsewhere. In reality, this is not the case because the government could do both at the same time when financing the 'other' billion with new debt.

Greece's debt increased dramatically from 2000 (the last year of the Drachma) to 2017, from 141,0 BEUR to 317,4 BEUR (this after a haircut of approximately 100 BEUR). A layman might assume that Greece's interest expense would have increased dramatically, too.

In fact, Greece's interest expense declined from10,2 BEUR in 2000 to 5,6 BEUR in 2017.

In 2000, the last year of the Drachma, interest expense absorbed 32% of tax revenue whereas in 2017, interest expense absorbed only 11% of tax revenue. This was due to a combination of higher tax revenue and lower interest expense.

In 2000, the last year of the Drachma, interest expense absorbed 17% of total government revenue whereas in 2017, interest expense absorbed only 6% of total government revenue. This was due to a combination of higher government revenue and lower interest expense. The statistics are below (in BEUR).

Interest Expense vs. Government Revenue
2000 2017
Taxes on income, property, etc. 13,2 18,1
Taxes on production, imports, etc. 18,5 30,8
-------- --------
Total revenue from taxes 31,7 48,9
Social contributions 17,0 26,0
Capital transfers, etc. 9,9 11,8
-------- --------
Total non-tax revenue 26,9 37,8
Total government revenue 58,6 86,7
Total debt 141,0 317,4
Interest expense 10,2 5,6
Interest expense as % of tax revenue 32% 11%
Interest expense as % of total revenue 17% 6%

What conclusions can be drawn from the above?

First, had Greece stayed with the Drachma, the interest expense would have remained high because Greece could not have taken advantage of lower Euro interest rates. Secondly, the interest expense would in all likelihood have increased because it is safe to assume that Greece's debt would have also increased. Whether government revenue would have increased substantially under a Drachma regime is anybody's guess. Probably not by much (this statement had to be revised. See the below addendum).

Put differently, interest expense as % of tax revenue, already a staggering 32% in 2000, would in all likelihood have increased. Markets might not have been concerned as long as that percentage increased to 35% or a even a bit more but once that percentage would have hit or crossed the 50% level, there would have been panic in markets. Could interest expense have hit or even exceeded 50% of tax revenue? If debt had continued on a rapid growth path and if tax revenue had remained flat, that could definitely have happened.

My conclusion is that, had Greece stayed with the Drachma, it could not have accumulated as much debt as it did with the Euro. This for the simple reason that markets would have determined long before 2010 that Greece had hit or exceeded its borrowing capacity.

Secondly, the Euro not only brought Greece lower market rates but also two additional advantages: Greece could avoid a sovereign default and, following the implementation of the programs, Greece was offered extremely below-market interest rates on the loans from its Euro partners. With a debt load of about 180% of GDP, it is miraculous that the government would only have to allocate 11% of its tax revenue and 6% of its total revenue to interest expense. Those are percentages which one finds in the strongest Euro countries. Countries like Portugal, Spain, Italy or Ireland have to allocate much more of the revenue to interest expense.


I have added the years 2008 and 2009 to the chart. The interesting point is that until 2008/09, i. e. as long as the economy was booming, tax revenue and government revenue in general had increased substantially. For example: revenue from taxes increased from 31,7 BEUR in 2000 to 50,1 BEUR in 2008, and total government revenue increased from 58,6 BEUR in 2000 to 98,4 BEUR in 2008. That seems to be a nice proof that a booming economy increases government revenue (even if it is all financed with debt).

 Interest Expense vs. Government Revenue
2000 2008 2009 2017
Taxes on income, property, etc. 13,2 19,7 20,3 18,1
Taxes on production, imports, etc. 18,5 30,4 27,8 30,8
-------- -------- -------- --------
Total revenue from taxes 31,7 50,1 48,1 48,9
Social contributions 17,0 30,6 29,3 26,0
Capital transfers, etc. 9,9 17,7 15,1 11,8
-------- -------- -------- --------
Total non-tax revenue 26,9 48,3 44,4 37,8
Total government revenue 58,6 98,4 92,5 86,7
Total debt 141,0 264,8 301,0 317,4
Interest expense 10,2 11,7 12,0 5,6
Interest expense as % of tax revenue 32% 23% 25% 11%
Interest expense as % of total revenue 17% 12% 13% 6%

Tuesday, January 8, 2019

New Goals For The Future

For Ekathimerini, the New Year has begun with exhortations regarding the future.

In an op-ed by Yiannis Manuelides, the author argues: "Years of proud Greek exceptionalism, followed by years of passive-aggressive acceptance of memoranda, need to be followed by something radically different. The world today is interconnected in complex ways. It will continue to evolve in challenging ways. For Greece to break free of its current isolation, it needs to engage with the world. The means of this engagement is a better and marketable Greek product. The actors who can bring this about are the residents of Greece working better together and becoming bona fide members of the global community. Rising to this challenge will see the return of lasting prosperity and legitimate national pride."

Alexis Papachelas argues that "it is high time for Greece to set new goals for the future, to make a plan: "Today we are looking at the future divided and with a clear leadership deficit. The asymmetry with Turkey, notwithstanding its internal problems, is a cause for concern. It’s time we hammered out a plan that will help the country restore its strengths and play a leading role in the region, taking advantage of untapped potential. Looking back at the big picture, it may not appear that bad, but if we want to halt the decline we need to set goals for Greece and the diaspora, which has also played a key part."

And then there is an obituary about Nikos Mouyiaris who is quoted: “I’ve been in America for over 50 years. I saw many of us succeed in what we chose to do. Professionals, academics, scientists, businessmen. Some also excelled in politics. As persons we succeed. Regretfully, however, I see that organized Hellenism is declining. Associations and federations are in danger of extinction. They are not capable of attracting our youngsters, our many incredible young professionals."

One of the wonderful traits of Greeks which I have learned to admire is their competency in making diagnoses. I have been with taxi drivers who would explain to me, during a 1/2 ride from the airport, everything that is wrong in Greece and why. It makes for wonderful conversation. What is lacking across the board, however, are specific proposals and action plans. Not sophisticated macro-economic dissertations but, instead, pragmatic goals and measures which the population at large can absorb and identify with (if they only hear them often enough).

Suppose a Prime Minister made the following speech on prime time TV: "We - the government - propose a New Deal to the Greek people: going forward, we will, unequivocally and irrevocably, pursue 4 obsessions in our daily lives: we will be obsessed with export promotion, thereby creating growth in the economy; we will be obsessed with substituting imports through local production wherever we can, also adding to economic growth; we will be obsessed with attracting foreign investment as a source of foreign capital, provided that such investment adds value to our economy and society; and - we, the government - will seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

If nothing else happens, that speech will go down into the history of beautiful soundbites. What else must happen? Each of these soundbites must be supported by specific action plans with milestones. During the last 10 years of crisis, there has been a multitude of proposed plans for the turn-around of the Greek economy. To only name my favorite: the Greece Ten Years Ahead Report submitted by the Athens office of McKinsey in 2011. And regarding the building of a modern and prosperous Greece, I refer to the former EU Task Force for Greece.

It really would not take all that much but what it will definitely take is Greek leaders who step forward and display civil courage and disinterested conduct. Does Greece have such leaders? A plenty, in my judgment. The eternal question I have about Greek society is why such leaders do not step forward and display civil courage and disinterested conduct.