Saturday, September 26, 2020

Greece's Admirably Strong Financial Condition

As Greece prepared for its exit for the 'rescue program' back in 2018, two possible alternatives were discussed: (a) a back-up line of credit from the EU for the post-program period or (b) a cash reserve in lieu of that. The disadvantage of the back-up line was that it would have involved some kind of conditionality, the disadvantage of the cash reserve was that it would trigger incremental and unnecessary interest expense. 

I had supported the back-up line. Greece chose the cash reserve. It was funded through the last tranche of the program and through new debt issues subsequent to the exit from the program. Today, I must admit that Greece was right and I was wrong.

Owing to the collapse of interest rates, the cash reserve probably caused only minimal incremental interest expense for Greece. At the same time, the cash reserve assumed huge proportions and "cash is king and increases creditworthiness". 

Finance Minister Christos Staikouras is quoted in this article as “We, the Finance Ministry, have got the cash reserves to support any government decision. We have built strong cash reserves of 37.7 billion euros so as to support any choice made". It should be noted that these are reserves of only the Finance Ministry. It is safe to assume that there are further reserves elsewhere in the public sector which are not included here.

Prior to Corona, Greece's budget was more or less in balance (after interest expense) so that the cash reserve was indeed a reserve for future expenses. Corona has totally altered this situation and now the budget deficit for 2020 could reach 8-10 BEUR. Under normal situations, this would be a crisis scenario. With a cash reserve of 37,7 BEUR, it is not much more than a footnote. 

Greece's cash reserves will receive a substantial boost from the 750 BEUR Recovery Plan of the EU. At the same time, Greece is likely to take advantage of market conditions and issue new debt. In consequence, despite the cash outflow due to Corona, Greece is likely to increase its reserves substantially going forward. More cash reserves translate into better perceived creditworthiness which, in turn, will make the raising of debt even easier. A positive do-loop.

In sum, Greece's financial condition is admirably strong. There will be no major debt service until the early 2030's. Greece already has more than enough cash to sustain the expenses until then. There is no liquidity risk in the next few years.

This would certainly seem to be the time for investing in Greek bonds with maturities in the next few years!

Sunday, September 6, 2020

I Am Embarrassed To Be An EU Member!

The United Nations Convention on the Law of the Sea (UNCLOS) is the international agreement that resulted from the third United Nations Conference on the Law of the Sea (UNCLOS III), which took place between 1973 and 1982. The convention has been ratified by 168 parties. An additional 14 UN member states have signed, but not ratified the convention.

There are 15 United Nations member and observer states which have neither signed nor acceded either the Convention or the Agreements. Turkey is one of them.

Greece has 182 UN member states on its side. Turkey is one of 15 which abstained from being party to the agreement. Thus, Turkey has the legitimate right to define its own position of what their territorial rights in the Mediterranean are. The only question is one of legitimacy: when 182 UN member states declare something as law, is that equivalent to 15 member states ignoring that law? When 182 UN member define something as law, is it defensible that one non-signatory defies that law outright?

There can only be a political solution to this. In the meantime, however, every EU member state should ask itself the question whether an attack on Greece is 'only' an attack on an individual sovereign country (which it is) but whether it is not also an attack on the union which that sovereign country belongs to. In my opinion, the EU cannot assume a mediator's role in a conflict where the EU itself is being attacked. 

The deafening silence of the EU in this matter is beyond comprehension. Notwithstanding all the economic interests of major EU countries in Turkey and the respective dependencies, Turkey is a country which has violated in the extreme many of those values which the EU considers as their core values. And, most importantly, in the refugee situation, Turkey has essentially blackmailed the EU and gotten away with it so far.

Given the fact that Turkey, from the EU's standpoint, should actually be considered more as an adversary than as a partner, I found it quite amazing what a beautiful birthday party the EU ambassadors presented to the Turkish foreign minister. 

Would they have offered the same admiration to Putin after he took over the Crimean?

But the real affront was an interview by CNN with Jens Stoltenberg, the General Secretary of NATO. The reporter's question was very simple: "The Greek Prime Minister accused Turkey of violating Greek air space. How does NATO react to that?" Stoltenberg refused to answer this question. The CNN reporter asked whether there were possibly 2 standards: one when Russia violates Turkish air space for less than 30 seconds and the other when Turkey violates Greek air space for months on end?

It is truly embarrassing how Stoltenberg ducks the question and seemingly justifies Turkey's actions without considering the position of Greece, a co-equal NATO member. Regarding the EU: it is commendable that individual countries like France or Austria have taken a clear position to be on the side of their fellow EU member state Greece but the deafening silence on the part of countries like Germany and of the EU itself is absolutely embarrassing. 

As an Austrian, I am very embarrassed to be a member of this EU!

Sunday, August 16, 2020

Showtime For Greece's Current Account

From January-May 2020, Greece's current account had already deteriorated by 700 MEUR over the same period in the previous year (minus 5,6 BEUR vs. minus 4,9 BEUR). However, the critical period is from June-September. During those 4 months, the annual result in the current account is either made or broken because during this period the capital inflows from tourism take place. Last year, those 4 months registered an accumulated surplus of 4,9 BEUR in the current account.

Owing to the Corona-driven collapse in tourism, a very significant drop in capital inflows can be expected. In a worst-case scenario, there may not even be a positive contribution to the current account during this period. 

The good news is that in the current environment, Greece does not have to worry about obtaining foreign funding. The bad news would be that the foreign funding is used to finance current account deficits instead of other more productive purposes.

Sunday, April 19, 2020

Will Corona Trigger A Rebirth Of Greece?

About 2 weeks ago, an Austrian journalist (a major blogger who has published several articles of mine, mostly about Greece, in recent years) asked me for an update on Greece. I wrote him a short mail with my assessment. He was so surprised that he asked me to put it into an article which he subsequently published. Why was he surprised? Because I explained that Corona seemed to be causing something like a rebirth of Greece. The country which oftentimes in the last decade seemed exceptional in the negative sense had now become exceptional in the positive sense. An admirable crisis management; early recognition that the problem was indeed a serious problem; consequential measures implemented and strictly controlled, etc. And the results could be seen in the Corona statistics.

I further argued that this style of crisis management had triggered a change in Greece. For once, politicians were cooperating instead of fighting one another. Even Alexis Tsipras had become tame. Corona had dramatically increased the digitalization of the country. A new sense of national confidence was emerging: Greeks who had become accustomed to being called failures were now witnessing how they were praised as trendsetters. Even Bill Gates had caught up to that.

Ever since I started this blog back in 2011, I have referred to Chile as an example that Greece should follow. Post-1973, a new wave of economic governance had swept the country. The Chicago Boys and their culture triggered a rebirth of the Chilean economy and the entire society was caught up in it. Suddenly, the entire society was on the move towards modernization. One may or may not agree with the policies of the Chicago Boys but that is not my point. Instead, my point is: if, at the right time, the right kind of leadership sets the right tone for change and improvement, and if that leads to rapid successes, the movement will develop self-reinforcing dynamics and there will be exponential progress.

"Never let a good crisis go to waste", so the saying goes. Regrettably, Greece let the crisis of the last decade go to waste. An enormous price was paid by society without any noticeable benefits. If anything, life got worse.

The present Corona crisis and Greece's reaction to it has all the ingredients for setting in motion a new change process which could develop a momentum on its own. When I listened to this interview with the Greek Minister of Digital Governance, I could not help but sense that an entire new way of doing things is developing in Greece.

Mind you, the economic damage caused by Corona will be gigantic in Greece. There will be enormous economic destruction. However, this could, for once, be a destruction which has the potential of becoming creative. If a new sense pervades society that destruction of some of the bad 'old' is not all that bad if it is replaced with some good 'new', the process will start feeding upon itself. It could even grow exponentially.

The crux of the matter is self-confident national unity in the common mission. Greeks, battered internationally for an entire decade, are beginning to have good reason for a sustained national self-confidence based on facts and not on myths. Put that together with unity in the common mission and there will be no limit to success!

Καλή Ανάσταση!

Tuesday, April 7, 2020

Eurobonds And Other Creative Ideas

The United States of America did not become united states overnight. When the 13 colonies declared independence in 1776, the governmental unision was a difficult birth. And the population at large was definitely not united in breaking with the mother country. The unifying institution throughout the War of Independence was the army. While it hardly won any battles, it upheld a sense of common purpose and destiny throughout the 13 colonies.

Alexander Hamilton, the illustrious Founding Father, argued that the first step towards a federal union was a federal army. And the second step? Yes, Hamilton was emphatic about insisting that all debt of the 13 colonies would have to be mutualized and federal debt introduced to the markets.

The debate then was similar to the debate within the Eurozone in recent years. The frugal Northern colonies were against the profligate South. The principal protagonists were Thomas Jefferson and Alexander Hamilton. Jefferson, history's darling for having drafted the beautiful Declaration of Independence, came from the South (Virginia) and represented the landed gentry of gentlemen farmers. He was literally paranoid about any central government with centralized powers over decentral states. Hamilton, an immigrant from the Caribbean and a brilliant mind, had studied the economies of several countries, notably that of Great Britain. His conclusion was that one prerequisite for economic growth was federal debt in unision with a Central Bank. Federal debt which carried the "full faith and credit of the United States of America" and, therefore, became a safe asset. Furthermore, Hamilton was convinced that the only way to maintain the union, or to even make it an ever more perfect union, was to have mutualized federal debt which made the states dependent on one another and on the central government. Hamilton prevailed in the end (Jefferson agreed to the debt mutualization in exchange for getting the nation's new capital for the South; Washington, D.C.). And as it turned out, the federal army and the federal debt hugely contributed to making the USA an ever more perfect union.

Why this long introduction? Because there can be no doubt that a joint federal debt, i. e. a Eurobond, is a prerequisite if one hopes to ever have a more perfect union in Europe. Just like a coordinated fiscal policy with a federal treasury is another such prerequisite.

My second point is: anyone who is truly interested in ever achieving a more perfect union in Europe is doing this goal a disservice by pressuring for Eurobonds now. A Eurobond would not achieve any benefit today which cannot also be achieved by alternatives which are less divisive. A Eurobond is likely to be eventually accepted by the North but it will require time, persuasion, a change of treaties, etc. To steamroll the EU into Eurobonds with the argument that a virus requires it will eventually result in a backlash. As Gideon Rachman, the renowned British journalist, wrote in the Financial Times:

"Advocates of eurobonds stress the potentially disastrous effects on public opinion in southern Europe if ­northern Europeans fail to respond while the Italians and Spanish live through a tragedy. But northern Europe also has to consider politics and public opinion. The mutualization of debt within the EU has always been the reddest of red lines for the Germans, the Dutch, the Austrians, the Finns and others. If it is pushed through now — in an atmosphere of crisis — it could set a time-bomb under the EU."

Let us take one step back for a moment. What actually is a Eurobond? I am afraid that one might get many different answers if one asked many people today. Perhaps one should look at the American equivalent of a Eurobond (US Treasuries) to extrapolate how it might work in Europe.

A US Treasury is a bond emitted by the federal government through its Treasury and it carries "the full faith and credit of the United States of America". The cash proceeds of the bond flow into the Treasury which uses the funds to finance federal expenses. Put differently, the entity which raises the funds and assumes the debt is the same entity which controls the use of those funds (i. e. the federal government under authorization from Congress). Also, that entity has its own independent revenue base such as federal taxes.

The federal government can spend the money on anything which Congress authorizes with one very important exception: the US Constitution prevents the federal government from extending financing to individual states or from assuming responsibility for state debt. Put differently, when disaster in the form of a brutal hurricane strikes the State of Louisiana and that state needs to raise funds to pay for the damage, it can raise funds by issuing its own bonds but it cannot resort to the federal government as a lender of last resort. The federal government can provide specific purpose relief funds or grants but it cannot provide general purpose funding for the state government.

I am appalled by the absence of specific proposals as to what the supporters of Eurobonds have in mind. One gets the impression that they think of Eurobonds as a source of funding which some third party will pay back. One author, Professor Fancesco Giavazzi, described it as follows:

"Member states should jointly issue a large amount of very long maturity COVID Eurobonds backed by their joint tax capacity. Each country would issue its own bonds, but the bonds would otherwise be identical. Their common rating would be the result of all bonds being guaranteed by the joint tax capacity of the countries participating in the joint issues."

Now that, dear Professor, is plain nonsense! There is a contradiction within the first 2 sentences: first, it is argued that member states should jointly issue Eurobonds and, then, it is argued that each country would issue its own bonds with the guarantee by the joint tax capacity of all participating countries. Well, dear Professor, it is one or the other but it cannot be both!

A bond cannot be issued jointly because the proceeds of it will have to flow to an individual account. Also, the purchasers of the bonds need to know who to sue in case the bond does not get paid. One can only go after the guarantors after the issuer has defaulted. There must be an issuer and it is currently not clear at all who the Eurobond supporters propose to be the issuer.

The idea that individual countries can issue their own Eurobonds as they please is childish, at best. No third party, and certainly no Northern member of the Eurozone, would guarantee such a blank check. The American example shows very clearly that a federal bond must be issued by a federal institution which represents the full faith and credit of the federal union. That full faith and credit is not accomplished because all US states jointly and severally guarantee federal bonds. Instead, it is accomplished through the federal institution's tax capacity and through its monopoly over the currency.

There is currently no EU institution which has a federal tax capacity. The EU has some revenues like import duties, etc. but the bulk of the EU's expenses is covered by contributions of the members states. If the EU issued its own Eurobonds, no purchaser would buy them because they would not represent the full faith and credit of the EU. It would only represent the full faith and credit of the EU Commission which has very little revenues and no authority to raise taxes. Clearly, the purchasers of the bonds would require a joint and several guarantee of the member states.

A joint and several guarantee means that the creditors can call on each of the guarantors for full repayment in case the EU Commission defaults. Every guarantor would be liable for the full amount of the bond and, obviously, the creditors would go first to those guarantors who have the strongest resources to pay. In all likelihood, each of the guarantors would attempt to limit his liability by setting caps. Then it would no longer be 'true' Eurobonds but only 'limited' Eurobonds.

If the EU raises funds via Eurobonds with the joint and several guarantee of its member states, the proceeds of the bonds go into an account of the EU. Then the principal question becomes: how do those funds flow to the proper beneficiaries and in what form. If they flow from the EU to, say, Greece as a loan, there is virtually no difference for Greece whether it raises funds via its own bonds or via Eurobonds. There used to be a difference during the crisis because Greece could not sell it own bonds or, if so, only at prohibitive interest rates. Today, with the ECB's declared policy, Greece can essentially sell its own bonds at the same interest rate as a Eurobond would carry.

A Eurobond only makes sense if it leads to a vast expansion of the EU's budget and when that expanded budget is used to provide relief to those countries that need it the most. Relief means non-repayable funds, i. e. grants or subsidies or whatever. It is special purpose relief and not general purpose funding of state budgets.

The battle for Eurobonds is currently the wrong battle at the absolutely wrong time. The far better response to the challenges faced by the South as a result of Corona would be to establish a large Relief Fund which would be funded either by direct contributions of certain member states or, alternatively, through its issuance of bonds jointly and severally guaranteed by certain member states. Obviously, if, say, Greece needs the relief, it does not make sense to have Greece guarantee its own relief.

Any relief must be non-repayable. In times of zero interest rates, it is no longer possible to provide relief via a lowering of interest rates. In many aspects, that Relief Fund would be rather similar to the Marshall Plan ("European Recovery Fund"). The Marshall Plan provided non-repayable funds for projects in individual countries. But here was the trick: in each country, there was a High Commissioner of the Marshall Plan who had final authority on the application of the funds.

Dear proponents of Eurobonds: please stop dreaming that Eurobonds are an easy way to draw down debt which someone else will repay without any strings attached! And please bear in mind that if you really want to plant a time bomb under the EU, then steamroll with the pressure of Corona other countries into crossing red lines which they have promised their voters they would never cross. The results will not be pleasant for the EU.

Monday, March 16, 2020

Corona And The Greek Economy

Corona is a health drama which is already turning into an economic drama as well. Countries will have to spend billions in order to protect their economies from meltdown. Austria, for example, has just approved a 4 BEUR package to support the economy, roughly 1% of GDP. The government has called this "a first step" with the indication that further packages will have to follow. This could well reach the dimension of 5% of GDP or more.

There is no alternative so such spending. There is a seemingly endless number of businesses, large or small, even entire industry sectors, which have lost their economic base: expenses keep accruing while revenues have disappeared. Liquidity crises would speedily lead to insolvencies.

That is not necessarily a threatening scenario because Austria, due to its credit standing, will have no problem raising 5% of GDP in new debt, probably at interest rates close to zero.

But what about a country like Greece? Will Greece be able to raise the new debt which it requires in order to prevent an economic meltdown?

There is one comforting factor. Greece has allegedly built up very significant cash reserves. Some say up to 30 BEUR. If new debt cannot be raised, those cash reserves will have to be used. The only problem is: those cash reserves were meant to be a financial cushion to assure future debt service, not to be spent on the economy. If they are spent on the economy now and if the economy still shrinks, there will be no further cushion for debt service.

ADDENDUM per March 18, 2020
The above-mentioned 4 BEUR package was announced by the Austrian government on March 14 and described as "a first step". Today, only 4 days later, a "second step" was announced: the 4 BEUR was increased to 38 (!) BEUR! We are now talking about roughly 10% of GDP. Since the original budget had called for a slight surplus, we are now talking about a budget deficit of 10% of GDP.

Extrapolating this on to the Greek situation, a 10% package would amount to about 20 BEUR. That would be an enormous challenge for Greece's finances. Extrapolating it on to the USA, it would amount to a package of about 2 trillion USD (as of this writing, the US are discussing a package of 850 BUSD).

Wednesday, March 11, 2020

EUROLEAKS - By Yanis Varoufakis

"On March 14, for the first time, European citizens will be able to take a front seat in the meetings where their future is decided: DiEM25’s #EuroLeaks will take YOU inside the Eurogroup that has no standing in law, but where the most far-reaching decisions about all our lives are made."

Thus spoke Yanis Vafoufakis. Presumably he refers to the meetings of the Eurogroup which he secretly recorded and whose transcripts he will publish on March 14.

EUROLEAKS: Letting light in to how crucial decisions are made (or not) in the EU.

Tuesday, February 11, 2020

Andreas Georgiou - Was It 'Breach Of Duty‘?

The story of Andreas Georgiou has been told many times in the international media because it is such a good story, albeit a very sad one. Georgiou was Director of ELSTAT, Greece's national statistics agency, for 3 years from August 2010 - August 2015. He was commended by Eurostat for having been the first Greek head of statistics who provided what Eurostat considered 'correct figures'. That got Georgiou into trouble with certain quarters of Greek officialdom and he was sued for several alleged crimes, e. g. by-passing ELSTAT's board of directors when reporting statistics to Eurostat, falsifying statistics, slander of predecessors, etc. As far as I know, most cases are still pending final judgment (correction: on the charge of failing to obtain board approval before reporting statistics to Eurostat, the Supreme Court, in June 2018, upheld the previous judgment of a suspended 2-year sentence, i. e. final judgment).

The Greek judiciary's treatment of Georgiou has triggered an international uproar. It seemed so obvious that Georgiou was being persecuted for telling the truth while no one had problems with his predecessors' having told lies. The latter was well described by the Icelandic journalist Sigrún Davídsdóttir in her article "Lies, damned lies and Greek statistics".

Thomas Cool, an econometrician and teacher in mathematics in Scheveningen, Holland, has now brought a new perspective to my attention (Cool uses the name Colignatus in science to distinguish this from his other activities in commerce or politics. See his website).

Colignatus argues that at the heart of the issue is Georgiou's by-passing the supervisory board when reporting figures to Eurostat. To recall: for the year 2009, Greece had submitted a budget to Eurostat indicating a budget deficit of 3,4% of GDP. This was subsequently corrected to about 6% but it stayed at that level until Giorgos Papandreou assumed power in late 2009. The new Finance Minister, Giorgos Papakonstantinou, shocked the world by revealing that the true budget deficit would be roughly twice that level. Eventually, he submitted a provisional figure of 13,4% to Eurostat. All of this happened prior to Georgiou's assuming the job of Director at ELSTAT.

In November 2010, 3 months after assuming his job, Georgiou reported to Eurostat a budget deficit of 15,6% for 2009, i. e. slightly higher than the previously reported 13,4%. He did so without first seeking board approval. Some commentators considered this merely a 'procedural matter', emphasizing that the European Statistics Code of Practice states that the heads of national statistical agencies 'have the sole responsibility for deciding on statistical methods, standards and procedures, and on the content and timing of statistical releases'. I, too, would have considered it as such a procedural matter because the substance of the report was not at issue.

The Greek judiciary has taken a different view: Greek laws were in place and Greek laws were broken, thus, a serious 'breach of duty' had occurred. The courts handed Georgiou a suspended 2-year sentence. Georgiou's appeal is pending (correction: sentence was confirmed by Supreme Court in June 2018).

Colignatus provides convincing evidence that (a) the law under which ELSTAT had been founded earlier in 2010 clearly stated that board approval was required prior to any outside reporting of statistics and that (b) the Statistics Code of Practice in force at the time (and since 2005) did not assign sole authority to national directors of statistical agencies. Colignatus provides rather convincing circumstantial evidence that Georgiou and his counterparts at Eurostat were well aware of this and colluded in the attempt to circumvent such board approval. Viewed from that standpoint, it was a clear 'breach of duty‘.

Colignatus argues that the above 'breach of duty', for which Georgiou is solely responsible, was at the heart of the issue because it then triggered all the other follow-up complaints and law suits. Colignatus further argues that both Eurostat and Georgiou are well aware that a violation of the law ('breach of duty') has occurred which is why they emphasize in their defense that Georgiou has never falsified statistics. This primarily in order to deflect attention from the main issue, the 'breach of duty'.

I have had lengthy exchanges with Colignatus about his position. My initial reaction was that it is rather irrelevant whether or not Georgiou by-passed his board when reporting statistics to Eurostat. The critical issue was (or should have been) whether or not his statistics were correct. Eurostat, as the final authority on statistics in the EU, confirmed (and complimented!) the quality of Georgiou's statistics and that was really all that mattered.

Having pondered the issue at length, I have become somewhat sympathetic to Colignatus' arguments. In a State of Law, laws do matter and if laws are violated, there ought to be punishment. It seems clear that Georgiou violated laws when by-passing his board of directors. Under normal circumstances, his colleagues on the board and at the agency might have considered that as a minor procedural mistake which could easily have been cured by providing post-approval. That, of course, assumes 'normal circumstances'. Circumstances in Greece were not normal at the time; neither at ELSTAT.

Perhaps Georgiou accepted the job at ELSTAT with a bit of naivité. Perhaps he thought he would be welcome there and that he would receive support from his colleagues in their joint effort to provide Eurostat with top-quality statistics. Well, that would have required a very substantial amount of naivité!

A seasoned manager would have known that he was about to enter a wasps' nest where undermining and mobbing would be ever present, and he would have prepared for that. He would have known that he could not afford the slightest misstep because he would immediately be crucified for it. And he would have been extremely cautious about colluding with Eurostat behind the backs of his colleagues at ELSTAT, knowing that his enemies would only wait for such a 'breach of duty' to happen. Apparently, Georgiou was not such a seasoned manager.

P. S.
Colignatus has published a book "Forum Theory and A National Assembly of Science and Learning". The chapter on Greece begins on page 155.

Wednesday, January 1, 2020

2010's: Greece's Toxic Decade

I have been writing in this blog since mid-2011. During this time, I have intensively observed the Greek crisis. When observing such a development step-by-step, when a crisis develops in incremental steps, one can lose sight of the overall development because one gets used to the incremental steps.

On the Website Macropolis, Yiannis Mouzakis summarizes all the incremental steps in one single article: "Learning the lessons of Greece's toxic decade". As the founder of MacroPolis, Nick Malkoutzis, commented on Twitter: "Less of a leisurely trip down memory lane, more of a hair-raising ride on the ghost train".

This is a brilliant article about an absolutely incredible decade of Greece. When reading this article, one wonders how it was possible that Greece returned to a more or less normal condition. If it hadn't been so painful for many people, if it hadn't affected the lives of so many people in a negative way, one might be tempted to conclude that 'It was a helluva ride!"

One might also be tempted to conclude that any society/nation which has gone through such painful upheavals would have learned lessons from that experience and come out of it stronger and more prudent for that reason. Mouzakis cautions about that in his closing paragraph:

"During every single significant event that defined this decade, from the economic collapse to major diplomatic and social issues, Greece’s leaders preferred to release poison into society to help their short-term political goals. It appears that Greeks have yet to flush these toxins out of their system. It is one of the main reasons that we should approach the new decade, which carries more promise for Greece than the last 10 years, with caution."