Disappointing news from Mr. Tsipras

I have previously said good things about Alexis Tsipras, focusing on his talent as a political leader who can motivate masses and convey hope to suffering people. I have always questioned his judgement as regards solutions to Greece's economic problems. His article in The Guardian confirms my suspicion that he is on the wrong track as regards solutions to Greece's economic problems.

Yes, the article reads well. Yes, if I were among the suffering people of Europe, I would go for it. And yes, if I went for it, I would later regret it!

Mr. Tsipras does not seem to understand that growth is not necessarily growth and austerity is not necessarily austerity. Good growth, the kind of growth Greece needs, must be sustainable growth. The kind of growth which creates sustainable jobs, which creates value, which creates returns which, in turn, can be reinvested. Bad growth is like the blaze which occurs when you throw gasoline into a dying fire - the blaze evaporates when the gasoline has burnt out.

Greece has had very high growth rates until the crisis erupted but it was growth caused by gasoline being thrown into a fire, a lot of gasoline! From 2001-2010, approximately 300 BEUR of new foreign debt (net) was thrown into the Greek economy plus billions and billions of EU grants. If you throw that kind of money into the middle of the desert, growth will occur even there. If austerity causes that kind of growth to disappear, it causes pain in the short term but can create value in the longer term (if it is intelligent austerity).

A tsunami of cheap money was made available by lenders in the last decade or two and, I hasten to add, lenders made poor lending decisions. A tsunami of cheap money was borrowed in the last decade or two and, I hasten to add, it was misspent by borrowers. Greece or the Southern Periphery were not alone in this. Look at Iceland, or even at California, for that matter. This is not the time for a morality play. Instead, it is a time for recognizing causes/effects and for making good decisions for the future based on that recognition.

Yes, the situation in Greece has been aggravated by the way austerity policies were imposed and/or implemented. Yes, austerity policies have led to cuts in benefits and caused a critical deterioration of the welfare state. From the distance, I cannot tell to what extent that kind of austerity was "imposed" on Greece or whether it was the choice of Greece to overburden one part of society while leaving another part of society nearly unscathed.

But it is wrong to say outright that austerity measures are preventing the Greek economy from returning to growth. Yes, they prevent the Greek economy from returning to the type of unsustainable growth which Greece has had (overspending borrowed money on consumption, above all on imported consumption). But they should not prevent the Greek economy from intitiating reforms which will lead to sustained growth.

Yes, an economic plan should prioritise the needs of workers, pensioners and the unemployed, not only in Greece but in any economy of the civilized world. If Mr. Tsipras thinks that only popular struggles will achieve that goal, he is taking Greeks back to the mindset of more than a century ago.

Mr. Tsipras does not have to remind European tax payers that the bulk of the so-called "help for Greece" has so far been, in reality, help for Greece's creditors and for exporters to Greece. European tax payers have understood that by now and they are equally angry about it as Mr. Tsipras is.

Mr. Tsipras does not need to remind European tax payers that they may be losing their money; they know that by now. But they also know that they are losing their money not because of austerity in Greece but, instead, because the Greek economy does not generate sufficient value to support the country's debt and the kind of living standard which Greece has had since the Euro.

Mr. Tsipras continues to fall irresponsibly short of pointing out how the Greek economy could return to generating value instead of spending borrowed money on imports and consumption. He seems to prefer giving a hungry man a fish to cure his hunger instead of teaching him how to fish. A more convincing case would be for Mr. Tsipras to use his talents at motivation to motivate Greeks to substitute imports with new domestic production wherever possible (a "buy-Greek" move), to become obsessed with expanding exports, to seek and welcome foreign investment and to extend support to the EU Task Force to help Greece to get its public administration on modern footings.

Yes, to keep alive democracy, equality, freedom and solidarity as the most important values of the European political tradition is the correct objective. To brainwash people into believing that there is such a thing as a free lunch is the best way to destroy them.

A Growth Model for Greece - Aquaculture

"Greece 10 years ahead" (GTYA) is the title of a study published by the Athens Office of McKinsey in mid-2011. It outlines a National Growth Model which, the study predicts, would create over 500.000 new jobs and add roughly 50 BEUR to Greece's GDP within a decade. The study consists of 72 pages. I have already explained in a previous post that I will make short posts about each major point of the study for those who prefer not to read 72 pages.

The study focuses on growth opportunities in 5 major 'production sectors' which are already of prime importance to the Greek economy and on 8 'rising stars', i. e. new sectors where present activity is still small but where significant potential can be expected. In this post, I will focus on the 'rising star' of aquaculture (page 63 in the GTYA-report).

Rising Star ---Aquaculture
Greece currently produces about half of the global output of sea bass and sea bream, and these two products make up 90% of Greece's aquaculture production. As in several other areas, Greece is exporting (export quota 80%) primarily in bulk so that the gravy margin is elsewhere. Furthermore, Greece's still dominant market position is rapidly becoming threatened by a very aggressive Turkey. So, standing still is not really an option for Greece. The risk is to lose market position to Turkey. The opportunity is to really expand on the current market position. Major priorities are:

* in addition to fortifying/expanding leadership position in core markets (Italy, Spain, France, UK, Germany), expand with existing products in Holland, Poland, Russia and Ukraine.
* promote existing product portfolio to new offshore markets in combination with other Greek exports (US, Japan, China).
* accelerate introduction of new species leveraging on the existing product development effort.
* further penetrate offshore markets (mainly in Asia) through high value-adding products and fast growing species.

For details, please refer to the GTYA-report.


Previous posts in this series: P1, P2, P3, P4, P5.

Here "productivity - there "life"

I was still in my teens when I first saw the movie Alexis Zorbas. That was in the mid-1960s, the post-war generation in Austria. We hadn't learned that life was about fun. Instead, we had learned that life was about serious things and about doing everything right, and - God forbid - never to commit the same mistakes again. Best of all, never to make mistakes!

Here I was watching a movie where the Englishman was proper as we had learned to be while the Greek was, in our value structure, quite a bit improper. And, strangely enough, I liked the Greek better than the Englishman. In the end, the improper Greek even acted carelessly if not recklessly, not only destroying the zip line but also endangering people's lives. In my value structure, that Greek should have been ashamed of himself. In fact, the police should have carried him away. Instead, the Greek burst out full of life, focused on the roasted lamb and nearly reached ecstasy when the Englishman asked him to teach him how to dance. By that time, it was clear to me that the Greek had the better value structure!

It seems to me that we are witnessing today a battle of value structures among European nations. Some even suspect that there might be a conspiracy to mold a uniform value structure throughout Europe. As though the troubles in molding uniform light bulbs hadn't taught them a lesson.

This is not an issue of the Greek way of life against the way of life of the North. It is the issue of different value structures and different cultures throughout Europe, not just between two countries. Read Thomas Mann's book about the Buddenbrooks and you will see that, even within Germany, there are light years between the Hanseatic bourgeoisie and the rustic, fun and beer loving Bavarians.

Many see this in the context of productivity on one hand and living on the other. Alexis Papachelas once phrased this beautifully in a comment in the Ekathimerini: "Maybe at the end of the day the problem will be that the Germans have found the perfect model for productivity, and the Greeks have found the perfect model for living (albeit funded by others)".

Peter Economides, in an article for the Greek Reporter, sees the North as a world dominated by productivity, efficiency, balanced books and the Protestant ethic to which the essential Greek DNA is the necessary opposite. He gives a beautiful description of what he sees as the essential concept of Greece:

"The spirit with which Greeks live their lives. The stuff that defines the “Greekness” of Greece. About what makes this nation tick. What makes us get up in the morning. I think the world understands what this is. It’s called life. And the amazing love that Greeks have for life. It was present in ancient Greece. The love of humanity that gave rise to democracy. The love of beauty that gave rise to sculpture. The love of peace that gave rise to the Olympic Truce. The love of knowledge which gave rise to science. The love of discovery that gave rise to philosophy. The love of wisdom that shines from the Acropolis in Athens. Life. This is Greek knowhow. You can feel the joy of Greece as soon as you land. Despite the crisis. Life is the Greek knowhow. The sea against the rocks. The sound of goats. Sea urchin and lemon. Lipsi island. In a country called Forever. Forever feels like home".

Trouble often begins when one starts thinking in terms of "either/or": either productivity or living, but certainly not "as well as". It takes great skill to be very productive but it also takes great skill to live well. Perhaps Northeners focus so much on their skill to be productive because they lack the skill to live well. Perhaps Greeks focus so much on their skill to live well because they lack the skill to be productive. When Northeners look down on the Greek skill to live well, it feels derogatory. When Greeks mock the Northeners' skill to be productive, they make Northeners feel like they are too dumb to live well.

Coming from the above-described post-war Austrian culture and being married to a Greek of the Zorbas-mold, I can guarantee that it is futile for one side to try to convince the other in "either/or" terms. Instead, one has to see the beauty in diversity (instead of uniformity). One has to reach the level where "as well as" becomes a realistic option. I often told our sons that they had the great advantage of being the product of two different cultures. While that doesn't always make life easier, it certainly makes life richer. Always!

Buying reading glasses in Greece

I went to see the Carrefour at the Makedonia shopping center at the outskirts of Thessaloniki this week because I wanted to check out some prices. Instead, I ended up buying reading glasses.

The Carrefour was awful. Nothing more miserable than a huge supermarket without any shoppers in it. No surprise that the Gran Masoutis near our home is so much more successful. They have a much better concept!

As I walked away from the Carrefour, I saw large footprints painted on the floor advertising eyeglasses for 19 Euros. Being a user of reading glasses, that caught my attention. I followed the footprints and ended up in a store for eyeglasses.

At that point, I was impressed. Having once owned/run my own small business in the Chicago area, I learned a lot about retailing. The trick is to get the potential customer face-to-face. Once you have him face-to-face, you are half-way home for the first sale (if you don't believe that, you better concentrate on the Internet for selling your stuff). If you sell products, you have to get the customer face-to-face in your shop. If you sell services, you normally have to get the customer face-to-face in his office. Either way, you have to get him face-to-face.

So here I was in a store for eyeglasses being greeted by a very friendly young Greek lady and I was favorably disposed to the whole thing --- even though I had had no intention of buying eyeglasses. Not bad for a start!

The eyeglasses advertised for 19 Euros were already sold out but the young lady could show me alternatives. By the time we were through, I was looking at a proposal costing 225 Euros.

While the young lady was testing my eyesight, we were chatting about the state of affairs in Greece, which she said was very bad. I asked her whether there were unemployed among her friends. She said yes, many, above all her husband.

Her husband is a carpenter and he had lost his job. I asked why he couldn't get some orders working on his own. The young lady reminded me that there was a crisis, among others a construction crisis, too. So that was a dumb question on my part. I asked her how much unemployment insurance her husband received and she said 'none' because he has been unemployed for over 1-1/2 years.

I then asked her what they would do if she lost her job, too. She said that they would have to look for work in another country.

When the prototype for the eyeglasses was ready, I asked where the lense would come from. From Germany, the young lady said. A Zeiss. I asked why it didn't come from Greece. She explained that there was only one lense manufacturer in Greece and his products were not as good as those from Zeiss.

I then asked where the frame would come from. From France, the young lady said. The French make much better frames than the Greeks.

Since the store was quite busy, I commented that the owner must be quite happy about the way his business was going. Yes, the young lady said, but the owner was a company in Holland.

I asked her whether she could see my point that Greece as a country would be much better off if Greek manufacturers made lenses and frames and if the business were owned by Greeks. She said 'of course' she understood that. The only problem was that the Greek politicians did not understand that, she added.

At that point, I could no longer resist and I purchased the glasses which I had not intended to purchase and which I really didn't need. So much for good salesmanship!

As I walked on, I passed by another store for eyeglasses. There were no painted footprints leading to it. There didn't seem to be any customers in the store. I walked through the door to check it out. No one paid attention to the fact that a potential customer had walked through the door. So I walked back out of the store.

So, within a couple of hours I had observed the difference between good and bad salesmanship, I had seen evidence that Greece could do a lot less importing (and create new jobs through more domestic manufacturing) and I had talked to a young lady who understood all that. Quite an experience!

99-year bonds instead of a haircut!

I have argued many times before that a haircut of sovereign debt after only a few years of crisis is the wrong instrument for a PSI or OSI. There are better ways to essentially accomplish the same thing.

It is quite noteworthy that when talking about debt sustainability, everybody always talks about the level of debt. That may be correct in the case of corporations because corporations have to compile balance sheets and once the equity has been eroded due to losses, debt must be forgiven (or converted to equity) if automatic bankruptcy is to be avoided.

Sovereign states don't compile balance sheets and they recognize incomes/expenses on a cash basis (and not on an accrual basis).

Thus, the level of sovereign debt is relevant only to the extent that it causes cash interest to flow through the budget or if the debt were due for payment. Put differently (and as a theoretical example): if all of Greece's debt werde due some time next century and if all of it carried an interest rate of 0%, a near limitless amount of debt would be sustainable at least for the next 100 years or so.

If Greece cannot sustain the present level of debt (and all indicators would suggest that), then the answer is not to forgive it via an OSI. Instead, the answer would be to structure the OSI in the form of very long-term bonds with interest capitalization for at least 10 years. Typically, one would opt for a 99-year bond but one could also opt for an Evergreen Bond.

What is the difference? The difference is that the creditors maintain their full legal claim. That is probably not worth anything today but it may become worth something in the future. An example is in this FT article: Greek bonds whose maturities were restructured earlier this year until 2023 are now trading around 28% of nominal. Only 4 months ago, they were trading at 14% of nominal. Whoever bought at 14% and sold at 28%, doubled his investment in 4 months' time!

No one negotiating a 99-year bond today will be alive to witness its payment in 99 years. Thus, the value of that bond will never depend on the likelihood of it being paid but, instead, on the likelihood of getting paid some interest.

Since interest is capitalized for the first 10 years (in my example), the first interest payment will be in year 11. Thus, it is unlikely that the bond will trade at substantially more than 0% during the first ten years. This also means that investors could buy the bonds for not much more than a handshake.

Now, if investors pay out not much more than a handshake but receive a full interest payment, they have made a huge return. Thus, as year 11 approaches, investors will assess the likelihood of an interest payment in year 11. Assuming that Greece has not fallen into the Aegean by that time, the likelihood is that Greece will be able to pay at least some amount of interest in year 11. Investors will assess the amount of interest they expect to receive and then make a calculation how much they are prepared to pay for the bonds to achieve an acceptable return.

Remember the following formula: if you buy something at near-zero and you get some interest payment, your return is near-infinite!

Greece will be smart to always pay at least some interest on those 99-year bonds because it is to Greece's advantage to have a market in those bonds. And this could be a very interesting market for speculative investors! Beginning in the late 1980s, a secondary market developed for distressed Latin American debt and many investors earned extremely high returns on their investments.

Whether the ECB holds a Greek bond with a maturity of 2023 or 2123 is a moot point. In the case of a haircut, politicians have to explain to their voters why they, once again, had to forgive Greece debt. In the case of a 99-year bond, politicians can tell their voters that they have not forgiven Greece a cent of its debt.

Being able to tell voters that no cent of Greece's debt was forgiven is more than just a moot point these days!

Much ado about a list?

After weeks and months of Troika-negotiations having been nearly the only issue in public debate, we finally have again an issue which fires up emotions --- the "list"! How should it be dealt with?

Well, first a comment on how it should not have been dealt with so far: it should not have been dealt with the way it was dealt with! It seems like individuals passed a USB-stick around amongst themselves to document alibi actions while at the same time hoping that one recipient would have the courage to take the stick out of circulation. Mr. Venizelos apparently had that courage but immediately got scared by his own courage when the issue resurfaced in the public. It couldn't have played out much worse.

Now the emotions are in full swing and everybody wants to see names just like the Romans wanted to see blood when they watched gladiators fight. Would it not be only fair and just to publish the list immediately?

Well, I am not so sure. After all, it is not illegal to have money in a Swiss bank account. The source of that money may be illegal and not having paid taxes on it is illegal. But if the source was legal and if taxes have been paid, the individual concerned would be a perfectly honorable citizen and should under no circumstances be treated by the public like another Akis Tzochatsopoulos.

When the German state of North-Rhine-Westphalia initiated the practice of paying for stolen data several years ago, I wasn't so sure that this was a good idea. In a State of Law, the (illegal) means should never be justified by an end. Not too long before then, a German police officer had been convicted of a crime because he had tortured a suspected kidnapper to find out the location of the kidnapped boy (as it later turned out, the boy had already been dead by then). There was a public uproar against the conviction but the State of Law argued that the State of Law was of supreme value in the republic.

Obviously, the State of Law was no longer such supreme a value when it concerned data of tax cheaters on whose discovery the state could make a lot of money. Sadly, one would have to derive from that that when it concerns collecting money, violating the State of Law is not as critical as when it concerns saving life.

What does that mean for Greece? Well, as a matter of principle I would say that the State of Law should be as supreme a value in Greece as anywhere else. In case of doubt, that would mean not to use data which were illegally obtained.

On the other hand, one doesn't do any State of Law any service if one acts completely naively and one-sidedly. From what I understand, it is virtually a tradition in Greece to violate the State of Law from all sides (165.000 pending tax cases are just one case in point). If no one respects the State of Law, why should the state itself be the only one to do so, particularly when the state could right some wrong's in the process?

Thus, I take off my theoretical hat and replace it with a practical and pragmatic hat. Yes, Greece should use the information which was given to it. BUT: it should be used responsibly and discreetly. Absolute confidentiality must be maintained until such a point where legal action against an individual can be supported.

Incidentally, where Germany really made money on the tax data was not through indictments and penalties. Instead, it was through the self-indictments which occured in masses. The law says that if people self-indict themselves before there is an official inquiry into their situation, they only have to pay up unpaid taxes and nothing else. On the other hand, if they get caught, they not only have to pay up unpaid taxes but also a penalty; and they may have to go to jail. Since nobody knew who was on the list, very many people who could have been on the list got scared that they might be on the list and chose to self-indict themselves (and come clean with the tax authorities) instead of taking chances.

If Greece really wanted to get serious about going after black money, it could do a number of things which would not involve buying stolen data (and violating laws in Switzerland). 

Cross checks between deposit withdrawals and income tax statements 
Almost 100 BEUR were withdrawn from Greek banks since the beginning of the crisis. A very significant portion thereof was transferred abroad; the rest was withdrawn in cash. Data about all transactions are on hand within the Greek banking system (and, with regard to foreign transfers, within the Bank of Greece). Obviously, all such data are subject to banking secrecy.

There is probably no greater national economic emergency than when a country loses a deposit base equivalent to almost half its GDP.  National emergencies justify emergency laws. It should be simply a matter of a new law to allow cross-checks of data between deposit withdrawals and income statements to test plausibility. 

Cross checks between major asset purchases and income tax statements 
As with deposit withdrawals, major asset purchases (real estate, upper-bracket cars, etc.) could be cross-checked with income statements for plausibility. This might not even require a new law because if taxes have to be paid on major asset purchases, the Tax Office would already have all necessary documentation.

Inquiries into transactions with anonymous offshore companies
Typically, these would be transfers from anonymous offshore companies in the form of investments, grants or loans. Recipients should be required to reveal the beneficial owner of the offshore company.

These are just three examples. Brutal interference with privacy rights unheard of elsewhere in the EU? Not really. Several years ago, Germany implemented the so-called "account screening". It not only allows a tax official to screen personal bank accounts but the account holder doesn't even know that his account has been screened. To cross-check major asset purchases with income statements is a standard in Germany. And, finally, the EU Money Laundering Guideline does not allow banks to open/hold corporate accounts without knowing the beneficial owner behind the corporation (or foundation).

Greece's high consumer prices

This article from the Ekathimerini very well summarizes the impression I have as a frequent visitor to Greece: consumer prices are not at all where one would expect them after several years of economic crisis, namely low. Instead, consumer prices are quite high relative to other Eurozone countries. I can compare them to Munich (where I lived until 2010) and to Austria (where I live now when I don't live in Greece).

First of all a disclaimer: when we shop at laikís, I wish there would be laikís with the same products and prices in Austria. A laikí is certainly a good place to shop but one cannot live on laikís alone.

Other than laikís, I form my opinion the following way: accompanying my wife to supermarkets (her favorite place is the Gran Masoutis); looking through shop windows in downtown Thessaloniki; frequenting tavernas, cafés and other places for food & drinks; visiting the Cosmos Mediterranean Mall, IKEA, Praktiker etc. from time to time; etc.

For the life of me, I do not understand why McDonald's should be more expensive in Greece than in Austria. My understanding is that McDonald's sources all of its products locally, i. e. everything they sell in Austria comes from Austria and the same for Greece. Given the recession in Greece, I have to assume that McDonald's cost structure in Greece is quite a bit lower than in Austria. If their prices are higher and the sales volume keeps up, they are making out quite well. Normally, their sales volume should go down because of the declining purchasing power of consumers and that should prompt them to lower prices. Well, it's obviously not working that way.

The Gran Masoutis is an excellent supermarket (there isn't anything like it near my home town in Austria) but the prices there are at least as high, if not higher, than in Austria. And here is the point: the number of shoppers (and cars in the parking lot) is not noticeably smaller than 3 years ago. It would be interesting to see their sales numbers.

Lidl strikes me a bit less expensive than the Gran Masoutis but just by walking through a Lidl store, one sees half the problem of the Greek economy: it seems that at least half the products are imported from Germany and those are products which could just as well be produced in Greece (and the jobs/income taxes are always where the production is).

As an Austrian, I have a bit of a "sweet tooth". From that standpoint, Greece is a dangerous place for me because there are so many great sweet stuffs on the market. But whether it is the ice cream shop or the regular pastry shop (not to even mention the fantastic Blé in downtown Thessaloniki!) - the prices are incredibly high!

Just like I use the McDonald's index for cross-border comparisons, I use the price of a glass of Ouzo for domestic comparisons. Luckily, there is a little taverna nearby where they charge 2,50 Euros for a glass of Ouzo but if I go to any of the places along the waterfront of Thessaloniki/Kalamaria/Nea Krini, I can pay up to 10 Euros for the very same glass. And those places are full of young people!

What would I expect to happen instead? Well, with the kind of economic depression which Greece finds itself in at present, I would expect to see consequences everywhere and not just selectively. In the places where we spend our time & money, I have to look carefully to see such consequences. Yes, there is quite a large number of closed shops and there are a lot of "for-rent and for-sale" signs on buildings but life around those is still quite bustling. Cafés are crowded all day long, shoppers are all over the place and traffic in Thessaloniki is as bad as ever before (despite much higher gas prices).

Still, it is a fact that disposable incomes have come down significantly and that would simply have to be reflected in purchasing power and demand. When a retail business sees demand going down, the first reaction should be to lower prices in order to keep market share. That may indeed happen selectively but it does not happen across the board.

In summary, the Ekathimerini article confirms what I have felt intuitively all the time. And it was just announced that, per August of this year, the annualized increase in consumer prices was 6,8%! This is a road to disaster, not only for Greece as a country but, particularly, for those Greeks whose disposable incomes have not increased by 6,8% in the last year. When in actual fact most Greeks have seen declines in their disposable income, it becomes even more mysterious how consumer prices can stay so high (and increase even further!).