Who the Heck Voted for Jean-Claude Juncker?

Much drama is currently being made around the person of Jean-Claude Juncker. Rolf-Dieter Krause, one of Germany's most prominent TV journalists, accused Chancellor Merkel in a TV commentary of "implementing a fraud. Not a fraud in criminal terms but, instead, in political terms. A fraud against the voters". Merkel, like all her colleagues of conservative parties in the EU, had endorsed Juncker as the European People's Party's (EPP) top candidate in last Sunday's EU elections. Now that the EPP has come out first in the EU elections, Juncker claims the job of President of the EU Commission and Merkel seems to back-track on him.

I agree that this is extremely poor optics. One shouldn't back-track from a candidate whom one has endorsed only a few weeks earlier. But which voters are being defrauded? Who the heck voted for Juncker?

I myself voted in Austria. I did not see the EPP nor the name Juncker on the ballot. So I checked the list of parties and candidates which ran for election in Luxemburg, Juncker's home country. Juncker's party (CSV) was on the list but not Jean-Claude himself. On whose list was he?

Juncker had made it clear from the start that even though he was the top candidate of the EPP, he had no intention of working in the EU parliament. Instead, he was only running for President of the EU Commission. But that position was not up for election last Sunday!

My understanding is that the President of the EU Commission is elected by a 'qualified majority' of the European Council (heads of state), 'taking into account the latest European elections'. This President-elect must then be approved by an absolute majority of the EU parliament. Since Juncker had no intention of working in the EU parliament and since his name was not on any list, it seems to me that it was Juncker who defrauded the voters when he asked them for their vote in an election to the European parliament where he had no intention of working. The more straight-forward tactic for Juncker would have been to try to become the candidate of the 'qualified majority' of the European Council! If the European Council doesn't want him as their candidate and if he doesn't want to work in the EU parliament, it will be the price he will have to pay for having put himself between two chairs.

I, for one, will not be sad if Juncker exits the European scene. Researchers could put together for each EU leader chronologies of all statements they have made publicly in the last 5 years, and each of them would show many contradictions. However, there is no doubt in my mind that Juncker clearly was the greatest chatterbox of them all; speaking when he should have remained silent and remaining silent when he should have been speaking; making incompetent statements; not only contradicting fellow EU leaders but just as often contradicting himself; making a virtue out of the fact that politicians have to lie from time to time; etc.

It was a little over one year into the crisis when I wrote, on July 5, 2011, Jean-Claude Juncker a letter stating that "it is beyond my abilities to explain to you in a convincing manner how much damage you have done in the last 2-3 years to the stability of the Euro financial system with your ill-informed and often self-contradictory public statements".

Jean-Claude Juncker is a charming man and a smooth operator with quite a bit of ironic wit. He has charisma and likes to kiss his female colleagues on their cheeks. So I guess he does well on the soft facts. Based on the last 5 years, I can see no hard facts which would qualify Juncker as an effective and competent President of the EU Commission.

OMT --- Much Ado About Nothing?

This piece of news is making the rounds in the German media: German FM Schäuble allegedly stated, back in April, at a university discussion group, that the OMT could never become operational.

Background: the 'whatever-it-takes' of ECB President Draghi is generally being credited with having saved the Eurozone. The ECB subsequently worked out the OMT as the structural basis for implementing the purchase of sovereign bonds. One of the conditions precedent, established by the ECB itself, is that a country must have agreed with the ESM on a restructuring program with covenants for fiscal and economic policies. The key phrase of FM Schäuble is: "Decisions by the ESM must be unanimous and we would, 'of course', not approve of any such program". Well, if decisions by the ESM must be unanimous (which they have to be) and if Germany would not agree (which Schäuble says Germany won't), then there is no point in having an OMT.

On paper, this means that the OMT is dead. More than that --- it never lived.

The practice might turn out differently. FM Schäuble is not 'Germany'. There is also a German Chancellor and a German parliament. If push were to come to shove, and if Germany were the only country in opposition, Schäuble might find out that he alone cannot take such decisions. He might, once again, find out that he works for a Chancellor who has frequently in the past, when pushed against a wall, supported something which she had strongly objected to before, always on the grounds that 'there is no alternative'.

One Helluva Way To Increase Bank Equity!

The Annual Report shows that 2013 was an outstanding year for Piraeus Bank: it reported a net income of 2,5 BEUR which it retained to strengthen equity. Together with capital increases from the outside (HFSF, etc.), Piraeus could increase its equity by 10.9 BEUR as shown by the below table: (in MEUR)
 

Equity 01 Jan 13			-2,324
	Net income 2013	2.546
	Capital increases	8.321	+10.867
			--------
Equity 31 Dec 13			+8.543

Relative to the equity at the beginning of the year, which was negative, the 2013 net income represented an infinitely high ROE. Relative to the increased equity at the end of the year, it was still an outstanding ROE of 30%! Equity at year-end represented 9% of total assets, which is not outstanding but still a lot better than at many other large banks.

How could Piraeus be so profitable in 2013? Because it recorded a one-time revenue of 3,8 BEUR. Without this one-time revenue, Piraeus would not have reported a net income for 2013 of 2,5 BEUR but a net loss of 1,3 BEUR, instead.

The one-time revenue of 3,8 BEUR stemmed from the acquisition of other banks which Piraeus could acquire by paying 3,8 BEUR less than those banks were worth according to their books (the technical term is 'negative goodwill').

(in MEUR)

Greek operations of Cypriot banks			+3.414
(Bank of Cyprus; Cyprus Popular Bank; Hellenic Bank)
Geniki Bank SA			+4
ATEbank SA			+84
Millennium Bank SA			+308
			---------
Total negative goodwill			+3,810

What stands out is the 3,4 BEUR one-time gain on the acquisition of the Greek operations of Cypriot banks. This means that Piraeus could buy assets (loans, etc.) for 3,4 BEUR less than what the books showed they were worth. Two scenarios unfold:

Scenario 1: those assets were indeed worth what the books showed and Piraeus could strike a bargain by paying 3,4 BEUR less for them. In that scenario, the 3,4 BEUR would have been a real revenue and it would have represented real increased equity for Piraeus. One wonders, however, why the sellers would simply give 3,4 BEUR of value away. The representative of the sellers could be sued by other creditors for damaging their interests.

Scenario 2: Piraeus paid a fair value for those assets because they were never worth what the books showed. In that scenario, to show the 3,4 BEUR as revenue (and equity) means showing something as revenue (and equity) which does not exist. The proper action would have been to make a loan loss provision of 3,4 BEUR to offset the ficticious one-time gain.

Time will tell. If Piraeus doesn't have to write-off any of the assets it bought, it struck an extraordinary bargain by acquiring those assets. If, however, those assets were really not worth more than what Piraeus paid for them, then the 3,4 BEUR of revenue and equity is nothing other than hot air which will evaporate as loans are written-off in the future.

The total of 3,8 BEUR which Piraeus recorded as revenue from negative goodwill is now part of Piraeus' total equity of 8,5 BEUR. In other words, 45% of the total which Piraeus reports as equity could possibly be nothing other than hot air. If one were to adjust the equity by that 'hot air', the equity/assets ratio would decline from an acceptable 9% to an unsatisfactory 5%, as shown below.

	Annual		Adjusted
	Report
Equity	8.543		4.733
% of Assets	9%		5%

The financial statements of Piraeus Bank are prepared according to IFRS and audited by PwC. Thus, one can assume that all accounting principles and rules have been observed in the preparation of these statements. It seems that it is possible to do both --- to fully comply with accounting rules on one hand and to create 3,8 BEUR ficticious equity out of nothing on the other.

The more conservative (if not more responsible) way would have been to book assets at the value which one paid for them, and to recognize any gains if and when they occur. That way, of course, Piraeus would have posted a loss for 2013 instead of a profit and it would report only a little more than half of the equity which it actually showed.

One helluva way to increase a bank's equity!

The Piraeus-Marfin Deal --- Follow-up (2)

The reader Dean Plassaras took violent opposition to the content of my previous article which was also published in the blog of Prof. Yanis Varoufakis. In a nutshell, Plassaras claimed that my conspirational mind was getting ridiculous. Below is my response to Plassaras.

"You make a powerful case, Dean. I can literally see Mssrs. Sallas and Vgenopoulos calling in their best PR-people prior to the accouncement of the deal and telling them the following:

'The deal which we are going to announce could trigger a lot of flak and your job is to take the wind out of any potential sails. Put together a story and place it with all the right people. Have your story focus on our role as responsible industrialists/bankers who follow the government’s call to make the Greek economy more efficient. Make sure to refer to the recent plea by the governor of Greece’s Central Bank for company mergers and the formation of healthy businesses that would help the economy along the recovery route and banks deal with mounting bad debt. Portray Piraeus as either a stakeholder or the main creditor of dozens of enterprises in various economic sectors that have run into problems due to the financial crisis. Portray Piraeus as the Atlas who has assumed the responsibility of carrying the suffering Greek economy on its shoulders. Portray both of us (Sallas/ Vgenopoulos) as responsible leaders who will do everything that we possibly can to improve the Greek economy'.

Dean, have you noticed that the 3 sources which you refer to (http://www.balkaneu.com/piraeus-mig-strategic-partnership-bring-host-business-sectors/; http://www.macropolis.gr/?i=portal.en.economy.1194; http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_19/05/2014_539859) all use more or less the same language? Seems to me that they are quoting from someone else’s paper instead of applying their own research.

If I had doubts before, the Reuters article which Yanis linked confirmed those doubts about the virtuousness and integrity of Mssrs. Sallas/Vgenopoulos. Considering the bank equity tricks they applied back in 2011, they might be called crooks in many other countries (a former top Austrian banker just went to jail for having applied similar bank equity tricks). Piraeus has sued Reuters for defamation over the story, claiming 50 MEUR in damages. That will be an interesting law suit to watch!

I am all in favor of marshalling the best industrial and financial talents of Greece to turn the Greek economy around. Sallas/Vgenopoulos do not come close to fitting that mold, in my opinion.

I have yet to see a reaction to the deal from those investors who recently purchased a 500 MEUR Piraeus bond. Were they informed beforehand what their money was going to be used for? If they had been told that half the money would go to purchase convertibles of a publicly traded company, would they not have said 'if we wanted to do that, we wouldn’t need you; we could buy those bonds directly'?

'ANEK, the Henry Dunant Hospital and other companies could join up with their MIG counterparts, thereby creating stronger and more competitive corporations' — and exactly why would that be so? Simply because MIG is the new owner? Both parts are losing money; they don’t automatically get better by putting them together.

If part of the 250 MEUR convertible is used to finance the acquisition of ANEK, the Henry Dunant Hospital and other companies, money moves from the buyer to the sellers. Money which is then no longer available to finance that which those companies might need to get into better shape. My guess is that the 250 MEUR will be used (other than to finance losses) for group-building and not for strengthening the real economy. The real economy doesn’t automatically get stronger simply because some groups get larger.

The MIG Group is not large at all. Sales range in the 1,2 BEUR area. And yet, they are spread over a myriad of companies in a myriad of industries: 'food and dairy, coastal shipping, healthcare, IT … to name but a few'. I just don’t see how a group the size of MIG could financially support the management competencies required to manage such a diversified group. They will probably have to hire management consultants at every step of the way.

I take it from the PwC report that the Greek economy is full of zombies. One doesn’t solve the problem of zombies by putting them together. If they are zombies for financial reasons, they need to be put through something like the American Chapter 11 (companies coming out of Chapter 11 are clean as a whistle). If they are zombies for commercial reasons, synergies need to be found through increasing the economies of scale. They should be merged with one another under a new professional management. Simply integrating them into a group, particularly if that is a financially weak group, doesn’t do a thing. All it does is make the group larger and, therefore, more ‘too big to fail’ in the future. At the end of the day, the damage is paid for with other people’s money.

MIG, the holding company, has – like any other holding company – no revenues and/or cash flow on its own. In order to pay for its expenses (in 2013: 15 MEUR for operations; 25 MEUR for interest), it depends entirely on cash-flow upstreamed from its subsidiaries such as dividends. Without such upstreamed cash-flow, a holding company is dead in the water. Since almost all subsidiaries are losing money, there was no upstreamed cash-flow in 2013. Without the 250 MEUR convertible, MIG would be dead in the water. If you ever want to see a financial zombie, that’s one of them".

The Piraeus-Marfin Deal --- Follow-up (1)

Below are two interesting comments which I received on my recent article about Bank Piraeus' deal to purchase 250 MEUR convertible bonds of the MIG Group.

Prof. Yanis Varoufakis in his blog 

"This deal makes no sense except in the context of the tangled web of accumulateddebt binding Pireus and MIG. To be more precise, of MIG’s  €1.37 billion debt something between €700 to €780 million are owed to… Pireus. Of those debts some are due to past Pireus loans to companies in MIG’s portfolio and others due to the complex deal by which the branches of the Cypriot banks were ‘transferred’ to Pireus ownership.

In this context, from quasi-insolvent MIG’s perspective, the deal represents a badly needed capital infusion (as opposed to a refinancing deal). And from the perspective of Pireus, it reduces its… exposure to loans extended to MIG.

When last year the Cypriot banks folded, Pireus rushed in to buy MIG’s Marfin-Laiki Bank and the Greek branches of the Bank of Cyprus. It paid next to nothing for these. In the process, together with the Cypriot banks’ Greek branches, Pireus acquired, at a 50% discount, loans worth (at least on paper) €325 million, netting a paper gain for Pireus of around €160 million.

You should not be be surprised that last year’s purchase of the folded cypriot banks was underpinned by a promise such as: 'You hand over to me now the Cypriot bank branches, including the discounted loan portfolio, and I shall repay you next year with a capital infusion which reduces your exposure to me and my exposure to you.'

If, lastly, you place this new deal in the context of the sordid past relationship between the ‘brains’ behind these two organisations, the picture becomes astonishingly clear. And the Greek government’s (as well as the troika’s) connivance in it astoundingly repulsive.

A Bank of Greece insider (known to me for some time) 

"Although I have always been taking Varoufakis’ views with a pinch of salt, especially when it comes to the issue of the Eurozone Greek membership, I shall agree with the point made herewith.

The problem, however, lies with the Head of the Bank of Greece who is held responsible for a number of such shady dealings. The funny thing is that even though the market has long ago been accusing him in cases like the enforced purchase of Greek bonds by private entities shortly before the haircut and his relations with the head of Piraeus Bank, nobody talks about these issues now!

By contrast he has embarked in an extensive public relations campaign, asking – almost begging – the Prime Minister to renew his term in the Bank of Greece for six more years!

It was encouraging that you have pointed the matter out to me. But it seems it is just you so far!

Let’s hope that more will follow. However, a follow up in your blog on the issue would contribute to the direction of replacing this person in the next few days, as his term expires mid-June".

The Marfin Group - A Great Place to Invest 250 MEUR?

My recent article about Pireaus Bank and the Marfin Group has lead me to take a look at the financial statements of the MIG Group. Warning: the below analysis is meant for readers who have never seen a balance sheet before. All others may excuse me for being so simple.

Like an individual person, a company has assets (things which it owns) as well as liabilities (monies which it owes). If assets exceed liabilities, there remains a net worth; also called equity.

MIG Holdings S.A. reported total assets of 1.523 MEUR at 31.12.2013. That is one-thousand-fivehundredandtwentythree-million-Euro; put differently - quite a lot! What were those assets? Brick and mortar? Machinery and equipment? Inventory? None of the above! The bulk of these assets (1,329 BEUR) consisted of paper; that is shares of other companies.

Against those assets, MIG reported total liabilities of 556 MEUR, most of which were borrowings. Sounds like a lot of liabilities but isn't a lot when compared to the total assets which exceed total liabilities by 957 MEUR; that was MIGs net worth or equity. Ninehundredfirtyseven-million-Euro is quite a bit of net worth. One would think.

MIG Holdings S.A.
(parent/holding company)
	- in MEUR -
		31.12.2013
Investment in companies		1.329
Other assets		194
		-------
	Total assets	1.523
Borrowings		497
Other Liabilities		59
		-------
	Total liabilities	556
	Net worth (equity)	957

The only thing is: if the paper assets were worth less than reported on the books, the net worth would be worth less, too. For example: if the paper assets were worth 957 MEUR less than reported on the books, MIG would have zero net worth. Thus, it all depends what those paper assets (i. e. the shares in companies) are worth. If they could be sold for 1.523 MEUR, the owners would indeed have a net worth of 957 MEUR.

Lesson 1: the balance sheet of the holding company of a group per se is meaningless because the holding company is no stronger/weaker than the sum of the companies which it holds. Anyone who lends to a holding company is lending against paper assets whose value is untested.

To assess the strength of the MIG Group, one has to add up all assets and all liabilities of all group companies. This is accomplished via the preparation of a consolidated balance sheet.

MIG Group Consolidated
- in MEUR -
		31.12.2013
Goodwill		318
Intangible assets		522
Investments in associates		65
Trading portfolio		8		913
Tangible assets		2.311
		-------
	Total assets	3.284
Borrowings		1.857
Other Liabilities		711
		-------
	Total liabilities	2.568
	Net worth	716

Much to our surprise, we now see that the consolidated net worth (716 MEUR) is less than the net worth of the holding company (957 MEUR). Put differently, the sum of the parts is worth less than the overall sum reported.

But then there is another, much more critical, aspect: goodwill, intangibles, investment and trading portfolio (i. e. paper assets) amount to 913 MEUR. What are these assets worth?

Well, goodwill is exactly what the words say: good will. At some point in the past, MIG acquired companies and paid 318 MEUR more than the books said the companies were worth. They now show that 'goodwill' as an asset on the grounds that they represent future earnings. Once a year, companies are required to show that such goodwill is not impaired but that is relatively easy to accomplish: just put together financial plans which show that the company will earn a lot of money in the future. The more realistic way is to treat goodwill as worth zero; i. e. deduct it from the net worth.

Intangible assets can be all sorts of things. The original Coca-Cola recipe is an intangible asset and no one doubts that it is worth a lot. Patents can be intangbile assets; so can brand names be. The essence of an intangible asset is that it is not tangible; one cannot touch it like one can touch property/plant/equipment, inventory, etc. When push comes to shove, one often finds out that intangible assets are worth very little.

Lesson 2: liabilities are always worth at least as much as the books show; assets rarely are.

The MIG Group had consolidated liabilities of 2.568 MEUR; that's for sure. Against that, it reported tangible assets of 2.311 MEUR. Put differently, there is a positve consolidated net worth only if one attaches value to intangibles. Without a sufficient value of those intangibles, the group would be overdebted.

What is certain is that the group had consolidated borrowings of 1.857 MEUR, of which 1.375 MEUR had short-term maturities: technically, repayment could be mandated within one year. Consolidated current assets, i. e. assets which could be liquidated within one year, were 637 MEUR. Ask a kid from grammar school what happens if you have 1.375 MEUR bills to pay within one year but only 637 MEUR of assets which you can convert to cash during that time!

Lesson 3: if you don't have a strong net worth, you better make sure that you always have strong cash flows from operations and high profitability. Otherwise, you could be blown out of the water in no time!

As I have shown above, the MIG Group has more liabilities than tangible assets. Thus, there is less than zero cushion to buffer a crisis. How is the profitability of the operating companies?

MIGs operating companies are segregated into 8 industry groups (Vivartia, Attica, Hygeia, Singularlogic, Flight Ambulance, Sunce Bluesun, Robne Kuce and Real Estate). For 2013, these industry groups posted the below results:

Vivartia: net loss of 99 MEUR
Attica: net loss of 10 MEUR
Hygeia: net loss of 38 MEUR
Singularlogic: net loss of 7 MEUR
Flight Ambulance: net profit of 3 MEUR
Sunce Bluesun: net profit of 2 MEUR
Robne Kuce: net loss of 20 MEUR
Real Estate: break-even.

Well, can't get much worse than that!

In simple words: the MIG Group has a negative tangible net worth; its operating companies are incurring substantial net losses; its borrowings are 56% higher than the sales of one full year; and only 637 MEUR short-term assets back up 1.375 MEUR short-term borrowings. In short, the lenders are financing losses. The lenders will probably continue to extend financing because they have no way of getting their money back in the shorter term. Let the lenders become nervous and the entire MIG Group will be blown out of the water in no time.

Considerations for lenders
Only a foolish lender will make unsecured loans to the holding company because the holding company has no tangible assets and no cash flow on its own. Even if lenders to the holding company have the holding company's shares in subsidiaries pledged to themselves, in case of trouble they can write off their loans entirely: much of the group's debt is in the operating companies and lenders to the operating companies are always in a senior position to lenders to the holding company.

Lenders to the operating companies can put their hands on all the tangible assets in the operating companies and they will still not be fully covered. All they can hope for is that the operating companies will soon return to profitability.

PS for Piraeus Bank: to buy 250 MEUR convertible bonds of the holding company is like throwing money away (unless the proceeds were used to repay loans owed to Piraeus Bank). It is nothing other than speculating that a group which is currently incurring horrendous losses will eventually return to outstanding profitability. Good luck!

Piraeus Bank, Marfin Group --- And the Real Greek Economy

I may be a bit prejudicial in this comment and, if so, I apologize. However, when the Cypriot Laiki Bank collapsed, I did a bit of reasearch into its background and I ended up with Andreas Vgenopoulos and the Marfin Group. For all I know, Mr. Vgenopoulos may be the most virtuous entrepreneur in the whole world and his Marfin Group may be solid as a rock. Nevertheless, based on the brief research I made at the time and adding to it my banker's common sense, I am inclined to think that this entrepreneur and his enterprises have a bit of a 'smell' to them. I would define that smell as 'using other people's money (OPM) not primarily for sound economic value creation but, instead, for one's own financial benefit'.

I now read in the NYT that Vgenopoulos and his group are using OPM provided by Piraeus Bank which, in turn, has just taken up a lot of OPM on its own. Frankly, that has an extreme smell to it! I would think that in times like the present ones in Greece, banks which are able to raise OPM would use that OPM for the benefit of the real economy; i. e. for making loans to the productive sector in the Greek economy.

Why do I suggest that the Marfin Group is not part of the productive sector of the Greek economy? Well, I am not really suggesting that. I am sure that parts of the group are indeed active in the real economy of Greece. But my point is the following: it is one thing for a bank to finance a specific project of a specific company. To provide general purpose financing to the holding company of a group (which the buying of convertible bonds is) is quite another thing. It depends on the group.

If the group were Warren Buffett's Berkshire Hathaway, I would have no doubt that Buffett would put that OPM to sound economic use. If it is the Marfin Group and an owner who has demonstrated with Laiki Bank what kind of fast ones one can pull off with OPM, I would suggest not to touch it with a ten foot pole.

When I read that "the deal is the latest in a long line of transactions between Mr. Sallas, CEO of Piraeus Bank, and Mr. Vgenopoulos", the smell gets even worse. If Mr. Sallas owned Piraeus Bank and financed it to 100% with his own equity, he could make deals with anyone he wanted to. As long as he is using OPM, he should not do with OPM what those other people would perhaps not wish to do on their own.