A New Greek Company --- "Greek Private Sector SE"

If all Greek companies with annual sales over 10 MEUR were under one central top management (call it the "Greek Private Sector SE") and if that top management were the best private sector top management around, then that part of the Greek corporate economy which represents 85% of all revenues in Greece's corporate economy and 67% of all assets (in short: the bulk of the Greek corporate economy) would be in top shape within only a few years. The road map how to accomplish that is shown in PwC's study titled "Stars and Zombies". Needless to say: that best private sector top management around would have one of the best and most fun jobs in the entire world!

Stars and Zombies (English)
Stars and Zombies (Greek)

* at issue are 2.726 companies which had, in 2012, revenues of 141 BEUR, capital employed of 120 BEUR, debt of 61 BEUR and about 470.000 employees (overall: roughly 25% of GDP)
* PwC segregates the companies into "Stars and Almost Stars" (29% of the total), "Grey" (17% of the total) and "Almost Zombies and Zombies" (54% of the total).

It is the Zombie group (54% of all companies) which represents the challenge because it is large: 43% of total revenues; 55% of capital employed; 72% of net debt; 213.000 employees. There the fine line needs to be tread between those which have the potential to be developed into the Star group and the others which should be quickly but orderly liquidated.

One major reason why the Zombie group must be urgently resolved is because it (particularly the 650 'true Zombies') has a negative effect on the cash flows of all other companies: total debt of 61 BEUR is concentrated mostly in the Zombie group and 41 BEUR of that cannot be repaid normally. 97% of the socalled 'trapped debt' is in the Zombie group. Detailed suggestions as to how to restructure that debt are in the PwC study.

The PwC study concludes that the Greek corporate economy is led by 180 "Stars" and another 630 "Almost Stars". The "Stars", of course, are stars but particularly the "Almost Stars" are the backbone of economic activity in the country and represent 52% of EBITDA, 32% of revenues, 18% of fixed assets and 24% of the employees in the overall sample. Clearly, these roughly 800 companies drive the Greek corporate economy!

However, the real challange are those companies which are not in the above Star group but which are not clear zombies, either. There are 1.490 of them and they account for: 56% of revenues; 65 of fixed assets; 55% of employees and 71% of EBITDA. These companies show significant diversity in performance but suffer from excessive debt. Clearly, if this group is restructured with great care separating the wheat from the chaff, great economic value could be preserved and expanded. At the same time, great damage could be done if these companies are not handled with great care and prudence. Mistakes which are made here could not be corrected afterwards.

The remaining roughly 400 companies seem to be beyond repair and require orderly liquidation. PwC concludes the following:

The strategy for the recovery of the corporate economy should have three dimensions: funding and promoting the two leading groups, restructuring of debt and refinancing the third group and the fast liquidation of the last group.

Missing Greek Exports --- Really a Puzzle?

The timing of my latest piece on the dismal Greek export situation turns out to have been fortuitous: it almost coincided with the EU Commission's publication titled "The Puzzle of the Missing Greek Exports". The conclusion of that paper is identical to mine --- the Greek export situation is dismal!

In ancient times, that is before cross-border services like tourism or transportation had arrived, the formula for a country was quite simple: if you wanted to import products from abroad, you had to export an equivalent amount of products. If you had nothing to export, you would not be able to import anything. Tough luck for domestic consumers desiring perfumes or tea from Asia but --- a fact of life.

2013 was a banner year for Greece's Balance of Payments in as much as a current account surplus of 1,2 BEUR could be achieved. Even more importantly, the trade deficit could be reduced to 17 BEUR, still an enormous amount but sensationally lower than the 44 BEUR in 2008.

And yet --- one has to bear in mind that, even in the banner year 2013, exports accounted for only about 55% of imports! Yes, that is a significant improvement over the 2000s when exports accounted for only 40-45% of imports but one has to take a step back and think of the dimensions: for every Euro that Greece exported, it imported two Euros in exchange (more or less). The USA have been criticized for their trade deficit but exports always covered close to 80% of imports. In crisis-stricken Italy, that ratio is closer to 90%.

My understanding is that Greece has not ever in its modern history exported much, for whatever reasons. That's fine and dandy as long as one accepts the consequence of not being able to import very much which, in turn, leads to the consequence of having a low standard of living. My first visit to Greece was in the mid-1970s and I remember a rather poor country outside metropolitan areas. Fair enough --- you offer little but you also don't demand a lot. A combination of factors (notably the EU membership with its subsidies and the Eurozone membership with its cheap loans) allowed Greece to demand very, very much without a corresponding pressure to offer something in exchange.

The EU Commission's paper is a very academic piece: it applies something called the 'gravity model of trade' and it makes all sorts of most sophisticated regression analyses. However, the bottom line is quite simple to understand: Greece could - and should! - offer substantially more in exchange than it is presently doing. To quote:

"Greece's export potential could be enormous. Greece controls 16% of international shipping, making it the world's largest shipping nation. It is located along one of the world's busiest international shipping lanes - the Suez Canal and the Mediterranean - and at the crossroad between three continents. This makes it a natural gateway for trade between Asia and Central Europe. As part of the EU, it is a member of the world's wealthiest free trade area. It is plentifully endowed with sun, beach and culture, making it a prime tourist destination country".

This reminds me of a statement which I made frequently in the early phases of this blog, namely: 'If only the Greek economy developed the right way, I could see - even without an ouzo - Greece as the economic power house of the Eastern Mediterranean within one generation'.

The paper suggests that Greece's exports fall short by 33% of potential. Thus, Greece ranks only 31st among 39 countries analyzed in the paper. But the really interesting thing is that the paper does not put the blame for that on any lack of skills or competitiveness. Instead, the conclusion is that about three-fourths of the shortfall are accounted for by institutional deficiencies in Greece. To quote:

"For Greece, we find that structural reforms that improve the institutionial framework to the average level of our EU/OECD country sample have the potential to close the exports gap - the difference between actual exports performance and gravity to model prediction by between 54% and 78%, depending on the choice of institutional indicator. Rule of law is required for contract enforcement and the willingness of banks to provide trade credit. Sophisticated exports rely on access to the international value chain and the ability to import requiring light customs procedures".

That, of course, sounds rather theoretical and is difficult to prove in practice. Still, I once took a first-hand look at the practice and I would conclude that practice confirms theory in this case. This is what a successful private export consulter told me a little over a year ago: "The public export promotion agency (which is quite large) is primarily interested in itself; in its political influence and in its relations with the public sector. Whether or not Greek exports are increased as a result of their activities is of secondary importance to them".

In late 2013/early 2014, the Greek government had elevated the primary surplus to the status of a life-or-death-issue. Fine, let the technocrats have their fun as long as they understand that a primary surplus has nothing directly to do with the functioning of the Greek economy. Going forward, I would strongly recommend that the Greek government elevates the export performance to a life-or-death-issue because that will have a direct impact on the standard of living of Greeks!

IMF on Greece --- 226 Pages and One Graph

The IMF's Review of Greece (the fifth!) covers 226 pages and is full of carrots and sticks. And... there is the following graph:

First a caveat: "Exports excluding oil and tourism" is a misnomer because tourism falls into the services section of the Balance of Payments (BoP). Also, the above numbers differ from the statistics which the Bank of Greece (BoG) publishes on its website. Nevertheless, since BoG and the IMF are indicated as sources, one should assume that the message conveyed by the graph is correct.

This small graph suggests that Greece's exports (however they are calculated) are today running at about 10% below the level of 2007. In fact, they have been declining in the last two years.

Greece is in the fortunate position of having two major revenue categories in the services section of the BoP: shipping and tourism. Thus, Greece can support a much larger trade deficit than other countries would be able to. For example, in 2013, Greece had an overall trade deficit of 17 BEUR, quite an enormous amount (though almost minute compared with the staggering 44 BEUR of 2008), but with revenues from services, other income and current transfers, a positive current account could be achieved.

The issue is jobs and everything else which is related to jobs (income taxes, social contributions, etc.). When a country imports products which could also be produced at home, the country is exporting jobs. When a country does not fully utilize its capacity to export, it is limiting job growth.

Given the substantial internal devaluation which Greece has gone through and given the fact that the Euro today is cheaper against the USD than it was back in 2007, it is hard to explain why Greece's exports could not have expanded in similar fashion as those of the other countries shown in the graph. The only explanation which comes to my mind is that Greece's productive sector, never strong to begin with, has even weakened further during the last years. 

Lower prices do not automatically translate into export growth. There has to be an export infrastructure both domestically and internationally. Domestically, there has to be a strong export lobby. There have to be public or private agencies which advise/assist Greek companies in expanding their exports. And, internationally, there have to be export promotion agencies in all countries which would be interesting targets for Greek products.

When a country like Germany follows the strategy of 'exporting its way out of a crisis', one has to take that with a grain of salt given Germany's enormous trade surplus as it stands. When a country like Greece, with its dismal trade deficit, does not follow a strategy of 'exporting its way out of a crisis', it's nothing other than disregarding opportunities.

Just A Regular Greek Billionnaire?

I came across this Reuters article about Dimitrios Koutsolioutsos, a Greek billionaire who has made his fortune in the last 25 years. Whenever I hear the expression 'Greek billionaire', my reflexes cunjure up images of cronies, corruption, tax cheating and all the rest of it. This billionaire seems different.

Mr. Koutsolioutsos is the founder/owner of Folli Follie, a designer/manufacturer of jewellery, watches and fashion accessories. I had never heard of it, so I asked my wife whether she knew of it. After her immediate 'of course', she showed me right away a Folli Follie watch which she had bought. I must say I liked it. I browsed the company's website and I must say I like their products.

It seems that Mr. Koutsolioutsos is just a regular billionnaire who has created his wealth through the regular life of an entrepreneur who has business ideas and turns them into reality with great success. And all that in Greece? In the midst of a depression?

I would very much like to know what people like Mr. Koutsolioutsos would do if they were in charge of running Greece. Above all, I am certain that there are many other Greeks, perhaps not all billionnaires, who have track records which suggest that could contribute a lot to their country.

Are they speaking up? If not, why not?

A Self-Goal by the EU Parliament!

If only EU parliamentarians had stuck to the principle assigned to EU elections by the Lisbon Treaty! Since they didn't, the EU will now end up with one of two evils, whereby it is questionable which of the two evils is worse.

Evil 1: the European Council (heads of state) pushes through a new President of the EU Commission who is not Jean-Claude Juncker. However qualified that person may be, such a move will be one more, and a very major, piece in the puzzle showing the EU as a non-democratic entity reminiscent of the former UdSSR.

Evil 2: Jean-Claude Juncker becomes the new President of the EU Commission. Then the EU Commission will have a President who will claim that he was democratically elected but who has not received one single vote. Not to mention the fact that I have yet to see one single analysis which suggests that Juncker might have the qualifications for President of the EU Commission.

All of this started with the EU Parliament's (notably Mssrs. Schulz and Juncker) turning the EU elections into a powerplay for the position of President of the EU Commission. Nowhere in the Lisbon Treaty is this role foreseen for the EU elections. This was then compounded by the European Council's allowing itself to be trapped into seemingly condoning this approach. Instead of responding to the EU Parliament's powerplay forcefully from the start by pointing out what the Lisbon Treaty said, they allowed things to unfold and, in the end, even endorsed this powerplay: leading heads of state publicly endorsed Schulz/Juncker as their candidates, creating the impression that they would accept the winner as the next President of the EU Commission.

To put things into place: this was an election to the EU Parliament! If anything, voters could have expected that they would elect the new President of the EU Parliament! At least they should have expected that any candidate in these elections would in fact be a candidate for the EU Parliament. In actual fact, at least two of the candidates in play (Jean-Claude Juncker and Alexis Tsipras) were not even on any election list. Furthermore, Juncker had made it clear from the start that he would not work in the EU Parliament.

What a democratic farce is that when a top candidate for the EU Parliament isn't even prepared to run for a seat in that parliament? Whatever one may think of Martin Schulz, the former mayor of a 40.000-people city in Germany, as a candidate for a top job in the EU, at least he had the courage to give the voters of his country the chance to vote for him (he was No. 1 on the SPD list). As I said, Juncker was not on the list of any party in any country. And in his own country he was just recently voted out of government.

Alexis Tsipras is now being praised, by some, for having given Chancellor Merkel a lesson in democracy by expressing his support of Jean-Claude Juncker. What a farce! If Tsipras really had had such a high regard for the EU Parliament, he would have made himself No.1 on SYRIZA's election list to make sure that he could work in that parliament instead of downgrading that institution to a jumping board for another job. Instead, a brief glance at the quality of the people on SYRIZA's election list shows clearly what this party thinks about the importance of the EU Parliament.

As I said, there is now no good solution possible; the end result will be bad for the EU. Responsible for this mess are those who started the process of a powerplay, notably Mssrs. Schulz and Juncker, and the heads of state of allowed this powerplay to unfold (notably David Cameron and Angela Merkel).

A German Satirist Elected to the EU Parliament

Martin Sonneborn is a German satirist; a good one at that! DIE PARTEI ("Party for Labor, State of Law, Animal Protection, Elite Promotion and Basis Democracy" - a party which was founded on a parodic platform in 2004 by journalists of the satire magazine Titanic and which has since participated in elections) had nominated Sonneborn as their candidate for the EU Parliament and --- they received 180.000 votes (0,6% of the total) and one seat in parliament.

One should, of course, take Europe and the EU seriously but every once in a while one may be permitted to introduce some fun into the subject. This is why I translate below an interview which Sonneborn gave the FAZ. His major (satirical) theme is that he will resign from the EU Parliament after one month so that another party colleague can take over the job. Again only for one month. That way, they will be able to route all the party's top people (around 60) through the EU Parliament for one month each and enjoy the perks of an EU parliamentarian. Below is the interview.

FAZ: Mr. Sonneborn, you were elected to the EU Parliament on the ticket of DIE PARTEI. What are the goals which you will pursue in Brussels?
Sonneborn: The objective is to resign. After one month. And I have 4 weeks to intensively prepare for that.
FAZ: Isn't there anything in your party program which you would like to see implemented?
Sonneborn: I don't think a single parliamentarian can implement anything ... This is why I will resign after one month.
FAZ: And you only need one month to decide that?
Sonneborn: The plan is to rotate 60 very deserved party colleagues through Brussels. They have now made politics for over 10 years. This is an appropriate award for their work: well-paid; 33.000 Euro; free flights; free train tickets; expense account; etc.
FAZ: 33.000 Euro are too high. The gross salary of an EU parliamentarian is EUR 8.020,53; net of taxes and contributions EUR 6.250,37.
Sonneborn: Yeah, but we get 4.000 Euros for expenses without having to produce receipts and we can spend another 20.000 Euro for office, fax and coffee machines.
FAZ: In other words, every party colleague will set up office from scatch every month?
Sonneborn: Not quite like that. However, every EU parliamentarian tries hard to spend 33.000 Euro every month and we will try hard to live up to that precedent.
FAZ: Which party colleagues are on the list to follow you?
Sonneborn: There are 64 long-serving colleagues, only that in our party, even the long-serving colleagues are under 30. We selected 60 of them so that we could run them through parliament during the next 6 years, each for one month. This means that, every month, DIE PARTEI will be represented by a different person in Brussels who takes the cash.
FAZ: To have a claim for transitional compensation, one has to have one full year of service.
Sonneborn: Nah, that's wrong! It is sufficient to resign. Normally, you get one month transitional money for every full year but one gets at minimum transition payment for 6 months. And that you get even if you spent only 3 days in parliament.
FAZ: According to article 13 of the statutes, one year is minimum service.
Sonneborn: We use Google as our source of information and there they say that we will receive very, very much money.
FAZ: Well, then...
Sonneborn: I would like to point out that we will not be the craziest ones in the EU Parliament!
FAZ: Who do you think is even crazier?
Sonneborn: At least 30% of the total. That is more than in the Bundestag and that means something!
FAZ: Do you already have a faction in the EU Parliament?
Sonneborn: Not yet, but I will try to build a faction of the mad, the crazy ones and the EU-destroyers.
FAZ: Have you received any congratulatory messages from possible supporters yet?
Sonneborn: Not yet, but I expect Martin Schulz to approach us soon.
FAZ: What do you say to those people who voted for you because of your campaign promises?
Sonneborn: I tell them that such naivité deserves punishment. Furthermore, our campaign was clearly against Angela Merkel and that is sufficient to draw a lot of votes.


PS: I have no knowlegde of DIE PARTEI nor what they really plan to accomplish in Brussels.

Greece's Current Account: January - March 2014

Much has been written about the phenomenal reduction in Greece's current account decifit in the 1st quarter of 2014: it could be reduced by more than half from 2,2 BEUR to 1,1 BEUR. While that is a sensational improvement, an analysis of the details does no shake one out of bed. Essentially, everything has remained more or less flat relative to a year ago except the current transfers, and current transfers have really not much to do with the development of the real economy.

What really stands out, and what would definitely require explanation, is the fact that Greece's exports other than oil & shipping have remained more or less flat for a very long time by now. These 'other exports' are the exports which should reflect that Greece is becoming competitive!

(in MEUR)

		January-March
		2014	2013
Revenue from abroad
	Exports	5.448	5.447
	Services (e. g. tourism)	4.637	4.146
	Other income	897	878
	Current transfers	3.179	2.779
		----	----
	Total revenue from abroad	14.161	13.250
Expenses abroad
	Imports	10.007	9.969
	Services (e. g. tourism)	2.696	2.669
	Other expense (e. g. interest)	1.537	1.762
	Current transfers	970	1.088
		----	----
	Total expenses abroad	15.210	15.488
Net foreign deficit (current account)		-1.049	-2.238
Trade balance		-4.559	-4.522
Services balance		1.941	1.477
Other balance		-640	-884
Current transfer balance		2.209	1.691
		----	----
Net foreign deficit (current account)		-1.049	-2.238

Link to the Bank of Greece