A New Greek Productive Model

There have been Economic Manifesto's by SYRIZA; there have been various documents which Yanis Varoufakis had called a 'plan' at the time but which were not much more than beautiful prose; there have been articles here or there; but the last specific planning document which I have seen for the Greek economy was the McKinsey Report of 2011.

Much to my surprise, I have now come across an article which is titled "24 Progressive Reforms For A New Greek Productive Model". The author is Yannis Maniatis, a former Minister of Environment, Energy and Climate Change (2009-14). He comes from the ranks of PASOK.

Mr. Maniatis makes 24 reform proposals for the areas of energy, the environment, new technologies and communications, public works and regional planning. Mr. Maniatis does not suggest that his 24 proposals are the answers to all problems. On the contrary, he clearly states that his intent is "to stimulate the required public dialogue among all creative forces in society".

I presume PM Alexis Tsipras will immediately appoint a task force of qualified Greek leaders who will take up this dialogue and transform 24 short proposals into specific action plans. Or not?

IMF Departure - Solution to Greece's Debt Sustainability?

Two very interesting articles were published within the span of a few days recently.

In "IMF go home!", Daniel Gros sheds light on Greece's interest cost and maturities profile. As I have argued on many occasions in this blog, from those two standpoints, the IMF is part of the problem and not part of the solution: the interest cost of IMF funding is almost 300 basis points higher than that of the Eurosystem funding (3,9% versus 1%); and the maturity profile of 5-7 years on IMF funding compares with up to 50 years on Eurosystem funding.

The IMF has super senior status to begin with. By insisting on major debt relief on the part of the Eurosystem, the IMF is essentially improving the quality of its super senior loans to Greece. When the IMF makes debt sustainability analyses justifying major debt relief, that obviously constitutes a conflict of interest.

The other interesting article was published by Yiannis Stournaras, the Governor of the Bank of Greece ("Greece needs a new deal with its European partners"). In it, Stournaras outlines the kind of debt relief which would be sufficient for Greece to get back on track. And here is the surprise: Stournaras argues that an extension of loan maturities by 20 years and repayment of capitalized deferred interest also over a period of 20 years, combined with a 2% primary surplus requirement, would do the trick.

Really? I mean the terms which Stournaras is suggesting may be some form of debt easing but they certainly don't represent significant debt relief. Significant debt relief, in my opinion, would be to have a 10-20 years maturities grace period on most of the debt and a reduction of interest rates to close to zero for the next 20 years, at least. One could describe this in different terms: free Greece of refinancing requirements for the next 10-20 years and limit the interest expense to about 1-2% of GDP. Even such a far more aggressive proposal than the one of Stournaras should be fully acceptable to the Eurosystem: they incur no write-off's of principal and they don't even incur funding losses at today's low interest rates. Essentially, this would be "debt relief free of charge for the creditors".

I rest my case!

First Brexit And Then Grexit?

What the Greek political elite could learn from the present Brexit debates is that any decision about possibly leaving a currency or political union should be preceded by intensive debates among political leaders. By that, I don't have in mind the kind of campaign speeches which one can find all over the internet with regard to Brexit.

Instead, I have in mind substantiated argumentations just like a Supreme Court would back its decision with a majority opinion (complimented by a minority opinion).

Just like with a possible Brexit, there would be economic as well as political considerations in connection with a Grexit. A good example of solid economic arguments against a Brexit are presented here by Frances Coppola. And an extremely powerful political essay in favor of Brexit is presented here by Ambrose Evans-Pritchard.

The only trouble is: such solid arguments/essays should not only be published by bloggers and journalists. Instead, is is the leading politicians themselves who should make the effort of preparing written opinions for the Supreme Sovereign, the citizens.

Europe could learn so much from the Americans' experience in forming their own ever more perfect union. We tend to think today that it was only natural that Americans opted for independence and formed a nation with a strong federal government. After all, Americans did not have different cultures like Europe does and they had a common destiny because, after all, they were Americans.

The historic truth is quite different. The 13 colonies were rather like 13 different countries and the then cultural difference between the puritan hard workers in New England and the slave-owning gentlemen farmers/landowners in the South arguably beat today's cultural differences between Germany and Greece by far. Only 12 of the 13 states voted for independence (the most important NY abstained) and the cumbersome ratification of the constitution (that NY eventually approved by a small margin was a sheer miracle owing to the genius of Alexander Hamilton) made the approval of the Lisbon Treaty look like a peace of cake.

I would argue that the odds of a US of Europe with a strong federal government (however unlikely that appears) are today substantially greater than the odds were, in the late 18th century, that there would ever be a USA with a strong federal government raising federal taxes in large amounts.

What the nascent USA had and what Europe is lacking today was political leaders who could go beyond campaign speeches. Political leaders like Washington & Hamilton & Adams (for a more perfect union) or Jefferson & Madison (against strong federal government). And it must be tolerated that people can get smarter with every day, i. e. that they can change their mind. If conscience is the reason for changing one's mind, political leaders are actually obligated to change their minds. Madison started out as a Federalist and only later became a passionate anti-Federalist.

If PM Cameron were worth his salt, he would tomorrow have an essay in the Telegraph taking issue with every single argument which Ambrose Evans-Pritchard has made. The Greek political elite is not (yet) under such time pressure but if Alexis Tsipras, Kyriakos Mitsotakis and other Greek political leaders were worth their salt, they would soon begin preparing their personal essays where they would argue their case for or against the Eurozone membership or even for or against the EU membership.

To simply project chaos as the result of either one or the other decision just is not good enough.

Fire One-Third Of Greece's Bank Directors?

I reproduce below an interesting article from the WSJ explaining details about the upcoming shake-up of the boards of the 4 large Greek banks. There is a likelihood that whatever action is taken by the ECB, the Greek government - and particularly SYRIZA - will interprete that vocally as a concerted action directed against the Greek government, particularly against SYRIZA. This would be an incorrect conclusion.

Bank executives in all European countries, as far as I know, need to be approved for "fitness" by Central Banks. For the roughly 130 systemic banks which are being supervised by the ECB, it is the ECB which does the approving. For all other banks it is the national Central Banks.

These approvals cannot be taken lightly. For example, when Anshu Jain became CEO of Deutsche Bank (meanwhile replaced), there were stories that the Bundesbank would not approve his "fitness" because of lack of fluency in German (such fluency is required so that bank executives can read and understand banking directives issued in German). Jain, the stories continued, had to commit to take regular German lessons.

The more normal procedure is to disqualify a person from "fitness" before his/her first appointment. To disqualify a person who has been approved before is rather unusual and would normally require a "cause".


Wall Street Journal
By MAX COLCHESTER and  STELIOS BOURAS
June 8, 2016 5:30 a.m. ET
ATHENS—European authorities are seeking to replace a third of the board members at Greece’s major banks, among the toughest actions by regulators since the financial crisis. And Louka Katseli is a major target.

The former socialist parliamentarian was named chairwoman of National Bank of Greece SA last year, one of several politicized appointments that European regulators say saps investors’ confidence in Greek banks and makes it harder to clean up a mountain of bad loans.

Under pressure from international creditors, the Greek Parliament established rules for who can and who can’t serve on bank boards, effectively banishing local business magnates and former politicians. The rules are extensive and complex. Directors must have worked in banking for at least a decade, for instance. But directors who head committees that control decisions about risk and personnel can’t have worked in Greece’s financial sector in the past 10 years.

The result is a small pool of eligible directors and a large pool of frustrated elites. This month, amid fierce lobbying, Greek banks will receive a report outlining which board members need to be axed. In Athens, bankers dub it the “Get Katseli Law.”

Greece agreed to the Draconian rules as part of an €86 billion ($97.68 billion) bailout a year ago, which included several billion euros to prop up its lenders. It is the third recapitalization of the banking system, and Europe is pushing for deep changes in how it is run. Last week, Greece and its creditors reached an initial deal to release a roughly €10 billion tranche of the funds.

Ms. Katseli and others are trying to convince Greek and European authorities that the country is being singled out for boardroom practices that are common all over Europe.

When Daniele Nouy, the top banking regulator at the European Central Bank, visited Athens early this year for a round table with top Greek bankers at the neoclassical headquarters of Greece’s central bank, Ms. Katseli attacked the new rules, according to a person familiar with the meeting. Ms. Nouy replied: “The law is the law."

Greece’s  banks are in this position because they hold €100 billion in bad debts, an extraordinary amount for a country with a gross domestic product of about €180 billion. Eurozone banking regulators argue the boards must be gutted if the banks are to attract the foreign capital needed to clean up their balance sheets. That cleanup, in turn, is vital if Greece’s deeply depressed economy is ever to bounce back.

The concerns stem from the unusually deep ties between Greek banks and Greek politics. The government, for instance, has traditionally named the head of National Bank of Greece, the country’s second-largest lender. Greek banks, meanwhile, have lent generously to the country’s traditionally dominant parties, the conservative New Democracy party and socialist Pasok. The parties used the funds to campaign, including busing in supporters from around Greece to swell rallies and flying them in from abroad to vote..

The parties still owe the banks some €300 million, which party insiders acknowledge they can’t repay in full now that they have been abandoned by many voters thanks to their role in Greece’s economic crisis. Among NBG’s political customers, only the Greek Communist Party and the ruling leftwing Syriza are paying the interest on their loans, according to one bank official.

Greek lawmakers have launched an inquiry into whether banks previously dished out about €800 million in loans to financially shaky media groups following pressure from politicians seeking positive media coverage of their parties. The banks and parties concerned all deny wrongdoing.

Under the new rules, passed in October, people who have been senior politicians during the past four years are entirely barred from serving on boards.

One such person is Ms. Katseli, a 64-year-old economist who had sat in Greece’s Parliament since 2007 and who publicly backed the ruling left-wing Syriza party in recent elections. In early 2015, after winning power, Syriza made her NBG’s nonexecutive chairwoman.

The ECB’s banking-supervision department, called the Single Supervisory Mechanism, signed off on Ms. Katseli’s appointment at the time. Now, it wants her out. Earlier this year, the regulatory agency wrote the bank asking pointedly about its succession plans.

Ms. Katseli is clinging on. Early this year, she flew to Frankfurt to complain to Ms. Nouy. Having been a politician doesn’t prevent someone from being a good banker, Ms. Katseli argued, said a person familiar with the matter.

She isn’t the only director under pressure. The country’s bank-bailout fund has hired U.S.-based executive recruiters Spencer Stuart to evaluate boardroom personnel. Its headhunters flew to Athens in May to begin evaluating Ms. Katseli and other directors at the four biggest Greek banks. The directors are being put through grueling interviews sometimes lasting several hours.

Spencer Stuart’s report, due in mid-June, is expected to recommend replacement of about a third of the 55 nonexecutive directors at Greece’s major banks, said a person involved in the project.

The board of Piraeus Bank SA, Greece’s largest lender, includes a shipping magnate and an airline executive who don’t meet the new criteria. Nearly half of the board will probably have to be replaced, said a person close to the bank. Piraeus Chairman Michalis Sallas, who has headed the bank since 1991, is likely to survive the purge, people familiar with the matter said.

From Russia, With Compliments: Special Economic Zones

I will soon approach the 5th anniversary of the first time that I recommended the establishment of Special Economic Zones (SEZ) in Greece. The idea was/is rather simple: since it is impossible to reform an entire country from A-Z in a reasonably short period of time, one establishes pockets in the economy (SEZ) where one can overnight offer ideal business conditions for investors. If the SEZ work well, they will rub off on the rest of the economy over time.

Needless to say, I was crucified by many readers. The criticism was that I aimed at establishing Chinese-style sweat shops in Greece, etc. So like with so many other ideas which I had ventilated in this blog, I eventually gave up writing about SEZ.

And now I read that Russia is establishing SEZ for domestic and foreign investors. This comes from a report published by Austria's official Chamber of Commerce (in German). To quote from the report:

"Russia wants to promote the establishment of new domestic and foreign operating companies. Among various instruments to achieve that, Russia has created Special Economic Zones. SEZ are spread throughout Russia and they are designed to promote certain industries. They offer investors tax advantages, exemption from duties, simplified administrative procedures and new infrastructure".

I link below one of the very many articles I have written about the subject of SEZ.

Special Economic Zones

Non-Performance Regarding Non-Performing Loans

The question of how to deal with the major Greek banks' non-performing loans is almost as old as the crisis itself. Essentially, there are two levels at which the consequences of any solution will be felt: at the level of the banks' borrowers and at the level of the banks' owners.

Once loans are explicitly put on a liquidation basis, life becomes extremely tough for the borrowers because they no longer have a banker to discuss their situation with. Instead, they face a liquidator who is only interested in one thing: liquidate the asset as quickly as possible. Even if a 10-year restructuring plan might eventually yield more return for the liquidator, the liquidator is not interested in what happens in 10 years from now. He wants to see cash now. My understanding is that certain borrowers (i. e. small mortgage borrowers) are legally protected from the excesses of liquidators but all others will feel pure pain.

What matters to the banks' owners is the price at which NPL are sold to liquidators. At the price which the owners desire they may not find a buyer. At the price which liquidators offer, the owners will suffer financially.

It is these two aspects which make the proper treatment of NPL so difficult and which are probably the reason why there has not been a solution to date. The Ekathimerini now reports on a new plan which might be a good solution: "Banks mulling special NPL vehicles".

Under this idea, the NPL would be spun off to existing shareholders in a separate special purpose vehicle. At the end of this exercise, the existing owners would own two companies instead of only one. One would be the former bank but now without undue NPL (and presumably operating quite profitably). The other one would be the NPL-SPV. Those owners who feel that they can work out the NPL much more successfully than any liquidator simply hold on to their shares in the SPV. Those who don't can sell their shares in the SPV at (very low) market values.

The principle point is that risk diversification takes place at the level of the owners and not at the level of the bank.

NPL are definitely not only a financial issue for banks. The ultimate success of a bank depends on what management spends it time on. In a bank where NPL approach 50% of the total loan portfolio, managements' time will be locked-up in that area. And only few managers are prepared to embark on a new lending strategy when they spend much of their time working out bad loans.

Greece's Primary Surplus

One finds innumerable postings when looking for articles on Greece's primary surplus. The debate about whether it should be 3,5% or 1,5% by 2018 seems endless. Some say that 3,5% is achievable and that's why the target should be set there. Others say that, at best, 1,5% is achievable. There is hardly any explanation for the uninitiated as to why there should be a primary surplus in the first place. The assumption seems to be that a primary surplus is good (because a primary deficit would suggest that there is no 'living beyond one's means'), and the greater the surplus, the better.

The primary surplus represents the amount of money available for debt service (i. e. interest expense). If the primary surplus is 1,5% of GDP and the interest expense is 3,5% of GDP, Greece needs fresh funding from its creditors to the tune of 2% of GDP in order to pay interest to those very same creditors. If the primary surplus were, instead, 3,5%, Greece could pay all of the interest without any need for fresh funding.

The honest message from the creditors would appear to be: "We no longer want to lend you money so that you can pay us interest. Instead, you should pay us interest out of your own resources. If your interest expense is 3,5%, you must achieve a primary surplus of 3,5%. Full stop!"

And then the question would be whether this makes sense.

It is often forgotten that debt can be a wonderful thing. If the proceeds of debt are spent on investments which generate a return greater than the cost of the debt, the more debt, the better. Two strategies would appear logical in consequence: (a) examine existing spending for possible reallocations from unwise purposes (waste) to wise purposes (revenue generation); and (b) tie new spending (i. e. new debt) to revenue generating purposes.

It is never debt per se or spending per se which is dangerous. The risk does not lie in the sources of funds; the risk always lies in the application of funds.

I would expect that there is no better short-term stimulus for the economy than reducing the state arrears which, allegedly, amount to 7 BEUR by now. Why creditors would prefer receiving interest which is funded by new loans from these very same creditors instead of having such money applied to a short-term stimulus like the reduction of arrears which might make higher interest payments in the future possible escapes my imagination.

That is exactly the point which I would like to see discussed in more detail but, regrettably, I don't see that.