Recipients of "special salaries"

Here is an interesting article from Athens News on the topic of the so-called "special wage scale" in the Greek public sector.

Upfront, the big challenge with salary comparisons, be they in the private or public sector, is to compare apples with apples. That comparison is often made impossible through a numbers of tricks. First, what is a "monthly salary"? In one case, it may indeed be one out of tweve equal salaries, in another case it may be one out of fourteen; etc. Secondly, instead of talking about "averages", one should present a salary pyramid which shows which percent of the total is in which bracket. Thirdly, the salary may only be one component of total compensation. There may be allowances for this, that and the other on top of it. Fourthly, one would have to know whether all recipients are subject to the same income tax legislation (some, like diplomats, may receive their salaries tax-free).

In my experience, I have found only one figure as a meaningful basis for comparison: the total amount of annual compensation (including all extra salaries, allowances, overtime, other material income substitutes, etc.) which an employee receives from the employer. I am afraid that this number is not used in the article (who knows how easily this number would be available???), so my observations are made with a caveat.

According to Athens News, 195.000 state employees (based on my information, that must come close to one-third of the total) have a "special wage scale". Here are the details as of February 2012 (source: General Accounting Office):

• 156,000 military, police or other "uniformed" personnel. Average monthly pay: 2,000 euros
• 22,240 public sector doctors. Average monthly salary: 5,000
• 11,920 university professors. Average monthly salary: 3,356 euros
• 4,215 judges and members of the State Legal Council. Average monthly salary of 6,270
• 885 diplomats: Average monthly salary: 6,500 euros
• Bishops: Average monthly salary of 4,540 euros

An average of 2.000 Euros for military, police or other uniformed personnel wouldn't strike me as high if that indeed translated into an annual average of 24.000 Euros all-in. Particularly when considering that the top-bracket in this group is probably two or three times this amount, there have to be many far below that in order to bring the average down. In short, I really don't see all that much "special" about this.

The average of 5.000 Euros per month for doctors strikes me as VERY high. First of all, a doctor friend of mine tells me that his "salary" is 900 Euros per month from IKA. Of course, he could earn an additional 4.100 Euros through private practice but for that he would not only have to work VERY hard but, more importantly, he would need to have the patients! The public sector doctors, on the other hand, have it as a fixed salary.

A salary of 3.356 Euros for an university professor would not appear high. What is confusing, though, is that I keep hearing of university professors who earn maybe 1.000 Euros, if at all. Why would there be such a discrepancy among university professors? It can't be the age!

Judges, diplomats and bishops: well, I am not going to pass judgement whether the quoted numbers are high or low for such hallowed professions. I would only hope that the recipients are aware that they belong to the very privileged section of society. Are they?

Again, the most revealing presentation would take the form of a pyramid with horizontal sections for each salary range, stipulating that salary range and the number of people in it. This would be even more revealing with pensions. I have once seen such a period for Austria. At that time, the average pension was about 700 Euros per month and the median pension (the mid-point among the number of recipients) was about 900 Euros. Both not extraordinarily high numbers. However, it was amazing to see the number of pensions significantly over a few thousand Euros. This would, of course, be fair with a private pension where the amount of pension depends on the monies paid in. With a state pension where almost everyone pays in less than he/she receives and where all of them pay equally little, there should never be so much difference with the resulting pensions.

I have a friend in Thessaloniki who retired at age 65. After the first pension cuts, his wife lamented to my wife that their annual income was now down by 12.000 Euros. I consoled my wife by explaining that if 15% of his annual pension were 12.000 Euros, he was still in pretty good shape. Apparently, my friend had had 3 careers in the pubilc sector and, accordingly, collects 3 pensions.

Why not Evergreen Bonds?

In most of the financial restructurings which I have been involved in, instruments like Evergreen Bonds, interest capitalization, etc. have played meaningful roles. I have written about this before. I am surprised that such instruments, quite common also with sovereign debt restructurings, have not been discussed yet.

Let's assume that everybody would agree that if Greece's sovereign debt were reduced to 60% of GDP (let's say to 120 BEUR), Greece could service that debt (including interest payments) without problems. Put differently, experts would refer to it as being "sustainable".

Following this logic, the remaining debt (I have lost track where that would stand now but let's assume we are talking about another 150 BEUR) would be considered as "unsustainable". Some might immediately suggest that these 150 BEUR should be forgiven.

The better idea would be to issue Evergreen Bonds for 150 BEUR. They could have a tenor of, say, 99 years but they could also have no maturity at all. What is important is that they have regular interest payment dates; ideally every 6 months.

The interest rate would be fixed at a margin over Interbank to be reset every 6 months. For, say, the first 10 years, interest would be capitalized to give Greece a chance to catch breath.

So here you have, at least for the next 10 years, a solution which is economically equivalent to a 150 BEUR haircut (no principal must be paid and no interest expense flows through the budget). However, it is not a haircut because the creditors maintain 100% legal claim. To give that to creditors wouldn't cost Greece anything but it would be of significant value to creditors.

Why would creditors agree to such a scheme? For a very simple reason, namely, because their alternative might be worse; they might have to - again - forgive that amount of debt. If you don't believe me, then ask those creditors who lost money with the recent PSI if they hadn't preferred to receive Evergreen Bonds instead. Even though those bonds wouldn't have had any value for the next 10 years, they would have represented a legal claim.

Now, here is the wonderful thing about Evergreen Bonds. Their value is not driven by the likelihood that they will ever be paid (no one alive will live long enough to see the 99-year maturity...). Their value is driven by the assessment of whether or not the next interest payments can/will be made.

Evergreen Bonds might trade close to zero during the first 10 years of interest capitalization. They might stay close to zero if Greece did not succeed in turning its economy around. BUT: should Greece succeed in turning its economy around, Evergreen Bonds could become a very attractive investment instrument: if they increased in value to, say, only 20% of nominal (from near zero), their holders would still make a killing.

In a way, Evergreen Bonds would be a kind of rating agency where the rating is done by the markets. If Greece is perceived to do well, their prices will rise. If not, they will decline. And this would go on for at least 99 years...

Who is the enemy here?

This article from the Ekathimerini is one of the more depressing pieces I have read about Greece. Essentially, it says that all the groundwork for necessary changes which would turn Greece around has already been done. It is now only a question of whether the government will follow-through and that, in turn, depends on whether the government is prepared to take on the interest groups, large or small. The author is not sure that this will happen because:

"Those who are against all change have played their cards well. Contractors, unionists, vested interest groups and cartels are seeking to benefit from the anti-bailout tsunami. They hope that if the country ends up outside the euro area, they will be able to survive in the new environment dominated by gangs, oligarchs and a state-dependent model unbound from European controls".

Do I understand this correctly? It is not the Troika, the European powers that be or other sinister external forces? Instead, it is the Greek interest groups, large or small, which have it in their hands to permit a better future for Greece (or not)? They would have in it in their power to assure that Greece remains in the hands of "gangs and oligarchs"?

The fact alone that a respectable author would not rule out such a scenario is discouraging. The fact that he seems quite worried that the "gangs and oligarchs" might prevail is absolutely depressing, particularly when we are not talking about Russia after the fall of the Soviet Union but, instead, about a pluralistic democracy and a member state of the EU!

A European banking union will not necessarily solve all problems!

It seems like a war among economists has started. First, around 170 German/Austrian economists rallyied around Prof. Hans-Werner Sinn in an open letter predicting no less than the expropriation of German savings. Then a group around Prof. Peter Bofinger published its rebuttal and called Prof. Sinn "irresponsible". And now a group of eonomists including the highly respected Beatrice Weder di Mauro (former member of the 5-person Council of Eonomic Experts) published a Manifesto for a European Banking Union.

What is this fuss all about? It's about the notion that a European banking supervision, a European deposit insurance and a European bail-out fund for banks would restore confidence in the Eurozone. The idea is "to de-couple banks and states". 

The idea that one can decouple banks and sovereign states in the EU through new institutions is a fairy tale. It is not a fairy tale in the US, but not only because the US has centralized bank supervision and a central Treasury.

Whenever the State of California goes bankrupt, the Californian Wells Fargo Bank (as well as other Californian banks) remains possibly untroubled by this. Why? Because the Wells Fargo Bank’s creditworthiness can be determined on its own merits. If the bank’s loan portfolio is first class; if their risk management of trading activities is convincing; and if the bank makes a decent profit --- well, then very few people will care about the fact that the Wells Fargo Bank is located in a state which is bankrupt.

If, however, the Wells Fargo Bank had invested about one-third of its assets in Californian bonds and if the State of California could unilaterally decide to give up the USD as the currency and create new Flower Money --- well, then Californian banks would face a run as soon as their state goes bankrupt (probably way before then). And no Banking Union could stop that run. On the contrary, banks outside California might end up in trouble, too.

The greatest flaw is not the design of the monetary union but, instead, the Basel-II regulation that government bonds are considered risk free, that they are not included in the calculation of leverage and that they do not need to be reserved against. No financial investment in the world is risk free; why would government bonds be?

This faulty Basel-II regulation prompted banks to run up “real” leverages to levels which the world has never seen: Deutsche Bank’s leverage is almost 40 to 1! In comparison, JP Morgan and Citigroup show leverages of around 10 to 1. Leverages at 20 to 1 or above have typically been reserved for hedge funds. From the standpoint of leverage, Deutsche Bank (and other large European banks) are more like hedge funds than like commercial banks. Even with a European banking supervision, Deutsche Bank will remain “coupled” with, say, Spain as long as it has huge amounts of Spanish bonds on its books.

What is the solution to restoring confidence in financial markets? One has to take all assets of questionable value (i. e. troubled government bonds) off the books of the banks and, going forward, one has to limit the amount of such bonds which banks can hold (establish risk provisions for them, too). Only when bank balance sheets reflect realistic asset values will confidence return to markets again.

What to do with "black" money?

The myths about black money in Greece and of Greeks seem to have no limits. Offshore bank deposits are said to be in the 3-digit billion EUR figures. Homes and palaces in Greece were allegedly bought with black money. Other luxury goods as well.

In countries like Austria or Germany, the owners of "black money" have one big problem: they cannot spend it, at least not in their own countries and not in larger amounts. It may be difficult to convert "white" money into "black" money but it is virtually impossible to do the reverse in a larger way.

The solution is simple in the world of IT: cross-checking official records. If someone buys an apartment, a copy of the purchase contract goes to the tax office. The tax office makes a cross-check to the latest income tax statement. If that does not show any income justifying the purchase, the tax office will start asking questions.

A few years ago, Germany even went so far as to allow tax authorities access to private bank accounts without the account holder even knowing about it. When the law was implemented, it created enormous discussion but in the meantime everyone seems to have gotten used to.

No Austrian or German will ever transfer money to, say, Switzerland, via official bank accounts knowing that tax authorities might look into it. If they want to have money offshore (and a lot of them do), then they have to transport it in cash. In contrast, the Bank of Greece has reported that between 2010-11, about 25 BEUR were transferred from private Greek bank accounts to private accounts offshore. Apparently, there is no cross-checking with tax authorities.

No bank should open an account for an offshore company without being informed who the beneficial owner is. That is not Austrian or German law; it is EU law. So if rules are adhered to, there is no way for a former defense minister to live in a house paid for by an offshore company without someone knowing who the beneficial owner of that offshore company is. No bank would accept a larger money transfer from abroad to a private account without questioning the recipient about the source of that money (or perhaps even reporting it to authorities).

About 2 years ago, in the beginning of the crisis, I had a conversation with a Mercedes dealer in Thessaloniki. I said that with the recession and the new tax controls, his sales would probably go down. He said no. I said that tax authorities would now check out every buyer of a Mercedes to see if he could afford one based on official records. He said yes. So, I asked, what is he going to tell them? The dealer said: he will ask the tax inspector what his monthly salary is. And then he will give him a sum of cash which will discourage the tax inspector to ask further questions.

Well, you can't beat any such informal system!

What Greece makes, the world needs. Really?

If Greece were a company, to run it would probably be the most attractive job in the world for a turn-around manager. Why? Because paradise on earth for a turn-around manager is when the problems are so obvious that they can immediately be attacked, and when the mess is so big that already the first few corrective steps will produce visible results.

As this NYT article suggests, when an economy's potential is as underused as that of Greece's, the pressed-spring theory says that a giant leap forward can quickly be achieved. This is what I once wrote about a 7-8% annual growth potential for Greece.

Now, public literature is full of anecdotes about the failings of the Greek economy, of Greek politics, perhaps even of the Greek state. It definitely pains to read that Greece, the country which could (should?) be the world's largest supplier of olive oil, is now reduced to a small role in the olive oil market and, to add insult to injury, reduced to the silliest and least profitable role --- selling olive oil in bulk to Italy so that Italy can re-brand it and market it throughout Europe and the world.

Does't that make Greeks look like the dummies of the world?

Again, nowhere is the upward potential greater than where reality is near bottom. And there is so much light at the end of the tunnel --- if only one would look for it. Let me just mention three subject matters:

EU Task Force
Greece ten years head (McKinsey)
EURECA (Roland Berger)

Again, if Greece were a company, the turn-around manager would already have his work cut out for himself with only these three resources. I recognize that a country can't be run like a company but there are several things a country and a company have in common.

When, in times of financial crisis, a company doesn't have competent management and good leadership, the turn-around challenge becomes so much harder, if not impossible. Particularly in times of financial crisis, during periods of painful adjustments, good leadership will always communicate with all employees about ongoing progress. The famous questions of: Where were we? Where are we now? Where do we still have to go?

I read today that Greece is now in non-compliance on about 210 points of the loan agreement. How many Greeks do even know that the loan agreement has 210 points? There are so many myths out there as regards Greece's compliance (or non-compliance) with commitments it has made! So I looked up the original memorandum of May 2010 and subsequent ones to form a first-hand opinion. Well, I gave up. Far to complicated!

The President of Germany admonished Chancellor Merkel over the weekend that she would have to make more of an effort to explain to German citizens what the Euro-crisis and the measures against it are all about. A very laudable initiative at a time where not even the majority of German parliamentarians seem to understand these issues (according to surveys).

Someone in the Greek government must start communicating with the general public. Perhaps it would be best to hire a good PR-agency to do that. It would certainly do Greeks a lot of good if they heard that there are indeed things which Greece makes and which the world needs. If they hear how foolishly some of the things are being handled at present (see exports of olive oil), they might be motivated to improve the situation on their own (i. e. without "help" from the government).

Above all, when Greeks see that there are things they can make which the world needs, this could lead to a light at the end of the tunnel. Greeks would understand that they only have to make more of these things for a better life to return. I quite like the following paragraph in the NYT article.

But average citizens have been beleaguered for too long by forces beyond their control. They were occupied by three different countries in World War II. Afterward, Europe’s richest countries subsidized Greek farmers. When Greece later joined the European Union, it was lent huge amounts of money. Now Greece is again waiting for other Europeans — especially the Germans — to decide precisely how miserable their next decade will be. The problems are overwhelming, but it’s somewhat satisfying to know that the solutions might be based on things the Greeks have long known how to do themselves, like processing olives and brining cheese.

Perhaps having the cake and eating it after all?

Mr. Michael Diekmann is CEO of the Munich-based Allianz-Group, one of the world's largest financial institutions (PIMCO is a subsidiary of theirs). Mr. Diekmann was a lone voice when, early on in the crisis, he said something to the tune of "our German industry ought to re-direct its foreign investments from the Far East to the South of Europe". He remained a lone voice with that view.

Mr. Diekmann is now quoted extensively in this article. "A return to the Deutsche Mark would be irresponsible", he says. "We have analyzed such a scenario in detail. Germany would fall into a deep depression; for some time the German GDP would decline; after 4-5 years, the total GDP decline could amount to about 25%".

Now, by implication this could be interpreted as meaning that Germany owes its well-being to an important extent to the Euro. Wait, haven't I heard that argument before? Yes, I have, but it came from the South and was contested by the North.