Greece's current account balance per October 2012

The overall development in the current account remains impressive (-54% month-to-month; -74% YTD-to-YTD) as follows:

in BEUR

		January - October			October
		2011	2012		2011	2012
Revenue from abroad
	Exports	16,8	18,0		1,8	1,9
	Services (e. g. tourism)	25,1	24,0		2,4	2,1
	Other income	2,7	2,7		0,3	0,3
	Current transfers	3,9	4,7		0,2	0,1
		----	----		----	----
	Total revenue from abroad	48,5	49,4		4,7	4,4
Expenses abroad
	Imports	39,9	35,3		3,9	3,5
	Services (e. g. tourism)	11,7	10,3		1,0	1,0
	Other expense (e. g. interest)	9,7	4,8		0,9	0,4
	Current transfers	3,4	3,1		0,4	0,2
		----	----		----	----
	Total expenses abroad	64,7	53,5		6,2	5,1
Net foreign deficit (current account)		-16,2	-4,1		-1,5	-0,7

It is quite noticeable that the improvement continues to come mostly on the expense side. Revenues actually declined in October and YTD they increased only modestly. As positive as it is that exports reached an all-time high in October, and that YTD exports increased by 7%, if one excludes oil and shipping from the total and looks only at the export of 'other goods' (the 'regular' exports), the YTD increase is only 3%. The most important category of 'services' actually declined 4% YTD. Why should the increase in exports be much higher? First, the Euro still trades significantly below the levels of recent years, thus making the entire Eurozone 'cheaper' relative to third countries and, secondly, Greece itself has become quite a lot 'cheaper' due to austerity.

The bulk of the improvement is due to the expense side, particularly lower interest expense as a result of the PSI. At the same time, YTD imports are running 12% below the previous year's level.

It should be noted that the 'primary current account balance' (i. e. excluding interest) will in all likelihood turn out to be positive for the entire year of 2012!

So what do we have here? We have an economy where budget and current account balances are already in or approaching equilibrium (before interest). That's the good news. The bad news is that the structure of the Greek economy is such that when the economy achieves equilibrium, it cannot employ its people.

It is funds flow from abroad which had become the principal driver behind adequate Greek employment, at least since the Euro. Going forward, that funds flow is unlikely to restart in necessary volumes in the form of debt. Thus, I offer three solutions for the Greek problem: foreign investment, foreign investment and, again, foreign investment. Not only with a view towards bringing funds into the country but, above all, with a view towards bringing know-how in all areas, particularly in the area of corporate governance, into the country!

Cause for furor!

Articles like this one can truly disturb my holiday spirits! Here we read about the inner workings of hedge funds; how hedge funds went on extensive fact-finding missions to Greece earlier this year; how they were given the red carpet treatment by all sorts of governmental bodies; how the Greek government and EU decision makers sought out the opinions/advice of hedge funds; etc.

If I were a hedge fund manager, I would laugh at the 'financial innocence' of politicians. In fact, I would laugh about such useful idiots all the way to the bank.

What in the world does a hedge fund directly have to do with the Greek problem? I am not disturbed when hedge funds make millions/billions in their dealings with other professional market participants. A hedge fund can only buy Greek bonds at 14 cents on the Euro if someone else is prepared to sell at that price. That is a totally voluntary transaction on both sides. If the hedge fund can later unload this paper at 28 cents on the Euro, again to 'someone else', again in a completely voluntary fashion, the hedge fund has doubled its investment by playing the market smartly. It has not taken huge profits on Greece. Instead, it has taken huge profits on 'the market'. That is fine and dandy.

But this silly behavior on the part of politicians (which we have seen since the beginning of the crisis) to ask those for advice who are most likely to profit if their advice is followed, well, that behavior is silly.

A debt or equity buy-back is a totally common event in financial markets. It's also a smart move when it is totally voluntary. Warren Buffett offers to buy back shares of Berkshire Hathaway when he thinks he can buy them below what he thinks they are worth. Potential sellers will only sell if they don't think those shares are worth as much as Warren Buffett thinks. If no shares are offered at the price which Warren Buffett tenders, there will be no buy-back.

I have written before how silly it was to make the Greek debt buy-back a major pillar of the latest agreement. In consequence, the 'voluntariness' was taken out of the game. When the Greek government knows that it must be successful with the debt buy-back, a hedge fund manager can take the attitude of "I won't even pick up the phone unless you offer at least 35 cents on the Euro". He knows the counterparty will call again...

Hedge funds are to be congratulated for having had the nerve to buy Greek bonds when they traded at 14%. They are to be congratulated for making millions/billions by selling them later at a much higher price. Troika and Greek authorities ought to be shunned for intervening in voluntary market behavior and more or less forcing holders of such Greek bonds to sell when they would not have sold voluntarily. What they did was to force those holders to allow hedge funds to cash-out on their speculation.

No one can tell whether 35% was a good price for the seller or the buyer long term. That is not my point. Instead, my point is that third parties which speculate amongst themselves should have to do that voluntarily so that risk and reward continue to go hand in hand, and so that it remains immaterial to Greece what those third parties do.

Beware of the primary surplus!

If one goes by the Monthly Bulletin of the Ministry of Finance, the general government already had a primary surplus of 2,3 BEUR from Jan-Oct 2012. Economic analysts would argue that these figures include distortions and that the 'real' result for 2012 will be a primary deficit of around 2,5 BEUR. Either way, everyone seems to agree that sometime in 2013, Greece will reach a primary surplus in the general government accounts.

At that point, i. e. when a primary surplus is achieved, things will get tough because at that point, for the first time in years, Greece (and its creditors) will have to choose between options. One option is to live by agreements and to use any primary surplus for debt service. The other option is to use the surplus for other things.

So far, the debt service was immaterial to Greece. Whatever interest the creditors demanded, they had to first lend that money to Greece before such interest could be paid (to themselves). While that increased Greece's debt, that is sort of a moot point because it seems certain that much of that debt will have to be forgiven sooner or later. With a primary surplus, the Greek government will, for the first time, be in a position where it has to explain to their electorate why they used excess cash to pay interest instead of doing better things with it.

If and when the primary surplus is reached, Greece will have to decide whether to use it to pay interest or perhaps to invest in the economy. Should Greece decide not to use it for interest, major problems with creditors can be expected because that would violate agreements. However, perhaps the creditors will come around and see the light in the sense that it is not prudent to drain cash from a weak borrower. In restructurings, surplus cash should never be used to pay dividends. Instead, it should be used to create even more surplus cash going forward so that even more dividends can be paid in the future. The expression for that is 'investment'.

So far, an interest moratorium would have had no major impact on Greece because all it would have meant is that creditors would have had to lend less money to pay (themselves) interest. With a primary surplus, an interest moratorium starts making eminent sense.

In conclusion: as Greece is headed towards a primary surplus, very serious thought should be given (not only by Greece; also - and foremost - by its creditors) to the optimal use of that surplus. I have proposed a solution once before: transfer the primary surplus into an escrow account which is targeted for new investments.

The number 1 OECD-recommendation for Greece

I came across the OECD Public Governance Review of Greece, specifically its Executive Summary and its Key Recommendations.

And what is the number 1 key recommendation? Here it is:

Key finding: There is no evident overall strategic vision to provide purpose and direction to the long-term future of the Greek society and economy, as well as for the short-, medium- and long-term measures to be implemented. 

Key recommendation: It is striking that there is no strategic and shared vision of where Greece wants to take its society and its economy. It means that public, media and internal government attention is unhelpfully focused on fiscal issues, with no sense of a broader agenda. There is no clear central steering, clear ownership of reforms, or accountability for results. At the core of its administration, Greece desperately needs a high-level structure which has the authority, responsibility and capacity to lead the development of a strategic vision and direction for public policies, and the effective implementation of this vision in practice and over time.

I have nothing to add to that because this has been one of the key themes since the start of this blog.

Appeal to Greek brainpower

EU Task Force vs. Troika - where are Greek media?

I recommend making two tables next to each other. List on one side all the articles, blogposts, tweets, etc. published on the Troika in the last 6 months and list on the other side all those published on the EU Task Force (TFGR). I suspect the result would be a very one-sided one in favor of the Troika.

Transpose this into a corporate debt restructuring. The Troika would be the equivalent of a Steering Committee of lenders and the TFGR would be the equivalent of a consulting firm. The Steering Committee reports to the lenders which it represents; the consulting firm reports to the company's CEO. The Steering Committee makes sure that the interests of lenders are defended; the consulting firm helps the CEO to get the company back into shape.

If you were a shareholder, which of the two efforts would be of greater interest to you?

The one-sided fascination on the part of Greek media with Troika-beancounters is simply not understandable to me. It starts with travelling schedules of the Troika. When will they come? How long will they stay? Why did they interrupt the visit? What will be their verdict? Etc.

Search for publications of the TFGR's activities and you will not find too many.

If one is to believe the latest Quarterly Report of the TFGR, there is an enormous quantity of activities under way to provide technical assistance to Greece in reforming the economy and public administration. The reader gets the impression like the building of a new country is in process. Perhaps much of that is 'hot air'. Perhaps it isn't.

This blogpost describes very well the desolate spirits presently prevailing among Greek population; the lack of a future perspective. Well, is that a surprise when all one hears and reads about is how things will get a lot worse in the near future? Of course, hearing and reading good news will not have any impact on the hard facts of the country's problems but publishing good news does have an impact on public sentiment. It is one thing to suffer in a hopeless situation and quite another to suffer with the prospect of a better future.

If one believes the latest TFGR report, there is something to hope for. The problems are so obvious and so large that it seems obvious that, if they get fixed, a more prosporous Greece must be the automatic consequence.

Thus, I would strongly recommend that Greek media, bloggers, twitters, etc. devote time to what the TFGR is doing. Report on their activities, comment on the plausibility of their plans, stimulate a public discussion about those plans.

What is the objective here? An attempt to build a better Greece or a desire to explain why the country is doomed?

Do read the TFGR Quarterly Report!

The EU Task Force for Greece has just come out with its latest Quarterly Report. This is worth reading! (40 pages)

One cannot help but be quite amazed about all the many things which the reports says are in progress. One gets the feeling like a new country is being built here. When that new country is finished, it's going to be a great place!

I only fear that the percentage of Greeks reading these 40 pages will have several zeroes after the comma. On the other hand, the percentage of Greeks who presently see no light at the end of the tunnel certainly has 2 digits before the comma.

It is not good enough to do good things; one also has to talk about it. It’s not good enough when only interested parties are impressed by the content of 40 pages. The message that something positive is happening must reach the ‘common man’. Above all, it must reach those 41% of the young generation who, as I read today, are considering leaving the country. If they got the message that Greece is the place where the future action will be, they might change their minds and take part in that action.

As I have often stated before, I am amazed how little public attention and media coverage some of the good things which are happening in Greece get. I may be totally wrong but my guess is that the existance of the TFGR is not known to too many Greeks who are not directly involved with it. My guess is also that Greeks have the perception that the TFGR is something which EU-elites have decided to bring upon Greece. Finally, my guess is that the TFGR is being perceived as a type of occupation force; perhaps as enforcers of Troika-measures; and those Greeks who cooperate with it may become seen as collaborators.

It would be very helpful if the Greek media gave as much publicity to the TFGR as they gave to subjects like PSI, OSI, MoU and so forth. And for those who can't wait, here are some questions and answers about the TFGR.

Greece at the brink of a civil war?

This article, published a few days ago, suggests that Greece may be at the brink of a civil war.

It was good to read this article because it brought things a bit into perspective for me. I had expressed similar concerns when I started publishing about the Greek crisis, except that I had expressed those concerns two years ago (and not just recently). At that time, I argued that the risk of a civil war would come about if Greece did not stay in the Eurozone. I argued that if Greece returned to the Drachma, much of domestic financial wealth would be wiped out; unemployment would skyrocket to the 20%+ range; and living standards would be knocked back to several decades ago. And, finally, I argued that no democratic society could survive such an Armageddon in peace.

Well, Greece did not return to the Drachma but the results are almost the same. While domestic financial wealth was not wiped out as much as it would have been had Greece returned to the Drachma two years ago and while overall living standards have not (yet?) been knocked back to several decades ago, the unemployment is now over 25%.

Financial wealth and living standards are important. But anyone who has ever been unemployed knows that the worst thing of all is unemployment (and the resulting financial strain). Not only does the unemployed man/woman experience the devastating feeling of not being wanted in the economic process any longer. The unemployed father experiences the feeling that he can no longer provide for his family the way he wants to (and feels he has to). The family of the unemployed father experiences rejection. The result is generally a deep depression for both the unemployed father as well as for his family. Suicides are but a symptom of that.

What went wrong?

One could, of course, argue that the EU (in abbreviated form: Germany) left Greece alone; that the lending countries imposed unacceptable austerity terms on the country. That, however, would be a very one-sided (albeit not totally incorrect) view of the story. From 2009 to mid-2012, Greece’s primary deficit was about 45 BEUR and the current account deficit was about 70 BEUR. Over 80 BEUR Greek bank deposits were withdrawn. Somebody has been financing that and, as is well known, it was the tax payers of the Eurozone-countries (including Greek tax payers!) who did that. Had they not done so, there would have been a real Armageddon quite some time ago.

Of course, those tax payers did not only finance the above-described financial needs of Greece but they also bailed out banks, hedge funds, etc. That was literally a crime on tax payers!

A prominent Greek politician coined the famous phrase “we all ate together”. He was correct! In principle, that is. Not only the ‘big guys’ took profit from the Euro-party. The small business owner in a small village who could suddenly do much business with the village profited just as much because the village spent money which, in the final analysis, was borrowed by the country.

Now, however, comes the critical difference. That small business owner (or the person who got a well-paid job in the public sector when he would otherwise perhaps have been unemployed) could not have known that he/she lived on money borrowed by the state and country. That small business owner may have been an extremely hard working man who thought he was doing his very best for his family.

The article states that Greeks are “seething with anger at the utterly corrupt system and a kleptocratic government that have done so much damage to the country”. Greeks are justified to feel that way. Regrettably, we know from developing countries in the Third World that it is next to impossible to unseat a well-established, corrupt elite.

Greece may be a country in need of development but Greece is not a country of the Third World. Instead, Greece is a member of the EU and of the Eurozone. Ideally, one would have hoped that Greeks themselves could get rid of their well-established, corrupt elite but one could certainly have expected that the EU and the Eurozone would ally themselves with the people against those well-established, corrupt elites.

As an Austrian, I remember vividly how, back in 1999, the EU was considering sanctions against the country (including an expulsion process from the EU) simply because the Conservative Party had the nerve to form a coalition with the second-largest party; a party which had a record of being clearly less than respectful of ‘European values’. Nevertheless, it was a democratically elected party and no one questioned that it was constitutionally legitimate. The EU reacted so forcefully because it felt that ‘shared European values' were at stake.

That very same EU had known for years how corrupt the well-established Greek elite was and --- it not only condoned it. Instead, it did a lot of business with it! ‘Tell me who your friends are and I tell you who you are!’

In June of 2011, I wrote an article comparing Greece today with Chile after the Allende-coup and I said the following: ‘If the present Greek leadership does not want to run the risk that, eventually, Greece will end up with the same political system which Chile had in the late 1970s and 1980s, they should make room for leaders who are not associated with the wrong's of the past but who can project the vision of a better Greece in the future! That would be the greatest contribution which any government has ever made for its society!’

In Greece, that would have meant for the political leadership to make tabula rasa. The very same politician who stated that “we all ate together” should have started a process where EVERYONE in parliament and in government would have done what the Japanese do when they completely failed their duties: take a bow, apologize sincerely and --- depart!

I have often hoped, and I still hope, that the day may come where Greeks pluck up the courage to show the adequate measure of ‘civil disobedience’ so that the corrupt Greek elites get scared. By ‘Greeks’ I don’t mean the usual suspects who crowd Syntagma Square whenever there is a possible occasion. Instead, I mean the silent majority who really suffer and who have not deserved to suffer.

Thus, I do hope that Greece is not at the brink of a civil war but I certainly hope that Greece is at the brink of the most powerful ‘civil disobedience’ which an EU-country has seen to date. A ‘civil disobedience’ by those Greeks who share the same values as Europeans in other countries (let me paraphrase those values with 'hard work and clean living'). By those Greeks whom foreigners living in Greece know from day-to-day life. By those Greeks who motivate tourists from all over the world, year-after-year, to visit the place which 'the Gods chose even though they could have chosen any place in the world'. 

And I would like to think that the EU would support that kind of a‘civil disobedience’!