Income Down, Spending Up?

Sometimes news happens so fast that one can hardly keep track of it.

On January 27, I read that disposable household income was down by an enormous 8%. And on January 31, I read that retails sales had increased for the first time since March 2010.

Obviously, a trend of spending increases while incomes go down is a trend which cannot go on forever. I am sure that there are good explanations for the above seeming contradiction.

In any event, I sometimes wonder how much one should make of official statistics in an economy where such a large portion is transacted in cash. 

Oops! Austrian (Karas) Picks A Fight With A Greek (Tsipras)!

Question: How can one trigger a political storm?
Answer: Go to Greece and announce publicly that Alexis Tsipras has no ideas as to how to solve Greece's problems!

It's hard to believe but this seems exactly what the Vice President of the EU parliament, Othmar Karas, just did. And, I am embarrassed to admit, Karas is Austrian.

The expansion of power of the Habsburg's is often explained by the saying "Let others wage war: thou, happy Austria, marry!" (referring to the success of the Habsburg's dynastic marriage policy).

I am happy to report that I followed the Habsburg's philosophy --- I married a Greek almost 40 years ago (but, in fact, diminished my parental power as a result of it...).

Karas has opted for the opposite. He has, indeed, picked a fight with Alexis Tsipras. One is tempted to think of the Latin question "Cui bono?"

Perhaps the answer is that Karas was politically raised in Austria's conservative party which considers everything left of center as a threat to political stability. And now he seems to have decided that the best way to strengthen political stability is to pick a fight with those who are deemed to be a threat to it.

Mission accomplished! Or perhaps not?

Retired Judge of Germany's Constitutional Court Presents Artistic Views!

Udo di Fabio, who served as a judge on Germany's Constitutional Court (GCC) from 1999-2011, gave a speech which is a bit of a piece of art. Below are a couple of his themes:

* di Fabio predicts that the GCC is unlikely to rule against the OMT outright. Instead, he says that "the particular issue Karlsruhe will be looking at is national budget sovereignty".
* "Budgetary self-determination of a nation is fundamental and cannot be transferred".
*  "Parliaments were put in place so monarchs cannot use people's money as they please. National parliaments have to be sovereign in controlling the use of taxpayers' money".
*  "If Rome decides on an expenditure, it cannot be that the Netherlands and Germany are held liable for it".

While all of this makes a lot of sense, in principle, it is incredibly removed from the reality in today's Eurozone. Or do Greeks really feel that they have 'budgetary self-determination'?

'Budgetary self-determination cannot be transferred' --- what about current EU intentions to move much of budgetary self-determination to Brussels?

If the Netherlands and Germany could not have been held liable for expenditure decision of, say, Greece, financial history would have taken a completely different turn in May 2010. Does Udo di Fabio not know what turn financial history took in May 2010?

As I said above, di Fabio's themes are really a piece of art!

Greece's International Investment Position

The respective data base about Greece's International Investment Position can be found by following this link to the Bank of Greece.

The International Investment Position shows all foreign assets which residents of Greece (institutional, corporate and private) have outside the country's borders as well as their liabilities to foreigners. The below numbers are as of 3Q2013 (in BEUR).

				Assets		Liabilities
Direct Investment
	Abroad/In-country			33.371		17.008
Portfolio investment
	Equity securities			4.807		7.716
	Debt securities			101.195		46.856
Derivatives				3.322		0
Other investment
	Monetary authorities			1.303		52.884
	General government			1.306		222.818
	MFIs			37.523		72.049
	Other sectors			35.031		16.993
Reserve assets				4.559		0
				---------		---------
TOTAL ASSETS/LIABILITIES				222.417		436.324
	NET INTERNATIONAL DEFICIT					-213.907

Greece had foreign assets of 222 BEUR and foreign liabilities of 436 BEUR. Thus, Greece owed 214 BEUR more abroad than it owned abroad. That should come as no surpise for anyone who has been reading newspapers about Greece's debt in the last 4 years. Figuratively speaking, if Greece were to fall into the Aegean and disappear, the rest of the world would be out of 214 BEUR (provided that there is no successor entity which could claim the assets).

The first question which comes to mind is why does Greece owe 'only' 214 BEUR abroad when the sovereign debt alone is over 320 BEUR? Well, a country is more than only the central government; a country also has foreign assets and not only foreign liabilities; and, finally, some of Greece's sovereign debt is owed to Greek residents.

Direct Foreign Investments would be investments by Greek residents (such as Greek banks) in other countries (such as subsidiaries in neighboring countries). The 'liabilities' from direct foreign investments represent that part of foreign assets which was not sourced out of Greece (such as profits retained abroad).

The really interesting category is Portfolio Investment. The assets would be foreign securities which Greek residents (institutional, corporate or private) buy through their Greek bank.

Greeks held 101 BEUR of foreign debt securities at 3Q2013. Interestingly, back in 2011, this figure was about 50 BEUR lower. Since then, the Greek banking sector had lost about 80 BEUR in bank deposits, 25-30 BEUR of which was capital flight according to the Bank of Greece. Consequently, the 50 BEUR could well be former bank deposits which the customers converted into foreign debt securities to hedge against a bank collapse and/or Grexit (instead of saving cash under the mattrass).

The liabilities under Portfolio Investment would be Greek securities held by foreigners at a Greek bank. What is interesting is that the debt securities, now 47 BEUR, are dramatically lower than the more than 200 BEUR at the outset of the crisis. It shows that foreigners reduced their holdings of Greek securities massively.

Other Investments represent the foreign debt of Greek residents (government, institutions, corporate, private). The assets are loans, currency, deposits, etc. which Greek residents have transferred abroad officially and the liabilities are Greece's foreign debt. The figures would suggest, for example, that 'only' 223 BEUR of Greece's sovereign debt of over 320 BEUR is held by foreigners.

Anyone who wants to know how Greece's international investment position stacks up with that of other countres should open this link to a Wikipedia article.

Greece's Current Account - January-November 2013

Below is my usual table:

(in BEUR)

		January-November			November
		2013	2012		2013	2012
Revenue from abroad
	Exports	20,7	20,0		1,8	2,0
	Services (e. g. tourism)	26,2	26,0		1,5	1,5
	Other income	3,2	3,5		0,3	0,4
	Current transfers	6,9	4,8		0,4	0,3
		----	----		----	----
	Total revenue from abroad	57,0	54,3		4,0	4,2
Expenses abroad
	Imports	36,6	38,7		3,2	3,4
	Services (e. g. tourism)	10,0	11,3		0,9	1,0
	Other expense (e. g. interest)	5,9	5,1		0,5	0,3
	Current transfers	3,0	3,4		0,2	0,2
		----	----		----	----
	Total expenses abroad	55,5	58,5		4,8	4,9
Net foreign deficit (current account)		1,5	-4,2		-0,8	-0,7

Essentially, similar comments as in my previous anaylsis can be made. One addendum, though:

In November, non-oil imports increased 4,4% while non-oil exports declined 7,8%. Falling exports with increasing imports would be a terrible trend, if it were a trend. More likely that it was just a one-off month.

And the Culprit Is??? --- Lack of Competition, Of Course!

So it's really quite simple, according to the OECD: Greece must only dismantle barriers to competition and everything will be fine. At least according to the OECD, which also says that 2,5% more GDP would be the reasonably quick consequence.

This sounds very convincing to a superficial observer like myself. I have always wondered in the last few years of austerity why certain consumer prices remained so high. Now I know why --- it's the lack of competition!

Unfortunately, I continued reading this article from the Ekathimerini and read about some of the most important reforms which, allegedly, the OECD has in mind:

* extend permissable shelf-life of fresh milk
* liberalize exclusive distribution of medicines
* open new pharmacies
* allow Sunday openings of retail stores

Allegedly, the OECD made 329 recommendations. I sincerely hope that they don't consider the above 4 recommendations as examples of the better ones. Yes, prices should come down much more in line with the decline in incomes but the above 4 recommendations are not going to achieve that, I don't think.

When I ask Greeks why they think prices don't come done, they mention things like cartels, crony networks and so forth. Is that because they are conspiracy fanatics or is it perhaps because they are right?

Addendum To Deutsche Bank - An Exploding Cost/Income Ratio!

A bank's P+L statement is a most complex piece of accounting. However, it can also be explained in simple ways as follows:

A bank has net operating revenues (interest margins, trading profits and fees) and operating costs (ranging from personnel to depreciation). Once operating costs are paid out of net operating revenues, the resulting surplus can be applied to the following:

* risk costs
* taxes
* dividends
* retained earnings
(in that order)

Deutsche reported a cost/income ratio (CIR) of 73% at year-end 2013. That means: for every Euro earned, 73 cents went to cover operating expenses and only 27 cents were available for risk costs, taxes, dividends and retained earnings. The 27 cents are often referred to as 'risk absorption capacity' (the lower that capacity, the greater the probability that risk losses move right to the bottom line).

73% is a very high CIR for a bank like Deutsche (I had never checked it before but I would have expected it to be no greater than 60%). But here comes the shocker.

Back in 2012, Deutsche announced a cost reduction plan and in 1Q13, the CIR had declined to 64% (down from 77% a quarter before). However, since 1Q13, the CIR increased in following quarters to 72%, 72% and 87% (!) in the final quarter. This is a most dangerous trend!

A bank with high operating costs blows up its balance sheet to generate more net interest revenue. The leverage increases accordingly. When a bank, like Deutsche, decides to reduce leverage, the balance sheet is reduced, net interest revenue declines and leverage accordingly (unless operating costs decline in the same proportion as net interest revenue, which is highly unlikely).

And the conclusion is? Well, the conclusion is that, as Deutsche's CIR increases and/or remains high, its loss absorption capacity becomes quite limited. As evidenced by the fact that Deutsche reported a 1,2 BEUR loss in 4Q13.