Will Greece Ever Be Modernized?

I am returning to a year-end practice which I started back in 2012. On New Year's Eve 2012, I published the article "Make 2013 'The Year of the EU Task Force for Greece!'" By that time, the EU Task Force for Greece (TFGR) had already been in operation for over one year but, apart from detailed periodic reviews, one didn't really hear a lot about it.

A year later, on New Year's Day 2013, I asked the question "Was 2013 "The Year of the EU Task Force for Greece?'" I am afraid my answer was not a positive one. Perseverant as I am, I suggested one more time that the TFGR should be a top objective for 2014. Still, things remained rather quiet around the TFGR. Yes, there were some success stories like increasing the utilization rate of EU subsidies but I, for one, could not identify anything Earth-shaking facts that the TFGR had accomplished. For sure, Greece had not become a modern country as yet. The TFGR finally expired in June of 2015.

In October of this year, I happily reported on the birth of a replacement for the TFGR. First of all, there was a significant improvement in the acronym: a boring TFGR now became a flashy SRSS. Somewhat reminiscent of an interballistic missile. It stands for Structural Reform Support Service.

And only a few days later the bombshell: "France will modernize Greece!"

I have not heard yet about any progress France has made so far. Let's be hopeful that there will be progress this time around. Meanwhile, let me repeat the Mission Statement of the original TFGR:

The Task Force is a resource at the disposal of the Greek authorities as they seek to build a modern and prosperous Greece: a Greece characterised by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos. 

What a wonderful mission! Will it ever be completed?

An Intelligent Foreign Investment

The Austrian Prinzhorn-Group has acquired the Greek Viokyt Packaging. From what I have read about this transaction in the Austrian media, it could be a classic example of what I would call an intelligent foreign investment for Greece, exactly the kind of investment which Greece should strive for.

Prinzhorn has a tradition of being family-owned (Prinzhorn family). As such, they are literally the opposite of a financial investor. Prinzhorn is among the European market leaders for recycling paper and the packaging industry. They employ 5.300 people in 13 countries and their annual sales are 1,2 BEUR. And - they are profitable and enjoy good creditworthiness.

Viokyt, I understand, is a star in the Greek packaging industry. Only a few months ago, they received the award of a National Champion from the European Business Awards.

The owners of Viokyt will profit because they allegedly received top-Euro for their excellent company. But Greece will profit, too. Prinzhorn takes a long-term view on its investments with a clear emphasis on growing the business instead of milking the companies.

Prinzhorn plans to increase and modernize the production facilities of Viokyt, both with a view towards tripling the production output. One can only assume that this will also have something to do with additional employment.

If I were Alexis Tsipras, I would invite Mr. Prinzhorn to the Maximos Mansion, entertain him to an unforgettable Greek lunch and then hold a press conference with him. And at that press conference, I would announce to the world that if Greece got another 20-30 of such investments, the country would be back in the future.

Non-Performing Loans And Fairness

The four large Greek banks, supervised by the ECB, will need to make very substantial write-off's on their loan portfolios in the next years.  Roughly half of all their loans are non-performing (107 BEUR at the ECB's last count). At this point, there are wild guesses as to how much of that 107 BEUR will eventually have to be written off.

Loans are an asset of a bank and a liability of a borrower. When a lender writes off an asset, he takes a loss (because he doesn't get the money which is due to him) while the borrower registers a gain (because he doesn't have to pay everything he owes). The lender's loss is material. The borrower's gain is not when he truly does not have the money to pay the lender. An overdebted borrower does not benefit when the debt which he truly can't pay is reduced.

There are essentially 3 ways in which a bank can resolve non-perfoming loans which have no chance of ever returning to full performing status:

1) Initiate bankruptcy proceedings.
2) Negotiate settlements with borrowers.
3) Sell the loans to a specialized fund at a deep discount.

Bankruptcy proceedings can assumed to be fair because they are under a court's supervision: an official administrator liquidates the borrower's assets and pays off the lenders with the proceeds. If the proceeds are less than the bank's claims, the bank's loss is fair and the borrower has no undue benefit. Regrettably, bankruptcy is always the most expensive solution for all parties involved and, typically, substantial economic value gets destroyed. The only question is whether the borrower's assets in the bankruptcy proceedings are his 'true assets' which leads to the following two disclaimers.

First, the old saying is that "the company is bankrupt but its owner is rich". Why? Because the owner had taken up debt in the name of his company and - through various legal or non-legal tricks - had milked the company, enriched himself personally while leaving the company worthless (as long as the owner had not issued any personal guarantees). That is an extreme case of unfairness but no legislation has yet been found which could counter such conduct (unless fraud could be proven).

Secondly, in the case of personal bankruptcies, the husband/borrower may truly present himself as a pauper whereas his wife is living in a palace and driving the Ferrari, both of which were bought with loans the husband had taken up. Again, there is no legislation against such conduct (unless fraud could be proven).

Selling loans to a specialized fund is the easiest (but probably costliest) way out for a bank: a deal is closed, a price is paid and the bank will never again have to think about these loans. From the borrower's standpoint, it is the worst solution of all. The borrower no longer faces his relationship banker at the negotiating table. Instead, he is looking straight into the eyes of liquidators who want to see cash. And fast! Still, selling loans is a 'clean' solution in the sense that no fund will pay more than it thinks the loans are worth and if the selling bank thinks the fund offers too little, it doesn't have to sell. In short: transparency and voluntariness all around.

Negotiated settlements are deals where the bank forgives part of the debt in exchange for something. That 'something' is typically a plan by the borrower as to how he can return to profitable operations once the debt is reduced. In this case, the bank voluntarily writes off some debt and takes a loss, while the borrower has significant benefits (above all: he stays in business and his debt load has been reduced to reasonable levels). In short, here the borrower truly gains.

And this is where unfairness can easily come into play. Suppose the 4 banks decide to set aside 20 BEUR for settlements on the 107 BEUR non-performers. It is not a computer which will determine which borrowers will get that benefit. Instead, it is human beings who will take those decisions. Human beings with friends and acquaintances, with networks, with shared political interests, etc.

There are undoubtedly very many borrowers out there who are already vying for a piece of that settlement cake. Some will spend their efforts to prepare restructuring plans for their business but there are a lot of borrowers who, instead of preparing plans, will lobby their networks to influence bankers' decisions. And who knows? A borrower who is forgiven, say, 20 MEUR might be quite disposed to transfer, say, 2 MEUR to the private offshore account of his banker. Or does this seem far-fetched?

To be sure, Greek bankers are not totally free to arbitrarily distribute gifts to their friends and acquaintences. They are being supervised by the ECB and the hedge fund owners will also be keenly interested to assure that the value of their investment is not damaged. But, still, there will be room for manouvre and the situation should be watched closely.

Now Argentina. Greece When?

Anyone who has spent any length of time in Argentina will attest to some of the similarities between Argentina and Greece. Both countries have a long tradition of terrible political leadership. As a result, both have oversized and corrupt public sectors characterized by cronyism. In both countries, the strength of institutions was sacrificed in favor of party politics. Both countries have very wealthy elites who contribute litte to their own society and who hold their financial wealth outside the country. On and off again, both have been characterized as failed states or even failed nations.

Prof. Andrés Velasco, a former Finance Minister of Chile, argues in this article that Argentina may now indeed have the chance for a fresh start. A really fresh start. Like in Argentina, I have always wondered about Greece why a society which has so many highly competent people through all walks of life, why such a society would not be able to bring some of that competency to the political top. Or to put it the other way around: why the many highly competent Greeks from all walks of life would not step forward to change the country.

When one looks at today's mess in Argentina, it is hard to remember that, 100 years ago, Argentina was among the world largest economies and the peso was a reserve currency. Something clearly went wrong along the way. In Argentina, it was 99 years of Peronist populism interrupted only temporarily by reactionary generals and short periods of governance by centrists.

Prof. Velasco argues that the newly elected President, Mauricio Macri, has a good chance of breaking with the above pattern and truly achieving a fresh start for the entire country.

That offers hope for Greece. After all, Greece did not have as many as 99 years of crazy politics but only about 30+ years: my understanding is that Greece was more or less an ok-country until Andreas Papandreou got on the scene with his newly formed PASOK and until ND, during intermittent periods of governance, only tried to be a copy of PASOK.

When will the Mauricio Macri's of Greece come to the conclusion that it's high time to stand up and be counted for their country? There are plenty of Mauricio Macri's in Greece. They just have to make an effort to come on stage. Before anything else, they must understand that they owe it to their country.

Ten Tips About Greece!

This listing of Ten Tips about Greece was published almost 3 months ago but it would not hurt anyone to re-read it every once in a while. These bullet points were prepared shortly before the last election of September. It concludes:

• If the left wing SYRIZA is re-elected, which is more likely, then the outlook is more complicated.
• They may decide to play by the rules, restore growth, and then try to implement a more ideological agenda.
• This would give everybody breathing space.
• But on the other hand, they may not want to govern within the constraints of the Agreement, or even, I would say, within the constraints of reality.
• If so, then we will have more turbulence.
• We will find out soon.

Well, 'soon' can be a very long time...

Does Greece Need Another Narrative?

This article in the Ekathimerini began with the following paragraph: 

"Greece will have to create the right conditions to win back the financial markets if it wants to return to a sustainable growth path. This means it has to present a credible investment story that combines fiscal discipline with privatizations and some structural reforms in addition to political stability, among others."

Well, I beg to differ. During the first couple of years of the crisis, I had written at length about the urgency of developing a narrative for Greece's future. Then the Great Narrator came along and ever since I read his First Economic Manifesto, I developed sympathy for His ability to project positive soundbites and, that, too, to come up with well-sounding narratives. As late as January of this year, I had fallen for His narratives quite a bit.

Narratives become stale when they are not eventually backed up with facts. To me, the last thing Greece needs today is yet another well-sounding narrative in which no one really has confidence. I think it is urgent to focus on facts, instead!

I also have my reservations about the content of the above article. It focuses almost exclusively on financial and capital markets and how a narrative could positively affect those. Financial and capital markets alone will not solve Greece's problems, at least not on a sustained basis. It is not (and cannot be) the primary motive of financial investors to create sustained economic value. Instead, their primary motive is (and must be) to create high financial returns on their financial investment, preferably within less than 5 years. 

What Greece urgently needs are strategic investors and investments. Those could be large international corporations which buy some stakes in large public sector companies but they could also be, perhaps they even should be in their majority, medium-size companies which recognize opportunities in Greece which would reinforce their own strategic plans. In short: investors who do not only buy balance sheets but also brick and mortar!

It would truly be helpful, in fact I would consider it urgent, if the government - instead of developing a narrative - put together investment profiles for, say, 100 interesting strategic investment opportunities, be that the aquisition of existing companies/projects or the development of new ones, for potential investors to review. To give just one example: it would escape my imagination that a company active in the solar business would not review with great interest investment opportunities in a country where the sun shines most of the time. Or that waste management companies would not be interested in investments in a country which has one of the worst waste managements in the EU.

But before anything else, the govenment - instead of developing any narrative - would have to come out and commit passionately that strategic foreign investments are what they truly want.

Greek Pension Reform - An Issue Since 1958?

Having read up on the issue of pension reform in Greece, I am amazed how long this issue goes back (to 1958!). This paper by Platon Tinios gives a good overview. This is the same Tinios who was in the commission which produced the famous Spraos Report of 1997 (only available in PDF via Google) which gave an outline of what aspects should be considered when implementing a pension reform and what such a reform could look like.

There is a whole chapter on the pension issues in Yiannis Palaiologos' book "The 13th Labor of Hercules". The following paragraph from this chapter is quite unique:

"On 16 October 1997, three days after the Spraos Report had been officially presented, Christos Polyzogopoulos, president at the time of the General Confederation of Greek Workers (GSEE), made an unintentionally prophetic statement. The Spraos Report, he said, 'essentially says that if its recommendations are not implemented, the system of social insurance will collapse by 2010. But the social insurance system, as a sub-system of the wider economic and social system, will collapse after the collapse of the State Budget and the economy as a whole'. Polyzogopoulos meant this as a counter-argument to Spraos. He thought he was demonstrating the absurdity of the idea that social security could ever go bust."

Well, 2010 came around faster than Polyzogopoulos might have thought at the time.