Alexander Clapp Spoils Bullishness About Greece

Alexander Clapp's essay on Greece ("The Rot at the Heart of Greece Is Now Clear for Everyone to See"), published in the NYT on August 22, met with a multitude of reactions. Personally, I thought the essay was excellent and fair but I can understand why the reaction from the Greek side would be less than enthusiastic. One exception to that was The Greek Analyst who published a lengthy thread on Twitter. This was remarkable in as much as The Greek Analyst (73,8K followers) has been extremely bullish on Greece of late.

Since I had been in contact with Alexander Clapp a few years ago, I sent him the following mail about his essay.

Dear Alex,

The key statement in your essay, to me, was the following:

"It is, rather, the unsustainable contradiction between the country Mr. Mitsotakis insists on pitching abroad — an unimpeachably democratic state whose respect for the rule of law and liberal bona fides ought to be rewarded with corporate investments and tourism dollars — and the one he actually presides over.“

That question has been bugging me for quite some time now. I belong to those who were initially overwhelmed by Mr. Mitsotakis: his cosmopolitan demeanor; his superbly eloquent English; the way he handles himself; etc. Watching English interviews with him was always a pleasure. And the trick worked with me because I started believing that a new Golden Age was in Greece’s future. A modernized Western nation where people act rationally, honestly and responsibly. I even wrote a couple of articles in my blog about it.

It started with the push-back’s. There is a Greek journalist at DER SPIEGEL (Giorgos Christides) who really seems to detest the current government and whose articles about the push-back’s were accordingly. So I really didn’t take them too seriously (apart from the fact that I have true sympathies for Greece with regard to protecting EU borders). When the EU published its report on FRONTEX, there were proven facts but I still didn’t get overly excited. And then I watched a session of the EU parliament where Mitsotakis was present. A lady (don’t recall from which party) read him the riot act with innumerable facts from the report. I still did not get excited because I expected Mitsotakis to address each fact in his response. Instead, his response was limited to something like „Greece adheres to all laws and international treaties.“ That, I thought, was arrogant.

Then came his visit to the US and his speech before both Houses of Congress. To use that speech for portraying Turkey as an evil empire (even though it is) was not only displaced, in my opinion, but also arrogant. Those issues should be addressed in private discussions but not as a guest of honor before both Houses of Congress. 

And now we have this issue with the wiretapping. I would have expected Mitsotakis to quickly announce the formation of an investigation committee including international experts and even members of the opposition. His actual reaction I found disappointing.

After Greece’s exit from the program in 2018, I wrote a lengthy article summarizing all my experiences of the crisis and concluding that Greece was now truly on the right track and that, therefore, I wouldn’t continue my blog. 

Of late, I have looked at some of the hard facts of Greece (as opposed to the soft PR of Mitsotakis). I have written about Greece’s massive current account deficit and the staggering increase in foreign debt. While I don’t want to spoil the party of a record tourist season, the hard facts are very disappointing. Greece seems to return to being a turntable for money, money entering the country as debt and leaving it as payment for imports and capital flight.

There is one minister, though, who really commands my respect - Kyriakos Pierrakakis. That man seems to be a digital genius. I wish we would have someone like that in Austria!

When I think of all the billions which will flow to Greece out of the EU Recovery Fund, I really get worried. Will that money be wisely spent or will it be wasted (again)?

I hope you are fine and if you get a chance to drop me a line, I would welcome it.

Best regards.

Greece's Gross External Debt hits 565 BEUR! (300% of GDP!)

The Greek financial crisis began when foreigners brought new lending to a halt and began calling in existing loans. That is a process which normally starts rather slowly at the first sight of clouds over the horizon but which rather quickly accelerates as foreign financial agents watch the conduct of their competitors and then start doing what they are doing. The culmination of the process is called "Sudden Stop". That is when no one makes voluntary loans to Greece any longer.

It is fair to say that voluntary foreign lending came to a halt in early 2010 (the first memorandum was signed in May 2010). At that time, Greece's gross external (foreign) debt was around 430 BEUR.

"Gross foreign debt" (not to be confused with "sovereign debt") is the total of all monies which have entered the country as debt (as opposed to foreign investment), regardless of the borrower. At that time, Greece's foreign debt was roughly 50:50 with the government and with the banking sector. A small portion was with individual borrowers such as large Greek corporations. 

By the end of the first quarter of 2022 (March 31), Greece's gross foreign debt stood at 565 BEUR. What? That would represent an increase of 135 BEUR in a period where Greece was most of the time restricted by memoranda with the Troika! Well, the number of 135 BEUR is indeed not correct. The actual number is even higher!

In 2012, foreign creditors gave the Greek government a 'haircut' of 100 BEUR, roughly 60 BEUR of which were foreign debt. Thus, the increase of gross foreign debt between early 2010 and March 31, 2022 was actually 195 BEUR! That's about one year's worth of Greek GDP!

The overall interest expense on the total of 565 BEUR of foreign debt is not known to me. If the weighted interest rate were 1%, the annual interest expense would be 5,65 BEUR. If it were 2%, it would be 11,3 BEUR annually.

Interest expense it accounted for in the country's current account. In order for the country overall to pay 5,65 BEUR in annual interest, the current account needs to have a surplus of 5,65 BEUR. If the interest expense were 11,3 BEUR, the surplus in the current account must be in the same amount. Otherwise, Greece would have to borrow from abroad in order to pay interest due abroad (unless there are cash reserves).

In my previous post, I have outlined that Greece not only does not have a current account surplus but, instead, a massive current account deficit which means that Greece has to borrow abroad not only to pay interest but also to finance the rest of the current account deficit. Well, not quite. Greece currently has substantial cash reserves which can be used for foreign payments. 

Whichever way one analyzes the above, those are staggering figures! A gross foreign debt of 565 BEUR represents close to 300% of the annual GDP. There cannot be many countries in the world which have a higher ratio. 

Also, it is a quite staggering development when an economy aims at bringing down foreign debt after a crisis while in actual fact increases foreign debt by 195 BEUR! It certainly raises the question of what happened to all that money? Was it invested prudently and economically or was ist spent?

If this process continues, it won't be long until Greece hits 600 BEUR in gross foreign debt. Perhaps when that staggering number is published, the eyes of creditors will once again start looking at Greece's financials.

Greece - The Dramatic Return of the Current Account Deficit!

This blog was/is essentially a blog about Greece's post-2010 crisis. After the exit from the Troika-program in 2018 and since the assumption of power by the Mitsotakis government, the crisis has turned into a bit of a success story and Greece, today, is on its way towards investment grade. And without a crisis to observe, there was no further purpose for this blog. The surprisingly high current account deficit for May (up 47% over the previous year) prompted me to write again about this issue.

From the beginning in June 2011, the importance of the current account for an economy like Greece's was the major issue of this blog. The current account is quasi the operating cash flow of an economy: it measures money spent outside a country's borders against money received from outside its borders. If more money is spent abroad than earned abroad (deficit), the cash shortfall needs to be covered with funds from abroad (mostly foreign debt). If there is a current account deficit, a country is living beyond its means cross-borderwise. From an accounting standpoint, a current account deficit represents a transfer of domestic wealth abroad or, put differently, a reduction of domestic net worth.

2014 was the best year for Greece's current account (or the worst, depending on one's point of view): the contraction of domestic spending power had contained the growth of imports, exports were beginning to rise and revenues from tourism were strong. The current account deficit was 1,2 BEUR, the lowest in memory (then about 1% of GDP).

The figures below compare 2014 with the linearly extrapolated figures for 2022; i. e. 5 months extrapolated on a linear basis into 12 months). Since the tourist season is not reflected in the extrapolation, the actual 2022 figures may turn out quite a bit better. Still, the overall picture is a valid case for observation.

(in billions of EUR)

The number which jumps to mind is the 24,2 BEUR deficit! The worst deficit Greece ever had was about 35 BEUR in 2008 (then about 15% of GDP) and that eventually lead to the country's illiquidity. From 2014-2019, the annual current account deficit increased moderately. Since 2020, it is exploding and in 2022, it is likely to be about 13%! Given the huge amounts of foreign funding which will flow into the Greek economy out of the EU Recovery Fund, the current account deficit is likely to increase even further.

Inflow of foreign funds is great fun for the domestic economic agents: those funds represent revenues on the part of the recipients which leads to growth and wealth. The higher the inflow, the greater the fun (remember the 2000's?). The only problem is that pain can result once the inflow stops.

It all depends on how the money is spent. If the money is invested in projects of sustained economic value, the inflow will lead to sustained prosperity. If it is spent on short-term consumption, we will see a repeat of 2010 at some point in the future.

The challenge for the Greek economy is to increase domestic value creation so that exports can be increased and, perhaps, some imports substituted. To achieve that would be something that could truly be called a "structural reform". Greece seems far away from that.

Even though the current account deficit is approaching a dangerous level, there is no risk of a near-term financial crisis. Greece has a relatively small amount of interest expense and principal of debt doesn't really start maturing until the early 2030's. And, as mentioned above, money will flow in from the EU Recovery Fund. So there really won't be any major financial constraints during the 2020's. When there are no financial constraints while money flows rapidly, all sorts of memories of Greece's past come to mind.

The Perennial Problem of Greece's Current Account

The statistics published by the Bank of Greece go back to the year 2002. During those 20 years, Greece did not even once record a balanced current account (not to mention a surplus). In fact, I remember reading in history books that Greece has not once in its 200-year existence as an independent nation recorded a balanced current account (not to mention a surplus). 

What is a current account and why is it important for a national economy? The simplest description is that the current account represents the cross-border operational cash-flow of a national economy. Operational cash comes into a country as proceeds from exports, revenue from tourism, transfers from the EU, etc. Operational cash leaves a country as payment for imports, for interest on foreign debt, for transfers to the EU, etc.

When the cross-border operational cash-flow is negative, there has to be a 1:1 offset through a positive cash-flow in the capital/financial accounts. This is not a matter of economics but, instead, of mathematics. Again: if the current account is negative, there have to be, on a 1:1 basis, positive capital/financial accounts. If there were no positive capital/financial accounts, there could not be a negative current account. Put differently, a national economy which runs out of foreign currency can no longer import. Below are the Greek statistics since 2002.

During the 20 years since 2002, the Greek national economy incurred a negative cross-border operational cash-flow of 274 BEUR. Put differently, Greece paid 274 BEUR more for imports, interest on foreign debt, etc. than it received from exports, tourism, EU transfers, etc. 

That deficit was financed through a surplus of 45 BEUR in the capital account (e. g. EU subsidies), a 208 BEUR surplus in the financial account (e. g. debt) and another 20 BEUR which the Bank of Greece calls "balancing items", i. e. items which cannot be categorized.

Why is all of that important? It is important because it helps to explain the living standards in the national economy and what they depend on. Many of the capital and consumption goods which Greeks desire must be imported for the simple reason that they are not produced in Greece. In fact, when it comes to consumption goods, a walk through a shopping mall creates the impression that most of those goods are imported. Revenues from exports and tourism are not nearly sufficient to pay for all the goods which Greeks desire to import. Greece needs funds from other sources in order to pay for the imports which Greeks desire. Without those 'other sources', the living standards of Greeks would decline sharply.

As the above table shows, those 'other sources' are principally EU subsidies, foreign debt and some foreign investments. Without EU subsidies, foreign debt and some foreign investments, Greeks would have to accept significantly lower living standards.

The above table shows another 'Greek phenomenon': as domestic purchasing power increases/declines, the current account deficit increases/declines as well. During the heyday of the Euro-party (until the financial crisis), Greek consumers were awash with cash and imported nearly beyond imagination (excessive current account deficits). As austerity was imposed on the Greek economy, Greek consumers were short of cash and the current account deficit declined. 

During the last couple of years, things have improved for Greek consumers and, not surprisingly, the current account deficit returned to very high levels. Not excessively high, but very high nevertheless. That really leads to a disappointing conclusion: despite all the reforms in the decade of the financial crisis, the structure of the Greek economy hasn't really changed. It still has the characteristics of a developing economy, i. e. products which the consumers desire have to be imported and imports lead to indebtedness because there are not enough products/services which the national economy can export.

In short, the living standards of the national economy still depend on: (a) foreigners lending to or investing money in Greece and (b) various types of EU subsidies and financial support programs.

Is that a long-term perspective? Not really, at least not a very good one because it suggests that Greece will always be dependent on foreigners lending to or investing money in Greece. What if foreigners, for whatever reason, would one day stop doing that? 

There is only one way to make the Greek economy less dependent on foreigners and that is to increase domestic value creation. To produce more of the goods and services which Greek consumers desire so that they do not have to import them and to produce more of the goods and services which foreigners desire so that Greece can export them. 

There is no other way! And it is an urgent matter!

Greece Is Booming!

When my wife and I last left Greece on December 13, 2019, we had no idea that it would be 1-1/2 years until our return. Well, Corona did that to us. But now, since 3 weeks ago, we are back in Kalamaria, a beautiful suburb of Thessaloniki. And, frankly, it feels like the Greece we returned to is a different country than the Greece we had left.

The first signs that the Greek state was no longer as dysfunctional as it had often presented itself in the past came in February 2020 when Corona started showing up in several European countries. Greece immediately took action whereas most Central European countries pondered the situation and announced that they would take immediate action once that became necessary. With the benefit of hindsight, we now know that this indecisive approach was a big mistake.

The lockdown procedures where rather similar in most countries: prohibition to leave homes except for 4-6 specific purposes. In Austria, for example, there were extended debates about those exceptions leading to substantial delays. And when the exceptions were finally agreed upon, there was really no plan how to control them. Greece, instead, implemented quasi overnight a system where QR-codes had to be obtained for exceptions via SMS. And significant efforts were made to control compliance. I remember that the Greek authorities often announced the number of checks they had made, the number of fines and the total amount of fines. That obviously promoted discipline among the people.

When I told this to my Austrian friends, they said that such was the behavior of a police state. Well, police state or not, when it helps keeping infections and casualties low, Greece was far ahead of most European countries (only some Scandinavian countries were equally successful). So Greece came through the first wave literally as a hero and I could only marvel at that.

By October, the influenza vaccinations were scheduled to begin. Austrian authorities had campaigned for months to motivate people to get influenza shots. The vaccination rate had only been 8% the year before and they wanted to increase that rate to 20% this year. There was only one slight problem: Austria did not have sufficient vaccines! Something had gone wrong with the orders, the authorities explained. And while we were desperately waiting to get the vaccines (by December!), my wife reminded me literally every day that her Greek friends had already been vaccinated. That pained!

As the Corona vaccinations began in early January of this year, Austrians were informed about the national vaccination plan with all of its priorities but there was zero information as to how one could register for vaccinations. Again, my wife told me that her Greek friends were already registering and had received vaccination appointments. That was a very painful period for me. 

In summary, during our 1-1/2 year absence from Greece, I observed from Austria that the Greek authorities handled the situation much better than most other European countries, certainly better than Austria.

When we returned to Greece late last month, a number of things quickly caught my attention. Above all: this was not the country which was expected to be debt slaves for decades and live in poverty and depression. On the contrary, everything and everyone seemed to be booming like in the good old days: overcrowded markets, shoppers all over the place, full cafés and restaurants, overboarding traffic and traffic jams with gasoline prices 30% higher than in Austria, etc. This prompted me to look at some economic indicators which I hadn't done in a long time.

There is no question in my mind that Alexis Tsipras - despite all the chaos which he caused in many areas - accomplished two major things for the benefit of Greece. First, following the (self-inflicted) near collapse in mid 2015, Tsipras had signed practically everything which the Troika proposed without objections. The Troika measures were rather brutal in many ways and I do not believe than anyone other than a leftist politician could have done that (because the leftists in opposition would have torpedoed most of the measures). In sum, however, these measures had positive effects as evidenced by the fact that Greece is now being attested much better competitive ratings than only 5 years ago. And, secondly, Tsipras had refused to enter into a stand-by agreement with the Troika following the termination of the program in 2018. Instead, he opted for the cash reserve strategy and the Troika started it off with a dowry of 15 BEUR.

Since then, the Greek state followed the motto "the time to take up debt is when one doesn't need the money". Today, cash reserves of the state (financed with new debt) allegedly exceed 40 BEUR and another 30 BEUR will come from the EU Resilience and Recovery Fund. Since significant debt maturities will not come until the early 2030s, the Greek state is now completely 'overfinanced' for the next 10+ years and, thus, there cannot be foreign payment problems. Prime Minister Mitsotakis has pursued and even expanded the cash reserve policy - in the last year alone, foreign debt increased by 50 BEUR to 500 BEUR!

Rating agencies are allegedly considering an upgrade of Greece's rating to investment grade. This is very interesting in as much as Greece today has significantly weaker economic indicators than 5 years ago: the debt/GDP ratio now exceeds 200%, the fiscal budget (prior to Corona it had been positive!) is now deep in the red and the current account, which 5 years ago had been almost in balance, registered a deficit of 11 BEUR in 2020, which deficit is likely to increase in 2021. When Greece experienced the sudden stop back in 2010, these indicators were not worse than now.

The fact is, however, that the funds which will flow into Greece in the next few years will be reminisicent of the 'Euro-party' in the 2000's. The Euro-party ended in disaster because the funds were largely misapplied. Optimists argue that this mistake will not be repeated this time around, if only because of the EU's supervision. We will see. The fact is also that Greece now has, for the first time in a long time, a government which includes a significant number of competent and professional individuals. To me, the superstar is Kyriakos Pierrakakis who is responsible, among others, for Greece's digitalization. The man seems to be a magician. I recently read an article which claimed that new digitalization has already saved 23 million working hours in the public sector. There is undoubtedly a bit of propaganda behind that statement but still, there is positive evidence. My neighbor tells me that he can now take care of most of his official business without having to go to public offices. Even though he is not very computer-literate, he can handle most things electronically. And then there is the issue of the Greek land registry. This project had originally been started by King Otto and his 3,000 Bavarian public servants back in the 1830s and hundreds of millions of EU subsidies had been wasted in recent decades. Allegedly, this project is now nearing completion and Greece will have complete digital land registry.

Miracles are unlikely to happen. In daily life, Greeks will undoubtedly continue to live with corruption and tax evasion. However, in those places where it really matters (at the upper levels of public administration, politics, corporate governance, etc.) a trend in a positive direction should be expected. I would not be surprised if this lead to a positive feedback loop and I would certainly not be surprised if foreign investors were to show significant interest in Greece very soon. That would not only bring additional capital to Greece but, above all, know-how.

All of this could suggest that one should invest in the shares of Greek banks. After all, this is where the tsunami of cash will flow in the next years and the business of the banks should be booming. However this will also be the potential Achilles' tendon. The critical issue will be how all that cash is applied, towards profitable investments or towards unproductive investments and/or activities. Time will tell whether economic rationality will drive the conduct of Greeks in the future or not.

Attractiveness Of Doing Business In Greece (rankings)

My last post discussed Greece's improvement over the last 10 years as regards perceived corruption (an improvement of about 30 spots in the ranking of about 180 countries). In that post I said:

"10 years ago when I had started this blog, one of my major arguments was as follows: Greece ranks the highest in the EU as regards perceived corruption and the lowest as regards attractiveness for doing business (which was the case then). If these tables could literally be turned (i. e. the lowest in perceived corruption and the highest in attractiveness for doing business), then Greece could well develop into the economic hotspot of the Eastern Mediterranean. How have these rankings developed?"

Below is the other important ranking, the World Bank's Doing Business Report for 2020. It measures about 190 countries in terms of their attractiveness for doing business. 

Here, too, Greece's ranking improved by roughly 30 spots. Depending on how one reads statistics, one could even argue by 40 spots. That would be the good news.

The not so good news is that Greece did not improve its position within the peer group (EU member countries). In fact, only the tiny Malta ranks behind Greece at position #84.

It is interesting to note that the significant improvement occurred during the years 2020-12, i. e. during the time when Greece was literally put through the wringer by its EU friends. 

Corruption Perception Index For Greece

Transparency International (TI) publishes annually the Corruption Perception Index where they measure roughly 180 countries in terms of perceived corruption. As the title says, it is based on perceptions and not on objective measurements because the latter would be impossible in the area of corruption.

10 years ago when I had started this blog, one of my major arguments was as follows: Greece ranks the highest in the EU as regards perceived corruption and the lowest as regards attractiveness for doing business (which was the case then). If these tables could literally be turned (i. e. the lowest in perceived corruption and the highest in attractiveness for doing business), then Greece could well develop into the economic hotspot of the Eastern Mediterranean. How have these rankings developed?

TI just published their 2020 Corruption Perception Index where Greece ranks #59. In and by itself, that ranking is not very meaningful but it does become meaningful when one analyzes a longer term trend and the comparison with peer countries (in the case of Greece the EU). Below are the rankings of the last 10 years:

There clearly has been a change in the last 10 years, a change for the better. If 10 years ago the ranking ranged between 85-95, in recent years it has ranged between 55-65. Roughly speaking, once can argue that Greece improved its ranking by about 30 points in the last decade.

When, 10 years ago, Greece ranked the highest among all EU countries as regards perceived corruption, Greece nowadays leaves several EU countries behind: Slovakia, Croatia, Slovenia, Hungary and Bulgaria.

The often heard argument that "Greece will never change" seems a bit disproven by the above.