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Wednesday, December 13, 2017

Betting On A Greek Recovery?

Having just finished our regular 3-month autumn stay in Greece, it's a good time to reflect on the impressions I could gather and what may be in store for Greece until we return there next spring. Obviously, the all-important questions are: Has Greece really turned the corner (economically, that is)? Are we perhaps witnessing the beginning of an accelerated turn-around? In short: has the time come to bet on a Greek recovery?

There have been different views in recent months. Some, like the reputable American investor Kyle Bass, predicted that "investors are getting ready to pour billions back into the Greek economy". Others considered talk about Greek economic recovery as "fake news in action". Today, it was Bloomberg who headlined an article "Betting on the Greek Recovery."

What stands out is that all commentators focus on the macro-side of things: Will Greece successfully exit the program? Will Greece be able to return to markets? Will yields on Greek bonds decline further? Are bank shares rising? Do banks report profits? Etc.

To be sure, the hard facts still tell a rather miserable story:

* the government continues to tax the living daylights out of Greeks, the result being that unpaid taxes (about 100 BEUR!) seem to rise faster than taxes collected. To put this into perspective: GDP is currently running at about 170-180 BEUR which means that unpaid taxes amount to substantially more than half of GDP!
* while some progress seems to have been made with non-performing loans, NPL still amount to almost half of all loans in the Greek banking sector. By all normal standards, a banking sector which has almost half its loans in the non-performing category is a defunct banking sector kept alive by artificial means (is there any other banking sector in the world which comes even close to having half of its loans in the non-performing category?).
* Greeks exposed to the risk of poverty are still said to be close to 3 million.
* while unemployment figures have come down of late, monthly incomes at the minimum wage level (or even below) seem to have become standard for those who find a new job.
* the government's conduct with regard to foreign investment (Ellenikon, Eldorado) makes one wonder why any investor would get ready to 'pour billions' back into the Greek economy.
* Etc., etc.

And yet...

A visitor like myself observes significant changes. Already during our spring stay I had written last May that "The gut says: 'Greece is on the rebound!'" Today, the gut says that even more emphatically. I emphasize: it's the gut which is talking, not the brain. If I ran into depressed Greeks a couple of years ago, I now ran into cheerful ones. If every Greek I talked to a couple of years ago talked about the crisis, was frustrated about the Troika, about foreigners in general and about Schäuble in particular, this time it seemed like the crisis didn't matter. Yes, it was still there but so what?, the feeling seemed to be. A bit like a boxer who was badly knocked down but not out and saved by the bell. And after the break he felt the juices returning and went on to fight well again, albeit with a lot of bruises.

As I write this, I look out the window at the Thessaloniki bay where a number of huge freighters are waiting to enter the docks. Not too long ago,  I was happy when I saw 3 or 4 ships and I don't even remember seeing large freighters. Now, there is hardly a day when there are not at least 10 ships, most of them large freighters, and they all seem to be heavy-loaded. Now, I have no idea whether this relates to Greek exports/imports or whether it is just goods in transit towards the Balkans and further up. But my point is: the economic activity in the Thessaloniki harbor has increased substantially!

Thessaloniki has returned to its vibrating temperament where life is pulsating. But in the villages, too, I noticed a return of spirits. And jobs, too. My wife's 2 nephews are both in the construction industry: one in earth moving and building materials and the other one is a project engineer. As late as two years ago, their families had to live off their savings. Now both have rather good order books. Some village tavernas which we frequent seemed to be close to shut-down not too long ago and now I have seen them fully booked. Albeit only on Sundays but there had been Sundays in the past were we were the only customers.

In short, wherever I looked I got the feeling that money was being spent again. Whether official or black money, I don't know.

All of these observations, be they the professional ones or my gut feelings, have one thing in common: they don't address the question whether things have really changed in Greece; whether the economy has really become reformed; has Greece really become a good place to do business? The original intention had been to use the shock of the crisis 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' (EU Task Force). Is Greece now on its way towards becoming such a country?

As I listened to my Greek friends over the last 3 months, I have never heard from anyone a comment to the extent that something had really changed significantly in the last years. It was much more common to be told, with a twinkle in the eye, that "Greece will never change!" Yes, the budget was balanced, no doubt a sensational result but actually a controller's result (raise taxes and cut costs). From true leadership one would have expected new visions, new narratives, new plans, etc. The general business model pursued in Greece does not seem to have changed much. Greece still exports far too little and imports products which it should make at home (including agricultural products and food stuffs). And Greece continues to hold the questionable distinctions of ranking at the bottom in the EU as regards attractiveness as a place to do business and the top as regards perceived corruption.

So my bottom line at this point is this: yes, a turn-around is happening and it may even gather some speed. Nevertheless, however large the turn-around will be, it is unlikely to be the result of a reformed and improved economic framework. Instead, it seems to be driven by catch-up needs and by a generally higher level of optimism. The well-known political slogan is 'never waste a good crisis!' As far as Greece is concerned, I am not sure that the terrible crisis of the last years has been put to good use.

Tuesday, December 5, 2017

US Ambassador Chastizes Privatization Of Thessaloniki Port!

Back in April of this year, right after the so-called privatization of the port of Thessaloniki was announced, I wrote a very critical article about the transaction ("Thessaloniki's private equity port"). My conclusion at the time was that "The Deutsche Invest consortium seems to be the prototype of the foreign investor that Greece should stay away from."

For reasons unknown to me, this subject never really made the headlines. Nevermind that at issue was/is Greece's second largest port and gateway to South-Eastern Europe; nevermind that SYRIZA had for years blocked privatization of this port; nevermind that Greece's conduct versus foreign investors is a much-observed subject --- the deal was declared successful and it was closed. End of story.

So much more was I surprised when no one less than the American ambassador to Greece now raised the subject publicly. In a speech at the American-Hellenic Chamber of Commerce on December 4, Ambassador Geoffrey R. Pyatt made the following statement: "We have seen the difficulties privatization faces in Greece, as in the Thessaloniki port, where it’s unclear who the private investors actually are and where their money comes from."

When an American ambassador says something like the above publicly in his host country about certain policies of his host country, one can undoubtedly consider it a bombshell. It will be interesting to see if this bombshell now makes the headlines or not.

PS: a Greek friend of mine gave me the following, albeit not very sophisticated, analysis of the transaction: "Someone needs to know something about running a port (the French), someone needs to figure out who needs to be bribed (Savvidis) and someone needs to provide the money for the bribes (the Germans)."

Saturday, November 25, 2017

Parliament's Budget Office Surprises!

When the head of Parliament's independent Budget Office states publicly that the social dividend planned by the SYRIZA government is counter-productive to much needed economic growth in the country, that should raise some eyebrows.

Several years ago, when it first became apparent that, some day in the foreseeable future, Greece might have a primary surplus again, I had made several suggestions as to what the primary surplus should be sued for ("Beware of the primary surplus!").

The first phase in a financial rescue is generally a phase where a borrower still needs fresh money in order to stay in business. Corrective measures have already been taken but it will still take a while until they show results. During this phase, the country still runs a primary deficit even though substantial reforms have already been made. That phase lasted in Greece until about 2013.

Phase II is where the deficit gradually turns into a surplus, initially rather small but growing steadily. However, doubts still remain whether that surplus can be sustained over time. What happens to the surplus during this time is of crucial importance.

Phase III is where everything is back to normal.

Greece now seems to be reaching the peak of phase II: from January-September 2017, the general government accounts registered a consolidated primary surplus of 5,3 BEUR, roughly the same as the year before and, according to the government, substantially above the target. It seems rather likely that, for the year as a whole, Greece's primary surplus will exceed 6 BEUR.

That is a sensitive number because Greece's creditors will undoubtedly remember that Greece's interest expense is currently running at about 5,5 BEUR annually (at current, subsidized interest rates). Put differently, Greece - for the first time since the crisis - could pay ALL of its interest out of the primary surplus this year. One would expect that creditors will put pressure on that.

However, Greece is still in phase II and the crucial question is how the primary surplus can best be applied in order to promote sustainable growth. Paying interest is certainly not conducive to promoting domestic growth. Will the social dividend be?

Without having any special insights into the subject matter, I would tend to agree with the Budget Office. A social dividend is generally for one-time consumption and that is it. The thought comes to mind that the Greek state owes substantial monies to domestic economic agents (unpaid bills, non-refunded taxes, etc.).

One would think that if the Greek state used a billion or two of its surplus to pay past-due bills with a special focus on small and medium sized businesses, that ought to have an extremely beneficial effect on the economy. That should also be in the interest of foreign creditors and domestic lenders because when small and medium sized businesses improve their performance, lending risks also decline.

One wonders why, with such huge monies flowing into Greece, why the state would have such high arrears in the first place. I seem to recall that parts of recent tranches were explicitly earmarked for the purpose of reducing arrears but the numbers don't show that this has happened.

Tuesday, November 14, 2017

The Incredible Shrinkage Of The Greek Banking Sector

The Greek banking sector has undergone massive changes since the crisis culminated with the First Memorandum in the spring of 2010. The tables below show how the aggregated assets, liabilities and equity of all Greek banks (excluding the Bank of Greece) developed between June 2015 and September 2017. It should be noted that these are aggregated (and not consolidated) figures, i. e. there may be significant overstatements of assets and liabilities. The equity should not be overstated. Source of the figures is the Bank of Greece.

Jun 2015 Sep 2017 Change
Loans to banks 116,4 15,0 -101,4 -87%
Loans to non-banks 281,0 195,4 -85,6 -30%
Debt securities 78,2 41,1 -37,1 -47%
Equities 18,7 8,6 -10,1 -54%
Remaining assets 50,4 55,6 5,2 10%
-------- -------- -------- --------
Total assets 544,7 315,7 -229,0 -42%

Total assets declined by 42%! To say that total assets in the Greek banking sector were cut in half would be an exaggeration, but not by much! 229 BEUR of assets went away!

The largest decline was in interbank loans which declined by 101 BEUR. This is an understandable development: Greek banks had been active in the international interbank market (most of these interbank loans were to foreign banks) and as liquidity became tight, the Greek banks ran down that portfolio. Still, assuming that interbank lending was profitable for the Greek banks, the near-elimination of that portfolio must have impacted the banks' earnings potential.

The bulk of the loan portfolio of Greek banks represents loans to Greek non-banks (i. e. regular private and corporate customers). This segment accounted for 72 BEUR of the decline in loans. Loans can decline for one out of three reasons: (1) because they are repaid; (2) because they are sold off to investors; or (3) because they are charged off. I would be surprised if a very large portion of the decline in loans was due to repayments because loan repayments typically slow down in a crisis.

The only category which increased during this period was 'remaining assets' but the BoG does not provide any details about that.

Jun 2015 Sep 2017 Change
Debt to Bank of Greece 94,3 41,7 -52,6 -56%
Debt to other banks 75,8 18,9 -56,9 -75%
Deposits 294,9 156,7 -138,2 -47%
Securities issued 15,0 2,1 -12,9 -86%
Other liabilities 26,8 21,8 -5,0 -19%
Capital & Reserves 37,9 74,5 36,6 97%
-------- -------- -------- --------
Total liabilities & equity 544,7 315,7 -229,0 -42%

The decline in the debt due to the Bank of Greece presumably represents the reduced dependance on ECB funding. A deposit decline of 138 BEUR, or -47%, speaks for itself. Of that decline, 94 BEUR were in the category of regular domestic deposits and another 19 BEUR were in the category of deposits from foreign countries.

As regards positive news, capital & reserves in the Greek banking sector almost doubled from 38 BEUR to 75 BEUR. When total assets shrink and equity increases, it has great beneficial impacts on the leverage in the system.

Monday, November 13, 2017

Venezuela As An Example?

Venezuela is now doing what Greece should have done in early 2010: meet with all its creditors to discuss a restructuring of the country's debt. On one hand, Venezuela is in a worse position than Greece was in then because Venezuela does not have the benefit of belonging to a common currency zone where the major players have to fear that Venezuela's default might bring the common currency down. On the other hand, Venezuela is in a better position: since the creditors know that there is no fall-back, they might be more interested in securing a deal.

The most critical, if not the holy principle of a sovereign debt restructuring is (or rather: was until the Greek restructuring) that 'risk takers must remain risk carriers'. If, say, Deutsche Bank had an exposure to Greece before the restructuring of, say, 100, it will end up with an exposure of 100 after the restructuring. Put differently, no creditor can reduce his risk exposure at the expense of someone else (ultimately at the expense of tax payers).

In fact, the principle of 'risk takers must remain risk carriers' should be quite acceptable to creditors. Normally when they go into a debt restructuring, they eventually come out of it with only 75 on 100, or even less. In case of an official bankruptcy proceeding, it's 20 on 100, at the most. So coming out of the sovereign debt rescheduling with 100 on a 100 is quite comfortable.

The only thing which should be required of existing creditors, once 'risk takers remain risk carriers', is that they are flexible as regards interest rates and maturities. This really is not asking much when compared to a private debt restructuring where creditors might lose much (or all) of their principal claims.

What is the incentive for creditors to go along with a debt restructuring like the above? It is the hope that, after the restructuring, their assets of 100 will be of better quality than their asset of 100 was before the restructuring. How can that be accomplished?

This is where official financial institutions (ECB, IMF) and governments become involved. Someone will have to negotiate with the debtor country sounder financial policies so that its debt becomes of better quality, and that can only be other governments and/or official institutions. Someone will have to coordinate the new terms and conditions with the existing creditors. Someone will have to come up with Fresh Money which the debt country normally requires to finance budget deficits and only other governments and/or official institutions can be expected to provide that. Finally, someone will have to exert open or hidden pressure on all creditors so that they 'play ball', and that can only be their governments and/or official financial institutions.

The Greek debt restructuring was not only a significant departure from rules governing sovereign debt crises until that time but is was also extremely unfair and inequitable to everyone involved except the original creditors. Tax payers bailed out private creditors and to an important degree, EZ tax payers bailed out the creditors of non-EZ countries. For example: China, the largest contributor to Greece's current account deficit in the 2000s, did not have to make any official contribution to Greece's restructuring and, presumably, there were also Chinese banks which profited from the bail-out. Not to mention UK and US banks which were pleased by-standers profiting from the Greek bail-out without having to share in its cost.

Friday, November 3, 2017

Life Ain't Fair To Unknown Passengers

This commentary from the Ekathimerini ("The unknown passenger's silent resistance" by Nikos Kostandaras) brilliantly captures a theme which I have tried to bring across on many occasions in this blog. The theme of a society where the clever operators built their economic well-being on the hard work and clean living of the 'unknown passengers'. The Greeks whom I met in Germany when I lived there during the 1970s were mostly guestworkers and akin to the 'unknown passengers'. When my wife talks about the Greeks in the small village where she had grown up, her family, their neighbors and friends, the villagers in general, she talks about Greeks akin to the 'unknown passengers'.

Those 'unknown passengers' rarely hit the headlines but one does come across them in day-to-day life. When foreigners rave about Greece and the Greeks, they do so with the 'unknown passengers' in mind; Greeks whom Kostandaras describes beautifully as follows:

"These are the people – and the children of the people – who in the golden age of our recent past were up at dawn, in long queues at bus stops, on their way to work when the nightclubs and bouzouki joints were still full of more privileged revelers. These are the people who would pay for permits to build a home or fix the family home in the village, while others would build illegally on public land; the people who made sacrifices in order to raise children, to pay their taxes and loans, to meet all their obligations. The country was built on their labor, while others set up their political and economic confidence tricks. With the workers’ acquiescence others cultivated the belief that anyone could do whatever they liked, with impunity."

"Life ain't fair" is an expression which one hears frequently in business life. Life certainly has not been fair to the 'unknown passengers'.

Sunday, October 1, 2017

Emmanuel Macron, the EU and --- Greece

French President Emmanuel Macron is the political star of the day. Many of those who, not long ago, predicted that the EU would eventually share the experience of the former USSR are now elated that there will soon be a strong EU on par as a power with the USA. Macron's wish list is remarkable:

I can see how countries like Greece will become enthusiastic when they read goals like "a bigger EU budget to fund investment and cushion economic shocks", "a guaranteed minimum wage adopted to each country", etc. My recommendation to Greece is: Beware of French bearing gifts!

In 2013, the provocative German author Henryk M. Border published a book titled "Die letzten Tage Europas: Wie wir eine gute Idee vernichten" ("The last days of the EU: How we are destroying a good idea"). Most of the causes behind anti-EU populism of today are explained in detail in this book, such as: a central bureaucratic authority, mostly self-appointed and with questionable democratic legitimacy; a central arrogance over concerns of nation states; a super-efficient central authority when it comes to minor issues and incompetent with larger issues; etc.

Anti-EU populists will not be carried away by new visions if these are not based on an honest and fair assessment of where the EU has been and where it is now; what has gone wrong along the way; which major mistakes need to be corrected and why. Anti-EU populists would remind Macron that it was a French president, the legendary Charles de Gaulle who had materially shaped European integration in his time, who was completely opposed to any European federalism and who created, in 1961, the vision of a "Europe of Nations". A vision of cooperation between governments with absolutely no loss of sovereignty and no supranational institutions. The standard answer that "today's challenges are too big for any one nation to solve on its own", however correct, will not be satisfactory to anti-EU populists. Anti-EU populists will question Macron what happened to one of the EU's major principles, the "subsidiarity principle".

Macron is the prototype product of French elitism, a truly outstanding product, for that matter. Ever since de Gaulle, French elitism has put French interests before any kind of European idealism. De Gaulle's conception of Europe was as a tool to improve France, i. e. an integrated Europe must be beneficial to France. Macron has yet to make the case that even though he is a product of French elitism, he has discarded the major elements which have shaped that elitism over decades. At this point, one cannot but share the suspicion that Macron is the most capable French elitist the country has ever produced and that he beautifully disguises French national interests behind a passionate pro-EU facade.

Macron's first major industrial policy decision was to nationalize France's biggest shipyard at St.-Nazaire rather than allow it to pass into Italian ownership. This was a classic de Gaulle move and not the move of a European visionary who wants to take the first opportunity to prove that he is willing to walk his talk. All the justifications about this only being a temporary move to allow time for a better deal and agreement to emerge notwithstanding.

Macron seems to have realized that de Gaulle's vision of France's being the supreme power in any European integration is no longer workable. He seems willing and intent to share that role with Germany. But what about the other 25 post-Brexit EU countries? Will those countries be happy to see a French-German cooperation treaty or will they feel threatened by it?

First calculations have suggested that the full implementation of Macron's wish list will require additional funding by member states in the order of 3-4% of national GDPs. Those are simply guestimates and should not be taken seriously, but still: 3-4% of GDP would translate into 5-6 BEUR for Greece at present, roughly the same amount which Greece currently receives from the EU as subsidies. Will Greece be prepared to re-allocate its EU subsidies to finance a vision of the EU?

In 2016, the controversial EU agricultural policy (CAP) amounted to slightly over 50 BEUR or 42% of the EU's budget (or more than the complete implementation of Macron's wish list according to first guestimates). The true test of an institution or policy is whether one would one would rationally decide to re-instal it if, for some reason, it disappeared overnight. Whether the CAP would pass that test is rather questionable. A true revolutionary proposal would have been for Macron to propose the elimination of CAP and to use the proceeds to finance his vision of the EU.

One of the great strengths of German federalism is that the federal state distributes its federal offices and institutions throughout its 16 states. A true revolutionary proposal would have been for Macron to propose something similar for the EU. Virtually every EU member could house an EU institution and the EU would no longer be equated with "Brussels".

The charity "My Europe 2100" presents a concise summary about Charles de Gaulle. Some excepts:

"De Gaulle played a major role in its implementation (Treaty of Rome) because he saw the European common market as a positive measure for the French economy. Similarly, he strongly defended the Common Agricultural Policy (CAP), implemented in 1962. He saw it as a very effective tool to modernize French agriculture. These subsidies to promote agriculture in member States, financed by all members of the EEC, benefited France particularly because of its enormous agricultural sector. Moreover, it was in this period that the modernization of the French agriculture began: mechanization and intensive farming were starting to materialize, but subsidies were necessary. All in all, the CAP served the interests of France, and that is why de Gaulle greatly favored it. This goes to show how he put French interests before any kind of European idealism. De Gaulle’s conception of Europe as a tool to improve France widely influenced the country’s position. For example, the massive rejection of European institutions and their decisions in France nowadays can be linked to the idea that being part of an integrated Europe must be beneficial to the country: if its benefits are not immediately apparent, then European integration must be given up or completely rethought ... De Gaulle was opposed to any kind of loss of sovereignty for France. He wanted it to be one of the great powers, and for that, independence was essential. This is why he advertised his conception of a “Europe of nations”, in which national governments would closely negotiate, but would never be forced to anything ...

Overall, Charles de Gaulle’s influence on Europe has been tremendous thanks to his popularity. His conviction that France was a great nation was, and still is, very popular in the country. As a result, his ideas about foreign policy remain highly respected and widely shared within France’s public and political elite."

Macron has yet to prove that while he may be the product of French elitism, he no longer shares the traditional parameters of that elitism. That while he is a child of that elitism, he has discarded its spirit. That his vision for Europe is not a disguise for pursuing French national interests.

A first step would be to revoke the nationalization of the shipyard at St.-Naziere.