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Wednesday, July 19, 2017

Some Interesting Debt Issues

This article from the Ekathimerini suggests that the Yanis Varoufakis who had just become Finance Minister was quite different from the Yanis Varoufakis who had been seduced by fame only a few months later. The article quotes a document which Greece had submitted at the February 16 Eurogroup meeting (February of 2015, that is). In it, views were expressed by the Greek side which were reasonable and appropriate. Here is an excerpt:

"In this document, the debt-to-GDP ratio is calculated in terms of net present value and estimated at 135 percent. The document dating from just three weeks after the elections – and repeatedly citing the head of the European Stability Mechanism, Klaus Regling – states in a special appendix that: “The misunderstanding regarding Greece's solvency is owed to the fact that the blunt 175 percent debt-to-GDP number does not fully describe the actual burden of public debt over the Greek economy.” The borrowing conditions of the European Financial Stability Facility (EFSF) as well as Greek Loan Facility (GLF) loans (the latter being the bilateral arrangements of the first bailout) are characterized as highly concessionary."

I should add that in my communications with Varoufakis prior to his becoming Finance Minister, we had exchanged views along the same lines and I felt confident that he would pursue negotiations along these lines. Well, somewhere along the lines there was an abrupt personality change!

On a separate front, Bloomberg reported that the reason why Greece had to shelve the idea of returning to the markets with a new bond issue was that it would have exceeded the debt ceiling set by the IMF. Presumably, there will be a bit of an uproar about the fact that the IMF would restrict, prohibit and/or disable Greece from borrowing in international markets.

The uproar would not be justified. It is only natural that the creditors would put a ceiling on total debt which their borrower can accumulate. According to Bloomberg, Greece's creditors do not allow the country to increase its indebtedness beyond the levels set out in the program. The program provides for enough new funding to refinance maturing debt. If Greece can secure funding for the refinancing of maturing debt from third party sources, the creditors would be more than happy but then they would reduce their commitments in a corresponding amount. 

Monday, July 17, 2017

Social Justice: Greece Ranks #28 Out Of 28 EU Countries!

The German Bertelsmann Stiftung surveyed all EU countries for the level of social justice. The 6 criteria measured were: poverty, education, labor market, health service, intergenerational solidarity and civil cohesion & non-discrimination.

Greece ranks #28 out of 28 EU countries.

Saturday, July 15, 2017

The Spanish "El Mundo" On The Blind Arrogance Of Yanis Varoufakis

Below is an absolutely outstanding analysis of Yanis Varoufakis and his accomplishments as Finance Minister of Greece from the Spanish "El Mundo". Regrettably, I cannot find an English translation.

Adults in the Room: The blind arrogance of Varoufakis

Friday, July 14, 2017

The 'Few' And The 'Many'

I would tend to agree with the following conclusion of this FT article:

"Of course, some Greeks are doing just fine. My motorcycle friend and I ended the evening dining in a packed rooftop taverna in a middle-class suburb. The richest Athenians have had “a nice crisis”, says Paris Mantzavras of brokerage Pantelakis Securities. They just take care not to flash their cash like before. Alexander Kitroeff, historian of Greece at Haverford College in the US, sees the country becoming almost Central American: the once solid lower-middle-class of pensioners, lower civil servants and small shopkeepers is disappearing, leaving only rich and poor. Ten years ago, Greece imagined it had become northern Italy, but it has since discovered it’s more like Bulgaria. Try shedding your fantasies to accept that."

During the 4-5 months we spend in Greece every year, we are moving mostly in the circles of the 'few'. And most of them still have a very good life, even if they don't flash it as much as before.

But we obviously also see the 'many' and whenever I see them (or read about them), I get the sense that fairness is not an outstanding value in Greek society.

Monday, July 10, 2017

DiEM25: "All Men Will Become Brothers!"

Extraordinary developments are taking place at DiEM25, Yanis Varoufakis' Democracy in Europe Movement 2025: a writer, media theorist and media activist by the name of Franco Berardi informed Varoufakis by letter that he would resign from DiEM25's Advisory Panel and Varoufakis answered that DiEM25 would not accept his resignation. The final outcome of this battle is not yet known.

Berardi's letter of resignation is quite extraordinary and I reproduce it below:

Dear Yanis, dear friends and comrades of the Democracy in Europe Movement 25,

After the shameful decisions of the Paris meeting of Minniti Collomb de Maziere it’s time to understand that there is something flawed in our project of re-establishing democracy in Europe: this possibility does not exist.

Democratic Europe is an oxymoron, as Europe is the heart of financial dictatorship in the world. Peaceful Europe is an oxymoron, as Europe is the core of war, racism and aggressiveness. We have trusted that Europe could overcome its history of violence, but now it’s time to acknowledge the truth:

Europe is nothing but nationalism, colonialism, capitalism and fascism.

During the Second World War not many protested against deportation, segregation, torture and extermination of Jews, Roma, communist militants and homosexuals. People had no information about the extermination.

Now we are daily acquainted about what is happening all around the Mediterranean basin, we know how deadly is the effect of the European neglect and of the refusal to take responsibility for the migration wave that is a direct result of the wars provoked by two centuries of colonialism.

The Archipelago of Infamy is spreading all around the Mediterranean Sea.

Europeans are building concentration camps on their own territory, and they pay their Gauleiter of Turkey, Libya, Egypt and Israeli to do the dirty job on the coast of the Mediterranean Sea, where salted water has replaced ZyklonB.

To stop the migratory Euro-Nazism is going to build enormous extermination camps. The non-governmental organisations guilty of rescuing people from the sea will be contained, downsized, criminalised, repressed.

The externalisation of the European borders means extermination.

Extermination is the word that defines the historical mission of Europe.

Nazism is the only political form that corresponds to the soul of the European people.

In the last twenty-five years (since when, in February 1991, a ship loaded with 26.000 Albanians entered the port of Brindisi) we have known that the great migration had began. Two paths were possible at that point.

Opening its borders, starting a global distribution of resources, investing its wealth in a long lasting process of reception and integration of young people coming massively from the sea. This was the first path.

The second was to reject, to dissuade, to make almost impossible the easy journey from Northern Africa to the coasts of Spain Italy and Greece.

Europeans have chosen the second way, and they are daily drowning uncountable children and women and men.

Auschwitz on the beach.

With the exception of a minority of doctors, voluntary workers, activists and fishers, who now are accused of being the abetters of illegal migrants, the majority of the European population are refusing to deal with their own historical responsibility.

Therefore, I declare that I’m not European anymore. And I declare that I have never been European.

We have naively expected that an alliance of British murderers, French killers, Italian stranglers, he German slaughterers and Spanish slayers could give birth to a democratic peaceful friendly union. This pretence is over, and I’m sick of it.

Five centuries of colonialism, capitalism and nationalism have turned Europeans into the enemy of the human kind. May they be cursed forever! May Europeans be swept away by the storm they have generated, by the weapons they are building, by the fire they have ignited, by the hatred they have cultivated!

Because of the aforementioned reasons I must renounce the honour of being part of the Advisory Panel of DIEM25.

Many Marxists seem to have one thing in common: their readers/listeners get the impression that Marxists are in need of psychotherapy. What other conclusion can one derive from Berardi's above musings? 150 years after the first publication of "Das Kapital", a work which Marx originally called "that economic shit" in a letter to his friend and partner Engels, one gets the impression that people like Berardi are intent on making sure that Marx's initial assessment of his work remains valid.

Berardi solemnly declares that "I'm not European anymore. And I declare that I have never been European." Again, a trait which many if not most Marxists share: deplore the way things are but shy away from outlining specifically how "opening its borders, starting a global distribution of resources, investing its wealth in a long lasting process of reception and integration of young people coming massively from the sea" would work.

To simply sing that "all men will become brothers wherever your tender wing remains" just doesn't seem good enough.

Saturday, July 8, 2017

Bail-Out Tranche Will Arrive On Monday... And Will Leave On Monday!

The heading of this article is a bit sarcastic. Of course not the entire 7,7 BEUR which Greece will receive on Monday will leave on Monday. A grand total of 800 MEUR will actually stay in the country, allegedly for the repayment of state arrears to suppliers and tax payers. At least that is the intention (or mandate) of the ESM. It might be an idea to check whether it actually gets done.

This routine of pushing the can down the road always reminds me of Argentina's Economy & Finance Minister in the early 1980s, Bernardo Grinspun. Grinspun was a totally unconventional minister who simply had no time for the games bankers play. The establishes rites of international finance (avoiding default, keeping the ball rolling, etc.) never really found a place in Grinspun's attention span.

The game was the same as the one now being played out with Greece: disburse new loans to pay off existing loans; make the disbursement into an escrow account which is beyond the country's control; make sure that none of the disbursed money bypasses the recipient banks and stays in the country.

In one meeting with foreign bankers which I attended, Grinspun said something like the following:

"Make an escrow account and run all your lending/repayment transactions through it. If you want to disburse new loans to repay yourselves maturing loans, fine with me. If you want to disburse new loans to pay yourselves interest, fine with me. Just don't bother me with it!"

Perhaps the Greek Finance Minister should take a page from Grinspun's book!

Wednesday, July 5, 2017

"Greeks Are Interested In The Eternal And Not The Contemporary!"

Below is an interesting exchange between two passionate commentators in this blog.

Anonymous can be rather annoying to listen to, but it is still useful. He expresses the opinions of many Greeks, the opinions they don't tell you to your face. It may not make you understand why, but it can make them more predictable to you, how they tick, what buttons to press.

Response by Anonymous
I wouldn't put it this way. As a general rule, we Greeks don't know what we want because if we don't then our enemies don't know either what we want and therefore they can not block us from having it. There is also the added benefit that if we "don't know what we want", then we can not be traitors to our country, like for an example an Austrian who knows exactly what his country wants and volunteers to tell us (at that point we can do some serious harm to Austria). We grumble continuously: nothing is satisfactory but yet again this is a nice method of passing information to each other without risking imprisonment or death (because we all grumble, therefore we are all guilty of the crime of being never satisfied and we can not be persecuted for such). This is where you foreigners fall into the trap. You hear Greeks complain about this, that and the other and you say "let's help these people fix it". But that's the thing: you can't fix it. Otherwise we lose this important protection of not displaying what our true intentions are and we become conquerable. And if we become conquerable then our fate is assimilation and extinction. The point is this: after thousands of years we are still here, we speak a language that is hard for a foreigner to understand and we don't want to have a Kratos (in other words an oppressive state) to dominate us which some of you gentlemen consider being the utmost good (a well-run state). That's why I have tried to warn you many times that you are wasting your time with us because whatever the cost we are determined to outlast you. This is our survival kit and has worked fine with the Romans, Byzantines and the Turks. Compare to the Greeks, Germans, Austrians and the like are simple footnotes - we know for sure how to outlast you.

So the bottom line question here is what exactly are you observing? We will never be clear as to what we really want; you will never understand what we really want and therefore you would be unable to give it to us. All you are going to get in the end is a lesson which I am not sure is applicable to your circumstances and daily lives.

Each Greek you speak to has many different opinions, none of which expose the core of our existence. They are a form of making conversation, or part of humanity if you wish.

None of our political parties are focused on our eternal strategy. They are only concerned about social trends and economics which are the most anti-Greek things because by definition Greeks are interested in the eternal and not the contemporary.

Friday, June 30, 2017

Greece: Overtaxed Or Undertaxed?

The Ekathimerini reports that Greeks work 203 days per year to pay taxes. Only the French and the Belgians have to work even more days only to pay taxes. No question about it: Greeks are extremely highly taxed.

Another way of looking at it would be the per capita government revenues, which are listed below for Eurozone countries:

Per Capita
Luxembourg 40.186
Finland 21.092
Austria 19.728
Belgium 18.997
Netherlands 18.081
France 17.633
Germany 17.175
Ireland 15.336
Italy 13.012
Spain 9.081
Malta 8.940
Slovenia 8.407
Cyprus 8.277
Greece 7.956
Portugal  7.409
Estonia 6.464
Slovakia 5.951
Lithuania 4.674
Latvia 4.641

There, Greeks rank at the lower end of Eurozone countries. Does that mean that Greeks pay very low taxes? No! Because taxes per capita would have to be put in relation to income per capita.

While GDP is not the same as total taxable income, it is a yardstick by which to compare the national taxation burden:

% of GDP
Finland 54,2%
France 53,0%
Belgium 50,8%
Greece 49,7%
Austria 49,5%
Italy 47,1%
Germany 45,0%
Netherlands 43,7%
Slovenia 43,6%
Luxembourg 42,7%
Portugal  41,4%
Estonia 40,7%
Slovakia 40,0%
Cyprus 39,2%
Spain 37,9%
Latvia 36,4%
Lithuania 34,5%
Ireland 27,5%

Here, Greece ranks among the top-5 of all Eurozone countries. Obviously, a very high level of taxation. But then, again, the question would what the tax payers get in return for the taxes they pay.

Bottom line: it is very difficult to answer the question who pays more or less taxes. But one thing seems to be certain about Greeks: those who pay taxes spend a very large amount of their income on taxes. And those who cheat with taxes spend a very small amount of their income on taxes.

All clear?

Sunday, June 25, 2017

Greek Mytilineos Group A Better Risk Than Greece?

The announcement that the Mytilineos Group successfully placed a 300 MEUR 5-year bond at a 3,1% yield caught my attention for a number of reasons.

For starters, Mytilineos' yield of 3,1% is substantially below the current yield on Greek sovereign bonds in the secondary market (5%+). That is the first time in my experience that I see a national borrower issuing debt in international markets at a lower yield than that of the sovereign. One of the general rules about country lending which I had learned over the years was that no national borrower, private or public, could raise debt at lower yields than the sovereign. The reason for that is the so-called 'country risk'. Country risk is the sum of many components, one of which is that within the national borders, it is the national jurisdiction which counts. Theoretically, a sovereign could any time of the day declare a moratorium on all foreign payments. If that happened, even a AAA-rated borrower in that country, flush with liquidity, could not service his foreign debt.

After browsing Mytilineos' website (the first time ever; I had not been familiar with this group), I saw that this group is internationally diverse with operations in several foreign countries. That could be part of the explanation. If the bond is secured by foreign assets or foreign revenues or whatever else is outside the jurisdiction of Greece, that could explain the below-sovereign yield. But then a couple of other observations came up (which I have to hedge by emphasizing that they are based on a very cursory review only and without any other knowledge about the Mytilineos Group).

This is not a large group by international standards with group sales just below 1,3 BEUR. Certainly not the kind of group which one could expect to be an important player in international capital markets attracting the very best conditions. A cursory glance at the group's P+L and balance sheet suggests the following:

* the most obvious financial strengths of the group are (a) very high cash flows (roughly 20% of sales); (b) a rather decent profitability (ROS of 5%+); and (c) almost 200 MEUR in cash on hand.
* with current assets exceeding current liabilities, the group's liquidity would appear fine.
* with equity representing about 40% of total assets, the balance sheet structure would appear to be stable.

However, there are some items which, at first glance and in the absence of more information about the group, could be considered 'scary':

* consolidated total assets include (a) 209 MEUR goodwill; (b) 243 MEUR intangible assets; and (c) 257 MEUR in own stock, or a combined total of 709 MEUR. This means that about 60% of the group's equity of 1.284 MEUR are invested in what cynical credit risk officers would call 'hot-air-assets'.
* the group has almost 800 MEUR in trade and other receivables. That reflects extremely unfavorable trading terms and possibly includes substantial risk.
* total group debt of 650 MEUR appears rather high even for a capital intensive industry.

In summary, the 3,1% yield raises more questions in my mind than it provides answers. Obviously, the immediate reaction is that the low yield (for Greek risk) is due to the group's outstanding creditworthiness and reflects investors' belief that Greece as a country is on the rebound.

Or it could be, as mentioned at the outset, that the bond is secured with foreign revenues or assets.

Or - one could be a bit suspicious. A very important element is not known in this matter, namely: who purchased the 300 MEUR bonds? Suppose it were the Mytilineos family itself. 3,1% on 300 MEUR is close to 10 MEUR per year. If the Mytilineos family had purchased these bonds, they would have arranged for an annual transfer out of Greece of close to 10 MEUR, and that in the presence of capital controls which would normally impede such a thing. Shamed be he who thinks such a thing!

Wednesday, June 21, 2017

A New Narrative For Greece. Again?

The article from the Ekathimerini about building a fresh narrative for Greece made me wonder what the old narrative was/is. Since I couldn't remember any, I thought what kind of a narrative I would like to see. These are some of the thoughts which came to mind.

The first question I asked myself was what exactly is it that I would like to see achieved? And here is the answer I came up with: "We will seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

As I pondered this statement, my first reaction was that it basically says everything there is to say. But, of course: stating a goal alone will not do the trick. There has to be a discussion about how this goal can be achieved.

"We will create an obsession with exports!" This proclamation will have to be heard in all walls and halls of Greece. What is it that we could possibly export? Where do we have comparative advantages? Where would be good export markets? How can we move our products up the value chain before they leave Greece? How can we get assistance in pursuing this objective? And why, exactly, should we do all that? Well, because through exports we achieve financial inflows which we can then use to pay for imports, i. e. to increase our living standard. Not to mention the fact that many new jobs will be created.

"We will create an obsession with import substitution!" Now why would we want to do that? Because with imports, all the jobs along the production chain (product development, manufacturing, marketing, selling) are in other countries. We want to 'steal' those jobs from other countries by no longer importing products which could just as well be produced in Greece. Questions are: Which products which we are importing now could be just as well produced in Greece? Can we get any foreign manufacturers to manufacture in Greece? Where should we import from? (presumably from those countries which can reciprocate in one way or another). Import substitution is a job creation program!

"We will create an obsession with tourism!" Tourism is actually another form of exports and through tourism we achieve financial inflows which we can then use to pay for imports, i. e. to increase our living standard. We are first class in the luxury segment but in the rest of the industry we leave quite a bit of money on the table. Either because we have cheap tourists from cheap countries or because rich tourists from rich countries pay cheap all-inclusive prices. We will put the focus on improving quality. Quality of the infrastructure and quality of the service.

"We will create an obsession with foreign investment!" Every Greek will have to understand that there are only 3 options to get out of our economic crisis: foreign investment, foreign investment and foreign investment, again! We will pursue very aggressively foreign investors who take a long-term view with their investments. Who plan to add value to the Greece. And we will de-emphasize any kind of financial investors because such investors are principally interested in short-term financial gain. The key question will always be: Does the foreign investor promise know-how transfer, further investment and expansion. Put differently: Does the foreign investor accomplish something which we could not accomplish by ourselves. Or: Does the foreign investor contribute to the increase in exports, in import substitution and in improving the tourism infrastructure and quality of service?

And, finally -

"We will turn the Greek state into an efficient administration with a strong public service ethos!" Meritocracy will the the buzzword reverberating in the halls and walls of our public administration buildings! In the future, it will be very difficult to get a job in the public sector because the required qualifications will be very high. Patronage or nepotism will no longer be qualifications!

Our guiding policy will be that anything which hinders the above described measures or even makes them impossible will be reformed with great speed. We invite our critics to remind us forcefully should we deviate from this policy.

Friday, June 9, 2017

Debt Relief For Greece - A New Proposal

This article proposes an approach to Greece's debt relief which has not been discussed by authorities. At the heart of the proposal lies the following premise:

'Debt burden' is the amount of government revenues which has to be allocated to debt service (i. e. interest). Populists would argue that 'this is the amount of government revenues which we have to give to banks instead of building new schools and hospitals'.

In consequence, 'debt relief' can only mean reducing the 'debt burden'. If one considers the percentage of the debt burden (i. e. percentage of government revenues allocated to debt service) as the 'Borrower's Sacrifice', the premise of 'debt relief' must be to reduce the 'Borrower's Sacrifice'.

The table below shows the 'Borrower's Sacrifice' for all Eurozone countries. I have made the arbitrary decision to consider countries whose annual debt service exceeds 5 BEUR as 'significant countries'. The 'significant countries' are marked in blue and sorted by 'Borrower's Sacrifice' top-down.

Year 2016
Ordinary Interest "Borrower's
Government Expense Sacrifice"
Portugal  76.613 7.836 10,2%
Ireland 73.029 6.178 8,5%
Italy 788.502 66.272 8,4%
Spain 421.672 31.358 7,4%
Greece 87.473 5.649 6,5%
Belgium 214.063 12.074 5,6%
Austria 173.077 7.347 4,2%
France 1.181.278 41.983 3,6%
Germany 1.411.381 43.372 3,1%
Netherlands 307.004 7.551 2,5%
Finland 116.047 2.277 2,0%
Slovakia 32.345 1.339 4,1%
Slovenia 17.352 1.275 7,3%
Lithuania 13.315 523 3,9%
Cyprus 7.019 465 6,6%
Latvia 9.097 282 3,1%
Malta 3.871 218 5,6%
Luxembourg 23.147 183 0,8%
Estonia 8.507 16 0,2%

Portugal has the highest 'Borrower's Sacrifice' (10,2%) and the Netherlands have the lowest (2,5%). Greece ranks in the middle with 6,5%. However, it must be noted that Greece's 'Borrower's Sacrifice' is highly subsidized by the fact that the bulk of its debt carries below-market interest rates. That is 'debt relief' right there.

Under normal circumstances, the 'Borrower's Sacrifice' of a country is determined by the markets. Not so with Greece because Greece is bankrupt and kept afloat by the Eurozone. Thus, in the case of Greece, the 'Borrower's Sacrifice' can (and must be) steered by its creditors. The balancing act is to make the sacrifice as large as possible for the creditors' benefit without making it so large that it becomes politically unsustainable in Greece (and/or slows the growth potential).

In short, the 'Borrower's Sacrifice' for Greece should be somewhere between 2,5% (the lowest of the 'significant countries') and 10,2% (the highest). My point is: it does not matter so much where the 'Borrower's Sacrifice' is set at the outset. What really matters is that (a) it is made variable; that (b) it is tied to the correct base; and that (c) it has the right adjustment mechanism when the situation changes.

Suppose the 'Borrower's Sacrifice' had been agreed at 2,5% for Greece. In that case, Greece would have been expected to set aside 1.750 MEUR for interest in 2016 (2,5% of 87.473 MEUR). Put differently, Greece would have had to pay 3.899 BEUR LESS in interest than it actually did. That would have been real 'debt relief'.

Once Greece has made its 'Borrower's Sacrifice' (i. e. paid the 1.750 MEUR), Greece's part would have been done. Now it would be up to the creditors to negotiate an agreement among themselves who gets what of the cake. As long as Greece needs to be subsidized, it is clear that none of the creditors can get everything they want. The trick will be to make all creditors equally unhappy.

Why should the 'Borrower's Sacrifice' be tied to government revenues? (instead of, perhaps, to GDP?). The answer is quite simple: interest is paid out of government revenues and not out of GDP.

What should be the right adjustment mechanism? That's the tough part. The adjustment mechanism must assure that as Greece's economic strength increases, the 'Borrower's Sacrifice' increases accordingly. At some point in the future, the 'Borrower's Sacrifice' will reach levels which are acceptable to the markets and, at that point, and only at that point, Greece can truly return to markets.

In summary: the negotiation with Greece should be about the initial 'Borrower's Sacrifice' and the adjustment mechanism, and the negotiation among the creditors should be about allocating the 'Borrower's Sacrifice' amongst themselves. No more, no less.

Monday, June 5, 2017

Greece's Creditors Waiting For 123 BEUR!

The story has been making the media rounds that if Greece's Eurozone creditors agreed to a debt relief in the form of interest deferral until 2048, they would be waiting until 2048 to receive 123 BEUR. This is allegedly based on a forecast by the German Finance Ministry. No details as to how that calculation was made were given.

After having recovered from the shock of this piece of news, one can justifiably ask the question: "What else is new?"

Interest deferral does not mean that interest is forgiven. Its payment continues to be due but, as the name suggests, instead of paying interest every year, all interest is deferred until payment at a later date in the future. Until 2048, for example. And, normally, interest on interest deferred is also added to the bill.

Suppose Greece owed 200 BEUR out of its total debt of about 320 BEUR to Eurozone creditors. At a rate of 2%, the annual interest amount to be deferred would be 4 BEUR. Multiply that by 26 (from 2022-2048), you come to 104 BEUR. Given the difference with the above 123 BEUR, the German Finance Ministry's forecast calculates either with a higher level of debt or a higher interest rate or high interest on deferred interest, or a combination of these.

So there isn't really any news in this shocking news because we are talking about 'debt reprofiling' and not 'debt relief'. Debt reprofiling means to reprofile the existing debt and interest maturities in such a way that they become more amenable to the borrower's cash flow. That's all. There is no relief in that whatsoever.

To express shock about having to wait until 2048 for payment would only be justified if one felt that the payment can eventually be made. I don't believe that there is any person in the world who still believes that Greece can service its debt (i. e. pay interest at market rates), today or in 2048. Thus, to calculate interest at market rates (which cannot be paid), defer it out to 2048 so that a huge bullet payment results and then clamor that 123 BEUR have to be written off, well, that reminds a bit of Paul Kazarian's accounting tricks.

The only thing which will work for Greece is a debt reprofiling combined with a reasonable debt relief. To avoid that governments of lending countries have to tell their tax payers that they had to forgive Greece debt, the relief should be played via the interest rate.

The simplest way would be to set the interest rate at zero percent and to build in certain 'kickers' stipulating that interest could be charged in the future under certain unforeseen developments. For example, if Greece were to discover the world's largest oil reserves and became very rich, that could be a situation where the 'kicker' kicks in.

In the present interest rate environment, this debt relief would not be too costly for the lending countries. They could fix their funding cost until 2048 at rather low rates and the resulting 'loss on Greece' would become an opportunity loss (not collecting interest) whose bookkeeping entry no outsider could find in the published fiscal statements (because there is no bookkeeping entry for opportunity losses).

Everything else is a bit of a farce.

Saturday, June 3, 2017

America First! Germany First! Greece Perhaps last?

The Germans are all upset about President Trump not living up to global responsibilities. The President tells people to 'buy American' and to 'employ Americans'; he withdraws from the Paris Agreement because it would enrich other countries at the expense of Americans and then he even has the nerve to say it loud and clear: "America First!" President Trump blasted that message to the whole world in his inauguration speech.

That is indeed bad behavior. The Germans (and many other European countries) would never say that out loud. But a closer look merits the observation that there are indeed some parallels between Germans within the Eurozone and Trump within the global world community. Germany does not want to enrich other Eurozone countries (or rather: make them less poor) at the expense of German tax payers. Nevermind that it would be good for the Eurozone overall. Germany does not purse rogue companies like VW as forcefully as they pursue rogue (because profligate) states like Greece. The German Chancellor criticizes the American President for tweeting an unintelligible word but she does so in a sentence without true content. And one doesn't have to be a linguist to hear behind every statement of the German Finance Minister the unspoken appeal: "Germany First!"

Well, well, well. This doesn't look good for Greece. If everyone else aims at being first, someone has got to come out last. No point in pondering that. Better to have an ouzo!

PS: this obviously was written with tongue in cheek!

Wednesday, May 31, 2017

The Lure Of Grexit - Debunked!

An author by the name of Leonidas Stergiou published an analysis in the Ekathimerini under the title "Why depreciation is the wrong medicine for the Greek economy". It is, for once, an objective discussion of the pro's and con's of a Grexit for the Greek economy. Stergiou takes issue with the premise voiced often by FM Schäuble: Greece should return to the Drachma, adjust its economy and when a new equilibrium is reached, Greece could return to the Euro. Schäuble's argument is that an adjustment of the Greek economy cannot be avoided and, given that, it would be far less painful to make that adjustment with the Drachma as currency instead of the Euro.

Leonidas Stergiou says that Schäuble is wrong, and he makes very good points to support his argument. His key point is:

"Harsh reality together with economics teach that the devaluation of a currency may help, provided that the country does not import more than it exports, and mainly that it does not import a lot of raw materials or intermediate materials that have to be processed. A country with such issues that proceeds with depreciation will be plagued by inflation. ... So in a country with a negative trade balance that imports a lot of raw materials, depreciation raises production costs and creates inflation. The raised production costs annul part of the competitiveness that was achieved by the depreciation. Should the inflation be transferred to salaries, then all the gains from the depreciation will be lost because, in the end, nothing became cheaper."

So for all those who would be hoping that a return to the Drachma would make their lives more comfortable, Stergiou serves a grand disillusionment:

"In other words the measures mandated by the memorandum would be inevitable and would have to be implemented strictly – but without the funding that came with the memorandum. In any case, right now there is internal devaluation taking place within the eurozone. If Greece did not have the euro, a tough economic adjustment program through austerity measures would still be necessary. Otherwise, the inflation due to depreciation would offset the benefits of the competitiveness after the depreciation. Now, Greece in the euro area cannot depreciate its currency in order to make its products and services more competitive. But it could directly reduce the prices of all components of the domestic GDP. To put it simply, if you cannot increase the purchasing power of others, you must decrease your own."

And Stergiou concludes with a condemnation of the Greek government (or rather: all Greek governments since the crisis broke out):

"Greek governments have preferred to accept austerity measures particularly through tax increases and reductions in pensions and wages rather than proceeding to reforms and speeding up the implementation of the MoUs. Instead of this, they entered into long-term and overnight negotiations with the troika in an attempt to postpone the political cost of the reforms for later. Thus, the recession period was prolonged, the debt increased, the financing needs remained unmet. This tactic leads to new MoUs and the prolonging of the recession period and increases the the chances of spiraling into recession and default. On the other hand, without a new MoU, a default can be considered a certain outcome."

Sunday, May 28, 2017

Greek Pensions - Dreams Turned Sour?

Under the heading of "They stole my money", the Ekathimerini reported about 4 cases of pensioners who feel that they have been 'destroyed' by the various pension cuts of the last 7 years. There is no question that a very large number of Greeks have ridiculously low pensions (below 500 Euros!) but if the average Greek pension is almost as high as the average German pension, as the IMF states, that can only be explained by a high number of pensions significantly above the average and/or by a high number of pensioners who do not fullfil today's pension criteria.

My understanding is that the 'reformed' pension criteria are now: ordinary retirement age 65 and minimum contribution years 40. Also, the survivor's pension is 50% of the original pension. I would guess that those are rather standard criteria in today's Europe.

One should review the 4 cases in the above article with a focus on the following questions:

1) At what age did the person retire?
2) How many years did the person work/contribute?
3) In the case of survivor's pensions, how high would the original pension have been?

When one reviews the 4 cases with the above questions in mind, one would come to the conclusion that there have indeed been drastic reductions but when looking at these 4 pensions as they now are after allegedly 13 pension cuts, one can only conclude that perhaps the Ekathimerini did not chose the best examples of how much many pensioners are suffering today.

The following 2 statistics about Greece's approximately 2,6 million pensioners also merit consideration:

* 633 thousand pensioners (24% of the total) are over the age of 81 and their average monthly pension is 712 Euros (compared with average Greek pensions of 890 Euros).

* 727 thousand pensioners (28% of the total) are below the age of 65 and their average monthly pension is 1.028 Euros. Put differently, pensioners below the new legal age of 65 account for almost one-third of the entire pension expense.

Wednesday, May 24, 2017

Current Account Vs. Fiscal Results

An anomaly is developing in Greece's domestic and foreign accounts. The historical trend was one of double-deficits, i. e. a deficit in both the budget as well as the current account. Makes sense in as much as a budget deficit increases domestic demand, puts money into the economy, increases imports and, in consequence, leads to a current account deficit.

Since 2010, austerity has taken money out of the economy leading to the well-known collapse in domestic demand. Greece turned a giant primary deficit into a surplus and, simultaneously, turned a giant current account deficit into a surplus in 2015.

In 2016, the primary surplus exploded as more money was taken out of the economy (taxes, etc.). However, an anomaly began: despite this further erosion of domestic demand, the current account went from a surplus of 205 MEUR in 2015 to a deficit of 1,1 BEUR in 2016. This trend now continues in 2017 where the government continued to run a primary surplus (albeit not a large as the year before) while the current account drifted more into the negative territory.

Below are the figures for Greece's current account in the first quarter of 2017, compared with the same period of the previous year. Also, the month of March is compared for both years.


January-March March
2017 2016 2017 2016
Revenue from abroad
Exports 6,7 5,5 2,6 2,0
Services (e. g. tourism) 3,6 3,0 1,3 1,1
Other income 2,6 2,5 0,6 0,8
Current transfers 0,9 0,7 0,2 0,2
------ ------ ------ ------
Total revenue from abroad 13,8 11,7 4,7 4,1
Expenses abroad
Imports 11,8 9,7 4,5 3,5
Services (e. g. tourism) 2,6 2,3 0,9 0,8
Other expense (e. g. interest) 1,4 1,5 0,4 0,4
Current transfers 0,5 0,6 0,2 0,2
------ ------ ------ ------
Total expenses abroad 16,3 14,1 6,0 4,9
Net foreign deficit (current account) -2,5 -2,4 -1,3 -0,8
Trade balance -5,1 -4,2 -1,9 -1,5
Services balance 1,0 0,7 0,4 0,3
Other balance 1,2 1,0 0,2 0,4
Current transfer balance 0,4 0,1 0,0 0,0
---- ---- ---- ----
Net foreign deficit (current account) -2,5 -2,4 -1,3 -0,8
January-March March
2017 2016 2017 2016
Exports "Other Goods" 4,7 4,3 1,8 1,6
Imports "Other Goods" 8,4 7,8 3,2 2,8
---- ---- ---- ----
Balance of goods excluding oil and ships -3,7 -3,5 -1,4 -1,2

Gone are the days of positive surprises with Greece's current account. What is even more disconcerting is the trend: the 2017 deterioration started noticeably in the month of February (January had actually been an improvement) and led to a whopping deterioration of 500 MEUR over the previous year in the month of March alone.

But the real question is: where is the money coming from to pay for this rather dramatic increase in imports? There is no significant increase in employment, no known increase in wages/salaries, certainly no increase in pensions and the increase in unpaid taxes would suggest that people are financially very strained.

I repeat the question: Where is the money coming from to pay for this rather dramatic increase in imports?

Saturday, May 20, 2017

A Plea For Greek Elites!

I had never heard of Mr. Aristides Alafouzos before. Like many foreigners, I have practically zero knowledge of the Greek elite (political, economic, social or otherwise) except for those who are in the media all the time. Whether one likes the term 'elite' or not, every society, even a communist one, produces its own elites. Some are artificial elites (i. e. hereditary or appointed), others are natural ones (meritocracy, charisma, etc.).

I learned about Mr. Alafouzos through two obituaries in the Ekathimerini (here and here). It seems clear that Mr. Alafouzos was one of the natural elites.

There is a German saying which cannot well be translated into English: "Wie der Herr, so das Gescherr". One translation might be: "Like master, like man."

Henry Ford II was known to be a CEO who would slap his top executives in their faces (almost literally). During his reign at the Ford Motor Company, managers all the way down to the supervisory level were known to slap their subordinates in their faces (literally speaking).

Other CEOs are of the gentleman kind and the culture in their companies will undoubtedly be gentleman-like. In fact, culture is very much influenced by the elites.

Based on the two obituaries, I have no doubt that Mr. Alafouzos formed and shaped a culture in his companies which corresponded to his own values. While he is now dead, cultures tend to survive for quite some time.

I have always wondered what kind of a society Greek society would be if the elites of Greek society (of the Alafouzos kind) came more to the forefront, played a more significant role in society. Some of the things we see these days on TV, like physical fights in the Greek parliament, are clearly the worst of Greek society.

Why can't we see more of the best of Greek society?

Tuesday, May 9, 2017

The Gut Says: "Greece Is On The Rebound!"

My wife and I always spend springs (typically 2 months) and autumns (up to 4 months) in Greece. I admit that the microcosm in which we move may not be typical of all of Greece but it is always the same microcosm: a mixture of big-city life in Thessaloniki, visits to villages, trips to tourist areas in Chalkidiki, travels throughout Northern Greece, etc. This microcosm may not reflect Greece overall but it serves well as a basis to measure trends. And here is my surprise for you:

Greece is on the rebound, no doubt about it!!! I first had that feeling last spring and it intensified last fall. After having been here for 3 weeks this spring, I am now convinced. I sense a level of positivism if not optimism which I haven't sensed since 2010. In the villages, I see 1-person shopmen who suffered terribly in the past and who now say that they have quite a bit of work. Some of them even in the construction industry. For my car service, I used to get an appointment at Hyundai with a week. Last spring it was already 10 days and this time around it was a little over 2 weeks. I see traffic jams in down-town Thessaloniki which I haven't seen since 2010, and this at gasoline prices 30-40% higher than in Central Europe! When I look out at the Thessaloniki harbor, I now see up to 10 freighters loading and/or unloading freight. I could go on and on. If the official stats do not show that, it's because the official stats miss a lot of reality.

Barring unforeseen surprises, Greece will sign a deal with creditors soon and it is likely to start benefiting from the ECB's QE. Today, I even read that they are thinking about placing a bond in the markets next June. If some of that (or even all of that) really happens, there will be a lot of positive news about Greece. And positive news will feed upon itself, particularly when a record tourist season reinforces such positive news every day. The steady decline in Greek bond yields will also be a continuous reinforcer of the good news. Financial investors will start wondering whether perhaps they might be missing the bottom of the crisis to make good deals. That, too, could feed upon itself.

I have no facts to offer but my gut says that Greece is on the rebound. The key variable for increased economic activity in Greece is the net inflow of foreign capital. Foreign capital does not always flow on the basis of hard facts. Oftentimes, if not even very often, it is the 'leading steers' that make the herds move. It would only take a few 'leading steers' to set a trend in motion. Who knows? We may soon see the financial herds turning around and 'discovering Greece' anew!?!

Mind you, I don't believe that Greece today is a much better place to do business than 7 years ago. But once the herds start moving, they never pay attention to such details. Neither do I think that the bottom of Greek society will benefit all that much from the herds. As Adam Smith said: "The problem with fiat money is that it rewards the minority that can handle money." I recently read that about 1,5 million people in Greece are without income and assets. I don't think miracles will happen for them.

But there will be a fairly large section of society which will benefit from the renewed bandwagon. As I said, I don't think it will be a new start in a fully reformed country. Not at all!

But I think that there is a good chance that we will soon see a renewed herd movement. Essentially a repeat of the past. When money comes into Greece, Greece does well. The better Greece seems to do, the more money comes into Greece. And I am fairly certain that the herd will start moving again soon.

Until the next 'sudden stop' happens...

Trade Balance: Bank Of Greece vs. ELSTAT

Much publicity has been given to the fact that ELSTAT reported an increase of 36,2% in Greece's trade deficit in March of this year (versus March 2016). The numbers are distorted by oil and ship transactions but even without those, the trade deficit increased 6,6%.

While this is interesting information, it always reminds me of a question which I have been trying to get an answer to for years, albeit without success, namely: why do ELSTAT and the Bank of Greece report trade figures which differ quite substantially, sometimes even enormously. For example, for 2016, ELSTAT reported a trade deficit of 18.705,0 MEUR whereas the corresponding figure from the Bank of Greece was 16.581,0 MEUR. A difference of that magnitude can certainly be considered as enormous.

Will I ever get an answer to this question?

Monday, April 24, 2017

Thessaloniki's Private Equity Port

It was announced that 67% of the Thessaloniki Port Authority has been sold by the Hellenic Republic Asset Development Fund to a socalled 'German-led consortium'. The lead member of this consortium is "Deutsche Invest Equity Partners GmbH", joined by the French "Terminal Link SAS" and "Belterra Investments Ltd." of Cyprus.

The financials of the transaction sound rather attractive: the total value of the deal is said to be 1,1 BEUR, of which 232 MEUR are for the acquisition of the shares. The remainder consists of mandatory investments, license fees, dividends, etc.

Deutsche Invest is a Munich-based private equity fund. Its website doesn't reveal very much information. The internet information about Terminal Link is even less. And no information can be found about Belterra (other than the fact that it is domiciled in Cyprus).

The above consortium won the deal over two other bidders: the International Container Terminal Services, a Philippines-based powerhouse in the field of container ports and terminals worldwide, and P&O Steam Navigation Company, the 168-year old bastion of the British shipping industry which now belongs to Dubai Ports World, a giant in the industry.

Since I have no background information on this transaction, I can only comment on it based on the brief announcement about the transaction in the media.

Here is, on one hand, a Munich-based private equity firm whose website lists a total staff of 5, and two powerhouses in the industry on the other. That is in and by itself highly unusual. The Deutsche Invest consortium won the deal because it had submitted the highest bid. If that was the only criterion of the seller, the HRADF, it was a rather short-sighted criterion.

A private equity firm has only one strategic interest when making investments: to sell the investment to someone else within a foreseeable time frame, seldom more than 5 years. Obviously at a good profit. That's neither good or bad; it's the business model of a private equity firm. Everything that is done during the limited period of ownership, every decision which is taken has one single priority - to increase the value of the investment for resale. More often than not, the methods applied in making the bride presentable for the next wedding are somewhat questionable.

Not in my wildest imagination can I come up with any explanation as to why the HRADF would have chosen a private equity firm over seemingly interesting strategic investors. Sorry, I can come up with one: maximize short-term profit. The only problem with that is: when privatizing state assets, the maximization of short-term profits should be the least priority of all. Far greater priorities would be the strategic importance of the buyer, the potential for know-how transfer, etc.

I have written on many occasions that I consider Cosco, the investor in the Piraeus port, as the prototype of an ideal foreign investor for Greece. Based on what I know so far, The Deutsche Invest consortium seems to be the prototype of the foreign investor that Greece should stay away from.

ADDENDUM per April 25, 2017
According to an article in DER SPIEGEL, the person behind Belterra of Cyprus is Ivan Savvidis, the Greek-Russian dealmaker of questionable renown. That rounds out the picture quite nicely: a small private equity firm which wants to cash-out reasonably soon; a questionable Greek-Russian miniature oligarch who obviously aims at collateral benefits and two global players in the industry who wonder about the ways and means of the Greek government.

I have just learned that behind the French "Terminal Link SAS" is the French Group CMA CGM Group. That also seems to be a powerhouse in the industry so that I have to take some of my above criticism back. The question would still be: why does such an industry powerhouse need the services of a small Munich-based private equity firm and a questionable Greek-Russian dealmaker?

Friday, April 21, 2017

On One Hand... And On The Other...

My return to Greece after a 4-month absence coincided with 2 articles which nicely sum up what the 'Greek problem' is all about. The first one was the following comment in the Ekathimerini:

"Foreign investors and international markets are awaiting tangible results from Athens in order to be convinced that the country is, finally, turning a corner, and that something is moving after years of frustration. Their wait has been a long one and the economic pressure on the country has been unbearable. But the deals regarding the old airport, and the new one as well, could do the trick. However, if foreign investors are to be convinced of Athens’s commitment to change, it will need to make some bold decisions that will allow the country to circumvent, and essentially neutralize, the naysayers within the administration and within the state that are doing everything in their power to stand in the way of the growth Greece so desperately needs. The problem is that those opposed to progress are determined as ever to keep standing in the way."

And the second article was written by Bill Rhodes, the doyen of sovereign financial crises. I had written about Rhodes on several occasions in the early years of this blog when I lamented that no one was listening to his advice (had they listened, the crisis would have been resolved within 2-3 years, in my opinion). The gist of Rhodes' message is summarized in the following sentence:

"Debt relief really means softening the terms on interest rate payments on the outstanding debt as the Greeks have no requirement for many years to come to start repaying principle."

We have now observed a song-and-dance around the above two positions between Greece and its creditors for months and it is likely that it will continue for even more months. Bill Rhodes once said exasperatingly: "We are in a sense of gamemanship here and everything is being played out in the public rather than getting in a room, something that I was accustomed to for 25 years with so many debt restructurings around the world, and to say 'Let's get it done!'"

In case of doubt, one is well advised to take the advice of those who have the most experience and the best track record. Between the Eurogroup, the IMF and Bill Rhodes, there is only one party which has a good track record; an excellent one, for that matter! And that party is not the Eurogroup nor the IMF!

As a starting point, it would be helpful to do some public educating that there are various kinds of debt relief. The key available elements are: forgiveness of principal, extension of maturities and reduction of interest. Greece so far has had a bit of all but never in a truly consequential manner. And the big mistake is that many understand debt relief to be a forgiveness of principal. A forgiveness of principal of official debt is totally out of the question in a year with several important European elections.

And - a forgiveness of principal is really not necessary because principal debt only matters to the extent that it carries interest and has maturities for repayment. If, for example, interest is brought down to close to zero and if maturities are extended into the next century, debt assumes the character of equity.

So far, the IMF has taken a huge profit on its 'help for Greece' because its lending margins are in the area of 2-3% and, as a super senior lender, it faces no credit loss. With the Eurogroup, the situation is a bit different because they now have a large portion of their loans on zero interest and they certainly face the risk of credit loss sooner or later. Neither is the IMF's 'help for Greece' recognizable with their maturity structure because all their loans mature in the foreseeable future. The Eurogroup, on the other hand, has already extended some maturities substantially.

Perhaps it is wise to have the IMF in there with maturities in the foreseeable future because, that way, one always has some leverage over the borrower. However, there would have to be some explanation why the IMF is not lowering its interest rate to the lowest they have ever charged a country because, as they have stated, they have never had a country in as bad a shape as Greece.

The Eurogroup should restructure its maturities in such as manner that there are no maturities for at least 10 years. And on the interest side, they should reduce the rate to their funding cost and lock in as much of the rate for as much of time as possible. That would be some 'help for Greece' without really costing anything. As a final 'gift', one could offer the deferral of interest for, say, 5-10 years.

If Greece were a company with the benefit of bankruptcy laws, its creditors would already have given debt relief involving massive forgiveness of principal, significant extension of maturities and zero interest rates on large portions of the debt. All that because it would still have been a less costly affair than a bankruptcy.

The only reason why Greece has not gotten such debt relief is that there are no bankruptcy laws for countries. But that should not be a free ticket to get away with bloody murder.