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Sunday, April 29, 2012

Political Common Sense?

In the blog GreekDefaultWatch, the author thinks his vote through for the May 6 elections and he comes to the conclusion that his vote should go to Stefanos Manos of the DRASI party. I don't know the blogger nor have I ever heard of Stefanos Manos nor his party, so I looked up Wikipedia.

According to Wikipedia, Stefanos Manos and his party espouse "common sense" as their ideological base. Now, politicial scientists in their ivory towers may not consider common sense as a qualified party program but, personally, I would hope that sooner or later Greek politicians would start using common sense (instead of silly rhetoric) in attacking their country's problems.

Friday, April 27, 2012

This is Greece, too!

I accompanied my wife to the local market this morning. An elderly man was selling rice. He sold it for 1 Euro per kilo whereas the price in the nearest supermarket is 3,50 Euro.

The man had a big wound in his face so he must have had a very serious operation. Yet, he was standing upright, moved respectfully and reflected dignity. Actually, he also spoke good German having studied in Vienna and worked in Stuttgart.

After his first try, the scale said 900 grams and my wife said "that's ok". It was not ok to the man. With precision, he juggled more rice until the scale said excactly 1.000 grams.

My wife then gave him one Euro and a bit more, thanked him and said he should keep the rest. He very politely but very definitely refused to accept it. He said: "The price is 1 Euro per kilo. If you force me to accept more, you hurt my dignity!"

How much of a percentage of the Greek population might this man reflect? I wish I knew!

Sunday, April 22, 2012

Here is a party to vote for!

Ronald Reagan proved that one doesn’t necessarily need a detailed party program to accomplish something. Sometimes it is better to have a few simple messages which everyone understands and which are repeated all the time. Below are the messages of a Greek party which I could vote for.

OUR PROGRAM
First, to get new jobs quickly we will “steal” them. We will steal them from other countries which presently sell to us products which we could produce ourselves in Greece. We will create an “obsession with import substitution” in the minds of the Greek people so that Greek consumers become literally ashamed when they buy products from abroad when such products are also produced in Greece.

Second, we will create an “obsession with exports” in the minds of the Greek people so that Greek producers become literally ashamed when they do not sell a good portion of their production to other countries, particularly agricultural products. And we will be “smart exporters”, that is we will make the products shelf-ready and market them directly to individual countries (instead of selling bulk to Italy).

Third, we will create an “obsession with tourism” in the minds of the Greek people. Our mindset will no longer be that tourists should be thankful for being able to visit Greece but, instead, we will let them know that we really want their visits (and their money).

Fourth, money will be required to accomplish the above, particularly for the investment in new productive facilities for import substitution and new exports. We will create an “obsession with foreign investment” in the minds of the Greek people. Whenever a foreigner invests money in Greece, we will consider this as a compliment to the attractiveness of our country as a place to do business.

Fifth, we will privatize state companies as much as we can but we will sell them only to investors with a sustainable business philosophy. Investors with a short-term financial focus we will consider as asset strippers and treat them accordingly. The primary motive for privatization will not be the one-time financial gain but, instead, the future technology transfer which we expect to receive in those companies.

Sixth, we will take full advantage of the resources of the EU Task Force 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. Our goal is to move up to the world’s top-20 countries as regards the ease of doing business as well as the low level of corruption. This within only one generation.

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

Finally, it will be a priority for us to raise the spirits of the Greek people again. We will set in motion a Greece-is-Changing movement and we will invite people from all walks of Greek life to participate in creating the vision of a new and more prosperous future perspective for Greece. We will use the most modern media technology available to reach all Greeks with our message on a regular basis.

What Greece needs now - Norbert Walter

Norbert Walter, the former Chief Economist of Deutsche Bank, argued at the INET Conference in Berlin that a "Marshall Plan" is not the answer to Greece's problems. The answer to Greece's problems is not more funding but, instead, the following:

* Greece needs now a batallion of US anti-corruption specialists
* Greece needs now a large group of German trust agency specialists to get the privatization going
* Greece needs now German engineers to do the real estate catastration in order to have land identified so that Greece can have a tax on real estate (because a real estate tax cannot be evaded...)
* Greece needs Italians to show them how to increase tax efficiency
* Greece needs Spaniards to show them how to get tourism up to international standards

And what exactly are the vote-seeking Greek parties saying about points like the above? 

Learn from those who have experience!

From the beginning of the crisis, I have strongly criticized EU-elites for being so arrogant as to not seek advice from those who have practical experience when it comes to countries with external payment problems. As Country Manager first in Chile and then in Argentina, and as the representative of one of the largest US creditor banks of both counties, I was intimately involved in the rescheduling negotiations with these countries during the 1980s.

The then Citibank chaired the Steering Committees and their William R. ("Bill") Rhodes turned himself into a legend by almost singlehandedly developing solutions which worked. At the same time, it was a case study of how rescheduling banks not only worried about getting their money back but, even more so, focused on new economic plans so that the countries would become stronger and be able to service their debt. Here are descriptions of Chile and Argentina.

EU-elites were serenely above the experience level of emerging markets. Bill Rhodes and people who had worked for him during major reschedulings of the last decades offered their advice but were politely told off on the grounds that experiences in emerging countries do not serve as examples for the Eurozone. Or, as Prof. Adres Velasco put it at the INET Conference in Berlin recently: "The sociology of knowledge is such that when it comes from countries like Chile, Argentina, Taiwan, etc. it is not worth thinking about".

Prof. Velasco's presentation at the INET Conference was a brilliant piece of advice to those EU-elites who are convinced that they know it all better. By the way, how could they know it better when they never had to deal with such a crisis before?

Prof. Velasco also, and very subtly, calmed persecution theories on the part of the Periphery quite a bit. He pointed out that none of these countries had to face a real financial crisis in the order of Latin American or Asian countries yet. A financial crisis, he said, is when the flow of money stops. When that happens, a country must cut imports overnight and the living standard collapses (and more). Nowhere in the Periphery has the flow of money stopped since the beginning of the crisis.

In all these countries, the current account deficit remained at 4% of GDP on the low end up to almost 10% on the high end (Greece). Thus, someone must have provided funding. Prof. Velasco described this as evidence "that perhaps German citizens have not been quite as ungenerous as some people at this meeting have made them out to be".

Obviously, it was the Bundesbank who provided the bulk of this funding so far. I am not talking about the LTROs. Instead, I am talking about the Target-2 claims which represented 615 BEUR of the Bundesbank's assets at March 31, 2012. Of that total, 107 BEUR were claims against the Bank of Greece (only 7 BEUR 4 years earlier). Thus, the Bundesbank alone has lent to Greece 100 BEUR during the last 4 years out of the ordinary course of business (Target-2). LTRO-funding of recent months and EFSF-funding of the banks' recapitalization would come on top of that.

Had the Bundesbank not done that, Greece would have had to stop the imports of many things dear to Greeks quite some time ago. No more cars, motorbikes, smartphones, etc.? Not really, but certainly a lot less!

Real national austerity is when a country which desperately depends on imports needs to cut imports overnight. Government austerity means that the usual suspects (those who have always paid taxes) have to suffer. National austerity means that everyone suffers, and in a harsh way!

Saturday, April 21, 2012

The lesson of West Germany & GDR

Strangely enough, Germany seems intent on ignoring the best lesson on the North/South problem within the Eurozone – its own experience with the former GDR after unification.

Estimates of the cost of German unification during the last 2 decades range between 1.500-1.800 MEUR. The privatization of the GDRs industrial sector (about 8.000 companies) was initially projected to generate revenues of about 600 billion Deutsche Mark and ended up causing losses of 250 billion Deutsche Mark. What went wrong?

On July 1, 1990 (even before the official unification), the GDR Mark was exchanged into Deutsche Mark at rates between 1:1 to 2:1. This was a political decision; many economists (above all the Bundesbank) urged not to do that. The government under Helmut Kohl argued that there was no alternative to doing that lest there not be a massive migration from East to West.

The net result was that the GDR economy was overnight catapulted into international competition. Liabilities were now in strong currency as were asset values, except that liabilities are seldom less than the books show and GDR asset values were already before the conversion less than the books showed.

In addition to these devastating financial consequences, the West German corporate sector had absolutely no interest in supporting the build-up of a real competitor in the East and they were supported in that by the unions who preferred keeping jobs in the West. Not only did the West German corporate sector not offer any help to the East but they even talked those GDR companies which could have competed with them even in hard currency down. To top it off, they showed no interest in investing in the GDR and preferred exporting to the GDR from the West. Since the overvalued and non-competitive East was eventually out of an industry of its own, the East became totally dependent on transfer payments from the West.

Within a few years, West Germans were making noises behind closed doors that perhaps the Wall should be built again. Why? Because they saw on their tax returns how much the unification was costing them (an 8% surcharge on income taxes payable otherwise).

So Germany then learned the lesson which is so important that it is again learned today: one can’t have both, have the cake and eat it at the same time. One either supports a region to develop a value-generating economy on its own (which means lesser exports to that region) or, if not, one can continue to export but then one has to make transfer payments so that this region can pay for the exports.

There isn’t really another way!

It's the country risk, stupid!

Anyone who has ever worked in international banking knows that risk management does not only look at sovereign risk per se but, much more so, at country risk as a whole. Country risk is defined as the amount of money which, if Greece were to fall into the Aegean, would fall into the Aegean, too.

The overall country risk/exposure is segregated into its major components: government risk, exposure to public sector companies, exposure to the banking sector, exposure to private sector companies, etc.

What matters in the final analysis is the overall country risk. Why? Because if there is a run on a country’s sovereign bonds (like the one which began in Greece in late 2009), it will automatically trigger a run on the entire country exposures: if lenders no longer want to buy Greek bonds because of lack of confidence, they will similarly no longer make loans to the Greek banking sector (and they will cancel existing ones when they mature).

Why is that the case with a country and not with a federal state of the USA? Because a country has its own jurisdiction. Argentina, for example, can nationalize an oil company whereas California cannot.

EU-leaders have so far only addressed the issue of sovereign risk. They have hardly done anything regarding the other components of country risk. But what is the point in curtailing (with great publicity) the amount of financing which the EU makes available to the Greek state when, at the same time, the ECB lends huge amounts of money to the Greek banking sector (with very little publicity)?

The ECB has felt that it had no other alternative if the collapse of national banking sectors was to be avoided. That is true. But it is not the job of the ECB to finance national living standards and/or capital flight! That should be decided by politicians who then carry the responsibility versus their voters.

A Central Bank requires investment grade collateral for its role as a lender of last resort. The ECB more or less gave up that requirement so that national banking sectors could be saved and they did this very quietly. That was wrong!

The ECB should have put (and could still do) an ultimatum to EU-politicians: “We give you 6 months to arrange financing for entire countries (instead of only national governments). Until then, we will make the necessary funding available. Thereafter we will make margin calls”.

What would have been the difference? The financial requirements of entire countries would have been put on the table and would have been subject to public debate. At least the following 2 consequences would have occurred:

 * tax payers in surplus countries would have had transparency that they are not only financing budget deficits but, much more so, current account deficits and capital flight; and

* politicians might then have decided that it is smarter (and cheaper) to help deficit countries to develop their own national economies instead of giving them money to strengthen the economies of those countries which export to Greece.

Incidentally, this could still be done today.

Friday, April 20, 2012

Do we want to succeed as a nation?

Some time ago, I read the very interesting book by Harvard professor Niall Ferguson about "The West and the Rest". In it, Ferguson identifies 6 so-called killer-apps which accounted for Europe's supremacy over the last 4 centuries. Greek politicians might want to check how many of those 6 killer-apps are in place in Greece.

I am now reading an equally interesting book by Harvard political scientist James A. Robinson and M.I.T. economist Daron Acemoglu titled "Why Nations Fail". Particularly this book would make good reading for Greek politicians as they explain to their compatriots during the election campaign what kind of a society they think Greece should become.

Particulary the latter book could be very useful. The authors argue (paraphrasing the NYT reviewer) that the key differentiator between countries is “institutions.” Nations thrive when they develop “inclusive” political and economic institutions, and they fail when those institutions become “extractive” and concentrate power and opportunity in the hands of only a few.

“Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few,” they write. 

“Inclusive economic institutions, are in turn supported by, and support, inclusive political institutions,” which “distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy.” Conversely, extractive political institutions that concentrate power in the hands of a few reinforce extractive economic institutions to hold power. 

The authors argue that once an extractive political and economic system has been firmly established by the society's elite, it is extremely difficult to change that. The explanation is simple: elites generally don't deprive themselves voluntarily of benefits which they have.

I guess the challenge for Greek voters is how to change an extractive political and economic system into an inclusive one.

Wednesday, April 18, 2012

The miracle of (some) Greek prices

I have now been back in Greece for 2 weeks after having been away for 4 months. Our apartment is in Kalamaria, one of the nicer suburbs of Thessaloniki. I realize that Kalamaria is not representative of Greece as a whole. I am also aware that the economic crisis is recognizable even in Kalamaria (seemingly innumerable apartments for rent or sale).

However, what baffles me is that prices in the places we frequent have really not come down, and they are still high when compared to Austria. Let me take food prices as an example.

The Gran Masoutis near our apartment has got to be one of the nicest supermarkets I have ever seen, certainly nicer than anything which comes to mind near our home in Austria. At the same time, my wife tells me that the prices of many, many products there are higher than in Austria.

Today, I accompanied my wife to the Gran Masoutis. In the area for fruits & vegetables I asked her how the prices compared with Austria. She said that most products were significantly more expensive. Most of the products were listed as "Greek origin".

A couple of things come to mind. First, if incomes go down but prices remain high, then that has something to do with the standard of living. Nevertheless, there don't seem to be fewer shoppers at the Gran Masoutis than in earlier times. Thus, while many Greeks are truly suffering, some Greeks do not seem to be affected much by the economic crisis.

Secondly, if Greek fruits & vegetables are more expensive in Greece than fruits & vegetables sold in Austrian supermarkets (of whatever origin), then it is unlikely that Greek fruits & vegetables will make it onto the shelves of Austrian supermarkets.

All the talk about increasing Greek exports should focus less on megalomaniac projects like HELIOS (which plans to export electricity to Germany at prices above German prices...) and start focusing immediately and with top priority on those products which Greece already has and has had for hundreds of years - agricultural products.

Agricultural products are renewable every year; the selling of islands is not.

Alexis Papachelas on "loving one's country"

This is one of the most insightful articles which I have read of late. I am no expert on the Greek psyche but it seems that some form of misguided pride prevents Greeks from recognizing reality.

If you get yourself into a mess, there is not too much to be gained from thrashing blame around. What is called for, instead, is to recognize which behaviors got you into the mess and to change those behaviors going forward. "Self-recognition is the first step towards improvement" - this is one of the first things we learned about ancient Greek wisdoms back in Gymnasium.

I would be curious to know what percentage of Greeks could identify themselves with this article. If it were more than 50%, hope for a better future would be in sight.

Several decades ago, Citibank had a legendary CEO by the name of Walter Wriston who had a wonderful talent of putting important messages into a few words. I remember clearly some of his words which would apply to Greece today: "When the world changes, we don't lament about the change. Instead, we look the new world straight into the eye and deal with it. And - don't analyze things to death. Instead, do something!"

Or as an old Doris-Day-movie was titled: "Don't just stand there; do something!"

Tuesday, April 17, 2012

Greek tourism - growth industry?

I am not sure that all revenues from tourism are included in the Balance of Payments category "travel" (source: Bank of Greece). If they are, we would see a rather bleak picture.

Revenues from "travel" were 10,6 BEUR in 2001, the last full year before the Euro. In 2011, ten years later, revenues from "travel" were 10,5 BEUR. In the intermittent years, there were up's and down's but the fluctuations were within 1 BEUR.

Some years ago, a CNN commercial concluded with the wonderful phrase of "The Gods could have chosen any place in the world and they chose Greece!" If tourists bringing cash from abroad can be considered something like modern day gods for a cash-stripped country, then Greece must make renewed efforts to please those gods more than in the past decade.

Monday, April 16, 2012

Greece's current account 2010-2011

The table below shows the development of Greece's current account in 2011 (in BEUR):




2010 2011
Revenue from abroad


Exports 17 20

Services (e. g. tourism) 28 29

Other income 4 3

Current transfers 5 4


---- ----

Total revenue from abroad 54 57




Expenses abroad


Imports 45 47

Services (e. g. tourism) 15 14

Other expense (e. g. interest) 12 12

Current transfers 4 4


---- ----

Total expenses abroad 77 78








Net foreign deficit (current account) -23 -21


At first glance, the improvement in the current account deficit would appear encouraging, above all the much steeper increase in exports than in imports. The Bank of Greece warns, however, that the lower increase in imports is exclusively due to the recession. Without structural reforms, imports will "explode" again as soon as there is economic growth.

The discouraging fact is that, after 3 or 4 years of crisis and so-called austerity measures, Greece as a country is still spending 1.368 Euros abroad for every 1.000 Euros earned abroad. That is a 37% excess of spending over income. This is much worse when only considering the trade account where Greece is importing 2.350 Euros for every 1.000 Euros which it is exporting!

Saturday, April 14, 2012

Don't forgive them for they know what they do! - Update

I recently posted an article about the issue that Greek parliamentarians attempted to "sneak through" more than 90 amendments awarding benefits to their clientele groups. I was happy to read this commentary by Nikos Xydakis who appears to be even more upset than I was at the time.


UPDATE as of April 27,2012
An here is another article, this time by Nikos Xidakis, which expresses ire at the behavior of Greek politicians. With good reason!

INET Conference in Berlin

I have watched some of the presentations at the INET conference in Berlin on livestream. I was overwhelmed by the level of intelligence some people have.

The presentations which I watched were very technical. That implied that a solution to the European debt problem could be found if one only chose the right technique. Fortunately for me, there was one speaker (Prof. Wendy Carlin of the University College London) who focused on the "soft facts" of the problem. She argued the importance of behavioral issues. Her point was that Greeks behave differently not only from Germans but also from Spaniards, and vice versa.

Different behaviors and different cultures are the essence of the European Union. As the Euro-experiment has shown, if one expects Southeners to behave the same way as Northeners one is headed for trouble. If the whole world behaved like the Germans, one would have to find aliens who do all the importing. If the whole world behaved like the Greeks, one would have to find aliens who do all the funding.

What impressed me the most was that terms like "current account", "export drives on the part of the South", "import substitution on the part of the South" were mentioned quite often. That lead me to the conclusion that not only brains were at work at the conference but also common sense.

Friday, April 13, 2012

Greek ingenuity!

I picked up the following in the internet.

A Greek walks into a bank in New York City and asks for the loan officer. He tells the loan officer that he is going to Greece on business for two weeks and needs to borrow $5,000.

The bank officer tells him that the bank will need some form of security for the loan, so the Greek hands over the keys to a new Ferrari. The car is parked on the street in front of the bank. The  Greek produces the title and everything checks out.

The loan officer agrees to accept the car as collateral for the loan. The bank's president and its officers all enjoy a good laugh at the Greek for using a $250,000 Ferrari as collateral against a $5,000 loan. An employee of the bank then drives the Ferrari into the bank's underground garage and parks it there.

Two weeks later, the Greek returns, repays the $5,000 and the interest, which comes to $15.41. The loan officer says, "Sir, we are very happy to have had your business, and this transaction has worked out very nicely, but we are a little puzzled. While you were away, we checked you out and found that you are a multimillionaire. What puzzles us is, why would you bother to borrow $5,000?"

The Greek replies: "Where else in New York City can I park my car for two weeks for only $15.41 and expect it to be there when I return?"

Be honest: you can't deny that a Greek might have pulled off something like that, can you?

Why can't Greeks living in Greece channel their impressive creative talents, their supreme skills at improvisation, etc., etc. - why can't they channel those competitive strengths into constructive and positive endeavors?

Wednesday, April 11, 2012

CBS's 60 minutes

CBS devoted only 14 of the 60 minutes to the simple subject of "An Imperfect Union: Europe's debt crisis". That kind of says it all. It was a fairly shallow report. The central actor was a top British economic analyst of whom the world had never heard before. Wolfgang Schäuble and Christine Lagarde were brought in to say some words to give the show some credibility (even though Lagarde's outrageous comments about Greece's possibly being forced to exit the EU were cut from the report). Overall, it was not a very balanced report.

The Greek side was represented by Prof. Yanis Varoufakis who - most eloquently as always - cited the Eurozone's faulty design as the principal reason why Greece is now effectively "in coma". Steve Kroft suggested that perhaps it was Greece's borrowing way too much; Greece's being a fairly unproductive society; and Greeks' not paying taxes which got the country into trouble. Prof. Varoufakis denied that. He said that these elements about Greece have always been around but they never caused a "coma" before. The "coma" was exclusively due to the Eurozone's faulty design.

I would strongly disagree with that. One of the above elements has never been around before and that is the amount of debt which Greece could raise abroad. One could, of course, argue that Greece could only borrow so much money as a member of the Eurozone. Had it not been a member of the Eurozone, it couldn't have borrowed so much and there would not be a "coma" today.

Obviously, no one can answer this question for sure but I would tend to disagree.

What started all the trouble was the lending frenzy on which virtually all international banks embarked. That lending frenzy was not limited to the Eurozone. A case in point would be Hungary where foreign banks made nearly unlimited CHF loans to the domestic banking sector so that those banks could make CHF loans to home buyers/builders. Foreign banks went so far as to advertise that borrowers would not need to submit financials because the only thing which mattered was the value of the property.

Thus, I would argue that Greece could have raised the same amount of debt outside the Eurozone as it did within the Eurozone. And that would have lead to the same "coma" which Greece is in today.

Obviously, loans are a joint responsibility of lenders and borrowers. Lenders were indeed "throwing money" at Greece (and other countries) and that is their responsibility. At the same time, the borrowing decisions were taken by professionals at Greece's public debt management, at the Bank of Greece and at Greek banks. Those were people who knew what they were doing (or at least thought they knew). They turned out to have been wrong just like those investment bankers who once thought that one could convert 3 bad sub-prime loans into one investment grade loan.