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Monday, July 30, 2012

Would an OSI make sense?

I am reading that an OSI (Official Sector Initiative) may be in the workings. Amounts between 70-100 BEUR. Would it make sense?

Hardly.

As I have argued in this blog ad nauseum, a debt forgiveness ("haircut") of sovereign debt after only a few years of economic crisis, without any one-time disasters, is absolutely the wrong thing to do because it only triggers emotions on the giving side and destroys the reputation of the receiving side.

Would the parties involved PLEASE understand the following: the level of sovereign debt is more or less irrelevant. The only thing which matters is the amount of debt service which flows through the budget!

If you think that Greece has more sovereign debt than its budget can support, just postpone the maturities and lower the interest rate to a level which the budget can support.

Instead of applying the interest rate and struggling with its effect on the budget, start the other way around. Ask how much interest expense the budget can reasonably carry. How to get to an appropriate number? Ask reputable economists to agree on a professional opinion. The question would be: what percentage of total government expenditures should Greece be expected to allocate to interest.

Presently, this percentage comes out to, I believe, around 15% of government expenditures. That is too high. Zero would be too low. So, the appropriate percentage would be somewhere between zero and 15%. Probably closer to 5% than to 10%.

And then you convert this logic into a variable interest rate structure (i. e. "interest paid will amount to, say, 5% of government expenditures"). If government expenditures go up, so does the interest expense. And vice versa.

I hear the counter-argument: creditors would never agree to such below-market rates! They don't have to! Let them charge whatever rate they deem appropriate but have them agree that only that amount which finds room in the above percentage will be paid in cash. The rest will be capitalized, payable at some point in the future. If they don't like that, ask them whether they prefer an outright "haircut".

Economically, this is has the same effect as a "haircut" for the budget. The only difference is that it is not an outright debt forgiveness forever, but only for a period of time. During this time, the creditors keep their 100% claim on principal and interest.

What is the difference between what I propose and what has been done so far (i. e. with the PSI)? A huge one! Creditors don't have to explain to shareholders and/or tax payers that, once again, they have forgiven Greece debt. If they want to, they can tell them their usual story that "we have not forgiven any debt; instead, we even make money on our loans" (accrued on paper...).

Some time later, perhaps in 20-30 years, one can still forgive the debt but by that time everything will be forgotten what is causing emotions to rise today.

Demagogues and others...

I generally recommend reading all articles by Nick Malkoutzis but this one I recommend particularly, this time not so much for the article itself but, instead, for the comments made to it. A highly emotional debate developed simply because a reader by the name of R. G. Danon (a Greek) made arguments which put another Greek on demagogic fire.

What really kills all rational debate is when complex issues are reduced to provocative either/or-arguments. Examples: austerity bad - yes or no! New loans for Greece - yes or no! Is Germany to blame - yes or no! One of the consequences of this is that one is immediately put into a corner by demagogues (and I am not saying that only Greece has demagogues!), and more often than not a corner that one doesn't want to be in.

Of course I agree that the EU had completely mismanaged the balance of payments crisis of Greece at the start (which mistake could not be corrected later). The EU should NEVER have prevented Greece from going directly to the IMF. The IMF is THE competent place for balance of payments crises. They have innumerable precedents and the blueprints as well. I am not saying that the IMF always has the right solutions (in fact, they have a mixed track record) but when their solutions don’t work, people get mad at the IMF as a supranational organization (and not at, say, Germany).

The first question in any financial crisis is: should tax payers be called upon to refinance maturing debt of private creditors or should existing debt be rescheduled by the existing private creditors? 

Refinancing would make sense in a case like Austria, my country, because the Austrian economy is strong enough to allow the hope that it will eventually generate the necessary revenues for the state so that the state can service its debt again (I fear that we might even see a test of that in the future…). When an economy has become so weak, for whatever reasons, as the Greek economy had, there can only be one answer and I am 100% certain that this is the answer which the IMF would have come up with (and recent publications seem to confirm that): existing debt must be rescheduled with existing creditors (NOT refinanced by tax payers!). Official lenders provide the Fresh Money and set the terms for the overall rescheduling package, but no more than that. And, by the way, the rescheduling must encompass ALL foreign debt of the country and not only the sovereign debt!

So, here I am on the same side with all the Greek demagogues who say that EU-elites (not only Germany) are to blame for the possible financial Armaggeddon we face today. For myself I have resolved: if the crash comes and if I lose my savings, I will blame EU-elites for it and not Greece.

That, however, leaves open the “other issue” which has been discussed in the comments to the article. If the Greek economy is a basket case, who should fix it? Clearly, a return to the Drachma would answer this question right away --- only Greece can fix the problems of its economy. If Greece didn't do that, the living standard of Greeks would tank (and a mass brain/talent-drain would take place).

There are some, like Prof. Yanis Varoufakis, who argue that Greece should do nothing until the EU cleans out the mess which it caused. That is plain silly. It's like saying: "I know I have problems but I won't worry about them until others have solved their problems". Prof. Varoufakis would argue that Greece cannot fix anything on its own just like Ohio couldn't do anything on its own in the midst of the US-depression. While that is, as most of his arguments, dialectically a master stroke, it is still plain silly, too. Try to start a company in Greece; try to get a permit; even: try to buy a car as a foreigner --- and you will quickly see what Greece could fix on its own. It's got to be fixed sooner or later! If one finds an excuse for not fixing it now, one simply slows down the process for improvement.

Now to this near-pathological issue of austerity. There is austerity and there is austerity. The state does not function like a family because if the state cuts expenses, it often cuts right into its revenue base. On the other hand, the economy functions, in its external relations, EXACTLY like a family. If you spend more than you earn, you have to get money from someone (typically from a bank).

I have never specifically commented in this blog about the fiscal austerity program. Why? Simply because I know far too little about it. I would argue that public finances are such a complex animal that sometimes even insiders don't have a clear view. David Stockman, President Reagan's Director of the Budget, once admitted that "none of us really understands what's going on with all these numbers". Thus, to comment on specific fiscal austerity measures should be reserved to those who really have the appropriate insights.

In general terms I would say: Greece's overall government expenses were/are probably high but, with about 50% of GDP, they are not way out of line in the Eurozone. Alexis Tsipras wants to bring them down to about 45%. That would be great; and sufficient! So, the crucial issue was not to drastically cut government expenses. The crucial issue was to reallocate them along the principles of effectiveness, fairness & justice ("stop paying money to the dead so you don't have to take it from the living!"), while moderately reducing them overall. And before I forget it, one should have cut government waste dramatically!

The other crucial issue was to increase the revenue base in an intelligent way. To simply take money away from the usual suspects (i. e. those who are taxed at the source) is not only unfair but also stupid because it cuts right into the revenue base. The clever thing would have been to increase revenues which do not cut that much into the revenue base (i. e. taxes on luxury assets/incomes and some form of EU-compliant levies on luxury imports).

Again, I will not specifically comment on the fiscal austerity program because I know far too little about the details. All I did was to outline some of the general themes.

I will, however, comment specifically about the Greek economy. The Greek economy had run into a phenomenal balance of payments problem since the Euro. Some would scream today that this was the fault (“guilt”, to use the buzzword) of the Euro and of EU-grants which destroyed Greek agriculture. To those I would respond: maybe yes, maybe no. But I remember very well times, not too long ago, when Greece was very happy about cheap Euro-funding and free EU-grants.

Nevertheless, by 2008, the Greek economy was a basket case as regards the balance of payments. For every 1.000 Euros earned abroad, 1.530 Euros were spent abroad. That is overspending to the tune of 53%! A family living like that would be told by its banker to either increase earnings, cut expenses or a combination of the two. For sure he would tell the family that he wasn't going to finance that kind of overspending any longer. I should add that from Jan-May 2012, the external overspending was still 32% despite 3 years of recession. Austerity? Not recognizable!

If you have external overspending, you have to finance it in one way or another. Either through guest-workers' remittances (like Greece in the 1960/70s) or through foreign investment (like the US). If you can't get either of the two, you need to finance external overspending with debt and, to the extent that you get them, EU-grants. There aren't really any more alternatives (at least none that I know of).

Guest-workers' remittances had more or less stopped many years ago and so had foreign investment. EU-grants, while still a few billion EUR annually, were not much more than peanuts in the grand scheme of things. So, the only answer to make the balance of payments balance was foreign debt. And Greece didn't even have to ask for foreign debt; it was thrown after it.

So let me conclude this part by saying: the Greek economy, by 2008, its growth, tax generation and everything else --- well, that was like an engine whose gasoline was foreign debt. Reduce the flow of gasoline and the engine stutters. Stop the flow of gasoline, and the engine stops.

One has to understand that the Greek living standard is a function of imports. Reduce imports and you reduce living standard. Reduce imports drastically and you reduce living standard drastically. The recession has by now reduced imports by quite a bit and the reduction in living standard is noticeable. However, reducing living standard on a continous basis is not necessarily what voters like to see.

The first reaction to a situation like the above is normally "We will export ourselves out of this problem". Fair enough, but that won't work in Greece, at least not in the shorter term, because the Greek economy doesn't have that much of an export base (yet). The next reaction should be: "Let's get foreign investment instead of foreign loans!" Dead right! And the final reaction would be: "Let's try to substitute all imports we could substitute. That way we reduce our foreign overspending and create new domestic activity!" Dead right!

Who should work towards making these 3 things happen? Angela Merkel perhaps? Or George Soros?

Neither new foreign investment nor new exports nor import substitution will come about by itself. The only way to achieve this is to reform the Greek economy in such a way that incentives are set for these things to happen. And as far as I can see, one wouldn't have to wait one more day to start working towards this.

At the end of the day, everything boils down to the question whether Greece can become a good place to do business. Doing good business creates economic activity and economic activity creates living standard. Personally, I think Greeks have a way of life where they can, if needed, be happy with a lot less materialistic values than, in contrast, the Germans. That speaks in favor of Greece. One doesn't have to be as productive as the Germans are but one has to be productive enough to justify the living standard one wants to have.

How can you tell a demagoue? He will forcefully disagree with everything I have said above. Not for logical reasons but, instead, for dogmatic reasons.

Sunday, July 29, 2012

Seeing the erred ways of my thinking... (6)

I had made the big mistake to think that EU-authorities would be aware of the distinction between sovereign debt risk and country risk. Sovereign debt of Greece represents the obligations of the Greek state; no more and no less. But what happens with a sovereign country is that the moment the sovereign debt hits a crisis, the entire country hits a crisis, whether that is objectively justified or not. When Greek bonds are down-graded, all other foreign debt of Greek borrowers (particularly the foreign debt of the banking sector) is down-graded at the same time. Once there is a run on a country's bonds, there is the same run on the country banks (sometimes the run on the banks starts before the run on the bonds). The chances of ever stopping such a run against a sovereign country are very slim (ask George Soros about the UK).

This is not so in a federal state of to US. If the State of California would find itself, once again, unable to pay all of its bills, it would not necessarily affect the Wells Fargo Bank, one of California's largest banks. Why? Because depositors of Wells Fargo would not have to fear that the State of California could convert their deposits to a new currency and if the Wells Fargo Bank had no exposure to the State of California, markets would not see its risk affected by the state's near-bankruptcy. So, in extreme terms, Wells Fargo might continue to be rated AAA whereas the State of California defaults.

Here is what happens in a bank when the sovereign debt of a country like Greece becomes troublesome.

The responsible board committee requests, optimally by yesterday, a report on the ENTIRE exposure to Greece, i. e. loans to the government, the public sector companies, the banks, the private sector companies, etc. If the sovereign debt of Greece is down-graded to junk status, all other debt will be down-graded as well. And when debt is down-graded to junk status, every bank in the world will immediately try to get its money back while it still can. The strategy becomes: be the first one out the door! Or, grab the cookie jar while you still can!

Moral of the story
Had the EU-authorities understood that, they would have had to ringfence the entire foreign debt of Greece and not just the sovereign debt of the state. Above all, they would have had to make sure that private banks would not cancel their loans to the Greek banking sector.

The final question
If EU-authorities did not know that, why would they not have asked those who knew?


PS: previous posts in this series: P1, P2, P3, P4, P5.

Saturday, July 28, 2012

Seeing the erred ways of my thinking... (5)

It pains a bit to think of that now but --- I thought, until he retracted the referendum, that Mr. George Papandreou was the best Prime Minister which Greece could have in these difficult times. Why could I err so much in my thinking?

When someone - be that a person, a company or a state - is in financial trouble and needs help to solve his financial problems, there is one ingredient which is more important than anything else --- credibility! The counterparties must get the impression that they are dealing with serious people; people who have a sincere desire to solve the problems; people who know how to handle themselves professionally and who come across decently; people who don't play games and who don't try to pull fast ones.

When Mr. Papandreou came to the scene (and to me he only came to the scene after the financial problems had erupted), I was most impressed by how he handled himself and how he represented Greece and Greeks. To put it bluntly: I would have bought a used car from him.

Why? Probably because he came across so cosmopolitan; so charismatic in his demeanor (at least on the international scene). To me, Mr. Papandreou easily outclassed the people sitting with him at the same table in Brussels and/or other European capitals. He once gave a speech in Germany where Ms. Merkel and the head of the German Industrial Association also spoke. The latter came across like a German professor from the text book; Ms. Merkel came across as the "Mutti" that she is perceived as; and Mr. Papandreou was the "sir". A German journalist commented with a strong German accent that Papandreou spoke “good English”. Hey, great observation!

I did not expect Mr. Papandreou to know how Greece's problems could be solved but I did expect that he would surround himself with the best possible advisors from the entire world to help him --- and to listen to them. And I felt certain that he was doing that.

My enthusiam for the person led me to write him a letter. Then another letter. And then another one. In one letter I warned: "Then comes the population’s outcry 'we have had it; no more of this!'. And then, I am afraid to say, even you and your government will find out that you have had it".

I was enthusiastic when he came up with the idea of a referendum, not because of a referendum being a good idea but, instead, because of its being an excellent negotiating instrument. Before he went to Cannes, I asked whether Mr. Papandreou would turn out to be "a Mrs. Thatcher" or just "the son of his father". Sadly, he turned out to be just the son of this father.

Moral of the story
People don't always turn out to be what they seem to be. In assessing the competence and qualifications of a political leader, one should be more driven by the brain than by the heart.

The final question
EU-leaders must have noticed that Mr. Papandreou was not a Mrs. Thatcher. While it was obviously easier for them to negotiate with a son of his father, did they really expect that someone who is but the son of his father would be capable of leading his country into a new future?


PS: previous posts in this series: P1, P2, P3, P4.

Greece's ruling class

Much has been said about the so-called "help for Greece" in the 3-digit BEUR figures. Personally and from a financial standpoint, I take a rather sarcastic view: one has used Greece's balance sheet (and tax payers' money) to bail out banks and to allow the Greek ruling class to entrench itself. Some argue that common folk in Greece have never been given a real chance.

I agree whole-heartedly with the latter assessment: common folk in Greece were never really given a real chance by their ruling class. Not since the Euro --- and not really before, however far one goes back in modern Greek history. Common folk moved their bodies to Northern countries in the time of guest-workers, worked incredibly hard there, built up a tremendous reputation for themselves, sent the money back to Greece and contributed to the rise in living standards of their families. Parallel to that, the ruling class moved the money back to the North and used it to enjoy a quality of life which one doesn't see so quickly elsewhere.

Not since my time in Argentina have I seen a nation where the ruling class did so little for the country, their own country, which offered them a wonderful lifestyle.

Perhaps one change has occured: in the "good old times", the ruling class may have been a limited group of oligarch-type families and in later years it became, at least financially, a relatively large sector of the country which Petros Markaris calls the "Profiteers and the Molochs".

Personally, I still think - at least I would like to think - that common folk are still the majority, albeit a majority without real and/or effective representation in the democratic process.

Interestingly, when I am in Greece (and that is about half the year), it seems like I only run into common folk (admittedly, I am never in glittery Athens). I know the other folk primarily through what one reads and hears in the media about them.

There is a theory (i. e. "How nations fail") which says that the dominance of a ruling class with its corrupt ways as in Greece is almost impossible to change. Certainly not when the country is a sovereign country on its own.

From that standpoint, Greece has the advantage of being part of a union which, despite having its own ruling classes, does not culturally support the kind of ruling class which exists in Greece. Thus, I continue to hope that, one day, common folk in Greece see the light and strike alliances with that union to help them change and/or get rid of their despicable ruling class.

This is not a matter of saying "we don't belong to the West; we belong to Greeks!" Instead, it's a matter of asking what type of a society do we want to be and who can help us get there?

Thursday, July 26, 2012

Seeing the erred ways of my thinking... (4)

During my career in the corporate world, one thing was a given: when a subsidiary, branch or whatever of your organization was in trouble, you went there personally to form a picture for yourself on the spot.

I would have thought that EU-elites, right after the outbreak of the Greek crisis, would have planned their next meeting in Athens. On one hand, to show colors to the Greek people that they could feel like being part of a family. On the other hand, to get first-hand information as to what the problems were and how they could best be solved in cooperation with one another.

Well, that's what I would have thought. I guess I was wrong.

Moral of the story
If there is a problem somewhere, one should first take a good and hard look at it personally before jumping to conclusions. If one doesn't get that assessment right, one is unlikely to get the solutions right.

The final question
Why in the world did EU-eliltes not do that?


PS: previous posts in this series: P1, P2, P3.

Are the Euro's obituaries premature?

One has to understand that the collapse of the Euro is not something which can come about automatically. At least not as long as there is a Troika and an ECB.

Unfortunately, there is not only one variable to consider but, instead, there are four of them: the financing of budget deficits; the refinancing of maturing sovereign debt; the financing of current account deficits; and - most importantly - the financing of capital flight.

The financing of budget deficits is peanuts compared with the other three variables. In the case of Greece, we are talking about the petty sum of roughly 20 BEUR annually (and that includes high interest expenses, and the sum is declining). Add up all the budget deficits of the Periphery and tax payers of the Core would sleep well knowing that this is all they are in for. As I said, peanuts.

The refinancing of maturing sovereign debt is a bit more scary. But it is also the silliest variable. Refinancing debt is not something which represents failure. If the best corporations of the world could not refinance their debt, they would be out of business in no time. The refinancing of debt has only become an issue because private creditors have begun to think (or rather: have been allowed and encouraged to think) that they have a right to have tax payers take that debt off their shoulders. A supremely wrong assumption! Unfortunately, an assumption which, so far, the political class of the EU has proven correct.

Everyone, particularly sophisticated financial commentators, gets very excited about rises in yields on sovereign debt. That is silly! It is absolutely irrelevant for a country like Spain what the secondary market yields on its debt are! The only thing which matters is at what rate the country can borrow if and when it needs to borrow and that is, absent all other solutions, in the final judgement of the Troika and the ECB. There is absolutely no need to demonstrate that a country can meet all of its obligations until doomsday. All a country needs to do is to meet the next obligation!
  
The continued financing of current account deficits by the ECB is a serious issue because it allows "overvalued" countries to live beyond their means. They will not stop that unless they are forced by financial constraints to do that. If those countries were deprived of current account financing, they would have to import less and, above all, they would have to think about import substitution. If they did that, they would quickly increase domestic economic activity! A sign-off on globalization? In a way, yes. But if globalization causes damage, that damage needs to be constrained!

And, finally, capital flight. That is the killer-app! If things keep going the way they are under the present Euro-structure, all national deposits of the deficit countries will eventually end up in foreign bank accounts and all national banks will be refinanced 100% by the ECB. That is where the big numbers come into play. Would that be wrong? Not really, if each national economy remained in the Eurozone and if each national economy would eventually make it.

BUT: if only one national economy did not make it within the Euro-structure, all hell would break loose. Tax payers of the surplus countries would realize that they have financed the capital flight of the wealthy class of deficit countries. Those tax payers would have to write off their claims and, at the same time, they would watch how the wealthy class of the deficit countries could enjoy the continued value of their assets which was financed by tax payers.

That is the real Achilles nerve of the Euro-structure as is! What is the solution? If nothing else comes to mind --- capital controls!

Seeing the erred ways of my thinking... (3)

I was completely brainwashed in the last 10 years of my 40-year career in banking. During the first 30 years, I was involved with more of the "high finance": balance sheets, balance sheet structures, balance sheet optimizations, maximizations of REO, reallocations of assets, EBITDAs, EBITDA multiples, etc. etc. A company was a balance sheet. When the banker visited the company, he discussed with management how new financial gimmicks might improve his bottom line. The CFO would not walk the banker proudly through the production lines (which he might not even know) and the banker would not be interested in that.

During the last 10 years of my career, the time of brainwashing, I was involved with middle-market entrepreneurs (as opposed to large, publicly-traded anonymous corporations) in Austria and Southern Germany. The companies were not small. Some of them had sales of several billion Euros. But they were privately held; typically family-owned.

Such entrepreneurs do not think of their companies in terms of balance sheets or return on equity. They do not think of cash flows in terms of how much they can take out of the company. They do not feel responsible to shareholders, tax payers or whatever. They feel responsible to their companies, to their employees and to themselves and their families. They are interested in what makes their business grow. They are not proud of reducing staff when business is slow. They are proud of finding new areas of business to employ the staff which would otherwise not be necessary.

One such entrepreneur once told me: “My job is not to reduce staff levels if business is slow. My bookkeeper could do that. My job is to find ways how to profitably employ the staff we have and, hopefully, hire additional staff”. Interestingly, such companies typically showed greater ROEs over time than many publicly-traded anonymous corporations. However, the ROE was not their objective; instead, it was the result of doing the right things.

Take a hundred or so of such entrepreneurs from all EZ-countries. Lock them up in a beautiful resort for a long weekend and mandate them to come up with solutions how the economies in EZ-countries could be brought back into balance in a way that the sum of combined efforts is greater than the sum of individual efforts. You would get practical solutions; solutions which could be implemented and which would work. They would not include items like debt mutualization funds, Eurobonds and so forth. There would be no discussion about abstract financial structures and instruments.

There would be a lot of discussion about market opportunities; about suppliers’ capabilities; about potential new areas for growth; about new technological trends; about competitive advantages; in short: about ways how to create real value. There would also be a lot of discussion about how people, the primary resource of all economic effort, could be employed to the fullest extent and how their talents could be optimally developed.

Specifically as regards Greece, they would not have spent their time listing all of the things which are deficient in the Greek economy. Instead, they would have spent their time listing all the things for which the Greek economy would have potential, how that could be optimally taken advantage of and what structural changes could be required on the part of the government to make this possible. Their focus would have been: "How can we increase economic activity which will be for the benefit of all of us?". It would not have been: "How can you balance your budget?"

Moral of the story
I would have thought that EU-elites would be capable of thinking the same way as such entrepreneurs would think. And, unfortunately, I was wrong!

The final question
Is there still a chance to move into the right direction? Quite unlikely but, as they say, hope dies last.


PS: previous posts in this series: P1, P2.

Nothing but a slap in the face!

Myths about deficiencies in the Greek economy have abounded since the beginning of the crisis. Sometimes I wish the EU would install an "Office for objective clarifications of myths". That would include myths about Greek pensions, Greek working hours, Greek salaries, etc. Why can there not be objective information???

The latest item which would require objective clarification is an article in DER SPIEGEL about the harbor of Thessaloniki. If objectively correct, it would be a slap in the face of everyone who is suffering in connection with the Greek crisis (Greeks as well as others).

The article states that the scheduled partial privatization of the harbor of Thessaloniki has simply been put off. Why? Because this is the wrong time to privatize. Strikes have "successfully" hindered the process, a union representative is quoted.

Salaries of employees allegedly run up to 100.000 Euros annually. In some cases, yes, admits the union representative but "normal workers" earn "only" around 35.000 Euros annually. Did I read correctly? 35.000 Euros annually? This in the midst of an existential crisis where some teachers have to get by with perhaps 600 Euros per month? And some IKA-doctors with perhaps 800 Euros per month?

If that is true, what kind of herbs is that union representative smoking? Has he/she ever made a comparison with workers' salaries in, say, Austria? More bluntly: does he/she know what's going on in the rest of the Greek economy?

I wish someone would provide objective clarification on this article!

Seeing the erred ways of my thinking... (2)

I was not so naive as to think that EU-elites would be experts at finance, particularly at financial restructurings of sovereign debt but I did make the mistake of thinking that they would be capable (and not too proud) to seek professional advice from the right people. Advice they sought, but they sought it from those who would be the greatest beneficiaries if their advice was followed - the holders of sovereign debt instruments, the creditors of Greece & Co.

I would have never thought that the creditors could pull off the kind of chuzpe which they did pull off --- they presented themselves helpless. They had not made loans to Greece which they could now renegotiate, they argued. Instead, Greece had emitted public debt instruments, bonds, and such instruments have a life of their own in capital markets. Investors had bought those bonds under clearly established rules for public debt instruments and if those rules were not adhered to, there would be automatic default and a subsequent catastrophe in capital markets.

This was sort of like saying: “We would like to be helpful and reschedule our loans but we can’t because we don’t have loans. We have bonds and if a bond does not get paid, default will be declared automatically. There is nothing we can do about that”.

Joseph Ackermann of Deutsche Bank had the nerve to say in a CNBC-interview: "Measures must be taken that sovereign bonds are made risk-free again, which is what they should be!" I beg your pardon, Mr. Ackermann! Who ever said that sovereign bonds are risk-free? True, Basel-II stipulated that no reserves needed to be held against sovereign bonds but that doesn’t mean that they are risk-free. Sovereign bonds represent the full faith and credit of a national state; no less but certainly no more! And if you don't agree with that, Mr. Ackermann, look up EU-treaties where it is stated clearly that the sovereign debt of one country will not be bailed-out by another country. Why should there be a "no bail-out clause" if there was no risk?

The creditors would have had a case if the bulk of Greece’s sovereign bonds had not been held by themselves but by anonymous private investors instead; but they weren’t. More than 90% of them were held by institutional investors who were known; banks, insurance companies, pension funds, hedge funds, etc.

True, bonds are anonymous public debt instruments governed by specific capital markets rules. De jure, one cannot involve the bond holders in a restructuring if those rules do not provide for such a restructuring. Nevertheless, when sovereign bonds are held almost entirely by known institutional investors, one can indeed involve those investors in a restructuring through “forceful persuasion”. If the private investors had caused problems, one would simply have paid them out since they represented such a small portion of the total. That would have been good use of tax payers’ money (and very little cost!).

When private creditors get into the kind of mess they had gotten themselves into with sovereign bonds, there is only one party which can help them --- the government(s); the national governments and the EU. I would have thought that the governments would have been aware of their negotiating strength versus the private creditors. Message to private creditors: “You need help from us. So either we play this game together at our rules or you will be forced to stop playing”.

I would have thought that EU-authorities would have pursued one single objective in the beginning: to convert an uncontrollable situation into a controllable one. How would that have worked?

“Forceful persuasion” would have motivated the institutional creditors to participate in a new syndicated loan (or several syndicated loan packages) which would have prepaid the bonds they held and thus would have taken Greece’s sovereign debt off the public market. No more rating agencies. No more uncontrollable defaults. No more restraints to restructure the debt in an optimal way.

At the end of this exercise, every institutional creditor would have had the same Greek credit risk on its books as before. The only difference being that it would now have been a private loan and not a public debt instrument! Overnight, public discussion over "what happens with Greece's debt?" would have disappeared because there would only have been private debt with private discussions. All private creditors, perhaps several hundred of them, would have fit into a large conference hall. They would have selected a Steering Committee with which debt restructuring negotiations would have been carried out.

Since EU-elites had exactly zero experience with a sovereign debt restructuring within the Eurozone, I would have thought that they would have recommended Greece to go to the IMF, the world-wide authority in the field of sovereign debt restructurings. I would have never thought that EU-elites would be too proud (or too arrogant) to allow for the possibility that in certain fields other authorities are more qualified than they themselves. The Spaniards call such a thing "tontos con iniciativa". To really recognize the tragedy in all of this: I understand that Mr. Papandreou wanted to go to the IMF as soon as the crisis erupted but EU-elites prevented him from doing so.

Moral of the story
It's hard to persuade "tontos con iniciativa" to not use their own unqualified initiatives and to let other more qualified ones use theirs. I would have never thought that EU-elites would be such "tontos con iniciativa"

The final question
Could one have foreseen that EU-elites would behave like "tontos con iniciativa"? Based on the performance of EU-elites in Brussels in the past, yes, one could have. I did not.


PS: previous post in this series P1.

Seeing the erred ways of my thinking... (1)

When I started this blog, the idea was to focus on the glass being half-full instead of half-empty. Instead of hammering in why Greece was in a hopeless situation, I tried to hammer in what would need to happen so that Greece, I almost have to eat my words now, would become "the economic tiger of the Eastern Mediterranean".

Even though my belief in a better future for Greece has not evaporated entirely, I do have to admit that my basic belief started falling apart some time between the first and second election of this year. About two months ago I wrote that Greece had probably crossed the point of no return.

So has the time come to admit defeat? Probably so! But a society's admitting defeat, resigning itself to being a failed state, is somehow against my nature. So I thought that I should, one by one, take the themes on which I had rested my case and show where I erred in my thinking. Time will tell whether this will be the first post in a series, or the first and the last post at the same time...

I erred in thinking that political leadership (particularly at the EU-level) would have more knowledge of how an economy works. That within one country, the expenses of one economic agent (be that an individual, a family, a company or the state) are the revenues of other economic agents. That within an economic union, the foreign revenues of one country are the foreign expenses of other countries. Particularly of Germany I would have expected that kind of knowledge because it had a prime example of it within its own borders a couple of decades ago.

I had lived in the US when the Iron Curtain fell, when Germany was unified and when the West gave the East the same hard Deutsche Mark as a currency, more or less on a 1:1 exchange rate basis. I had my own small company at the time and my employees asked me what I thought of that. I told them something like: "Knowing the Germans, they will probably run the dredging machines over that archaic, inefficient and run-down economic structure; then they will build up a new economic nirwana from scratch and within a few years that region will probably be the most attractive, competitive business area of all of Europe. Something like a Silicon Valley not only for IT but for business in general".

Well, I had overlooked a small detail. Other areas of Europe would have been threatened by that new competition and of all those areas, the one threatened the most would have been the former West Germany. Tough enough for Germany to have reasonably strong competitors in other countries but to have the greatest competitor of all within its own borders --- Gor forbid the thought!

As became known later, West German industry certainly did not reach out a helping hand but, instead, actually hindered the few good Eastern businesses to be successful. Even West German unions contributed their own part to making sure that jobs in the West would not be endangered by new jobs in the East.

And to perfect the disaster, the West gave the East an overvalued exchange rate (which, at the time, may have been seen as a "gift" in the English language but turned out to be a "Gift" in the German language). Now, so the thinking went, all the East Germans would have to do was to become, overnight, as efficient as the West Germans had become in 4 decades after WW2. A society which for 4 decades had been told that the state would take care of them was now expected to jubilate that they could take care of themselves.

The West knew that there would have to be transfer payments during a transition time. I believe that transition time was originally capped at 5 years. Today, more than 20 years later, those transfer payments are still in place and I understand that the sum is now approaching 2 TREUR. That makes almost 100 BEUR per year!

So there could not have been better proof of the following fact: if an economic region within a larger union, for whatever reasons, cannot develop its own economic strength, there will have to be transfer payments. Since nobody likes transfer payments, the primary goal in any union must be to have each and every economic region develop its own economic strength. If that were to mean that one's own economic growth is slowed a bit, then that would be the price to pay. At the end of day, it would be a small and temporary price to pay because, if all goes well, the sum of both will be better than what each individual part could have accomplished on its own (in fact, that was one of the ideas behind the EU structural funds).

Moral of the story?
One can't have the cake and eat it. There is only one effective way to get one's loans repaid by a weak borrower --- all parties involved have to figure out how to make the borrower strong again. For the Core to sell a lot of goods to the Periphery without paying attention to what the Periphery is doing with those goods and where they get the money from to pay for them is totally short-sighted. If the Periphery is importing consumption goods and paying for them with vendor loans, the exporters will sonner or later not have a Periphery to export to (and they will have to write off their accounts receivable from the Periphery). Thus, it is in the interest of the Core to make sure that the Periphery remains (or becomes again) a strong borrower. Even it that means selling less to them short-term (and possibly contributing to local production with direct investment in the Periphery).

Final question?
Is that really so difficult to understand?

Tuesday, July 24, 2012

There is nothing Greece can do on its own to improve its situation. Really?

Something like a ping-pong has developed between Prof. Yanis Varoufakis and myself (in his blog) where he argues that there is nothing which Greece can do on its own until the EZ-structure is changed and I invariably respond that there are a lot of things which Greece could/should do on its own while others should worry about the EZ-structure.

Prof. Varoufakis' latest blogpost focuses on the very hypothetical question whether Germany would be satisfied if Greece were miraculously "turned-around" or whether deep down the Germans would still like to see Greeks punished for their alleged wrong-doings over the years. An extremely thought-out intellectual decision-making model was presented to help one find the answer.

A cute exchange developed. I said "Yanis, I fear you are about to go over the top". He replied "With your hand on your heart, would you predict that the German median voter would want Mrs Merkel to press the red or the yellow button?" To which I replied "I just think it is so non-productive to devote brainpower to hypothetical constructs at a time where particularly the outstanding Greek brain power would be desperately needed for constructive purposes!" Well, that then led to the professor's final verdict: "As long as you remain focused on Greece, at a time when Europe is being torn asunder by a systemic crisis that is aided and abetted by a 1930s like public mood in Europe’s core, your own brain power is wasted Klaus. As a Greek I am honoured by your focus on our country. As a European I dispair at your reluctance to recognise that there is something terribly rotten in the foundations of Europe; something that shows up first in flimsy places like Greece".

I couldn't just let that stand there. My long response to the final verdict is below.

Yanis, instead of focusing on red or yellow buttons, allow me to turn the question around.
Assume, hypothetically, that all of Greece’s sovereign debt is forgiven (at least that portion which is held by foreign creditors). So Greece would have a second chance and start all over with a clean slate. Whether Greece decides to embark on that second chance with the Euro or with the Drachma is up to Greece. In any event, Greece would again have a sufficient debt capacity.

My question to you would be: what needs to change in Greece so that the second chance is not blown like the first one?

My opinion: if nothing were to change, Greece – with the Euro – would be back to where it is today within ten years. With the Drachma, perhaps a bit longer. Either way, no long-term perspective.

So I come back to my question: what would you (and others who are in a position to make good recommendations) recommend that should change in Greece? And the follow-up question would be: why not focus on these things now and let others work on the Eurozone mess? I definitely do not buy into your premise of passivity until the big storm has settled.

I have been fascinated by some of the initiatives which Greeks have taken at the individual level such as the potato movement, the don’t-pay movement, the parallel currency in Volos, the trend to move back to the countryside and return to a “normal” life, etc. etc. I read the Greeceischanging FB site and am impressed that there are indeed people who have a forward-perspective. But individuals alone can’t do much if there is not a general movement for change.

I will not forget the point made by a student in Thessaloniki in a debate following a little talk I gave: “We know our country is in trouble; we would like to contribute something to make things better but someone has to show us what we could do!” Well, I find it saddening when all that their role models can tell them is that there is nothing they can do (except perhaps vent their frustration in blog comments).

I am not nearly as much a believer in models and structures as you are. The best structure won’t work if the users go bananas. You can have the best-structured and controlled financial sector. If intermediaries go bananas and package dodgy sub-prime debt into well-rated securities and if investors go bananas and buy the stuff like there is no tomorrow, a lot of people get hurt when it turns out that dodgy debt is dodgy debt after all.

Yes, even the most uninformed European has meanwhile gotten the message that perhaps there was something very deficient in the Euro-structure. It’s like a car whose steering wheel is slanted to the left. A good driver will compensate for that by slanting his driving to the right. A bad driver may just let the car veer off to the left and have it run into the ground. Perhaps to prove that the steering wheel was slanted.

Now, let me give you a couple of if’s how the deficient Euro-structure could have worked nevertheless. If Germany (and France) had not set the precedent that Maastricht criteria didn’t have to be taken all that seriously. If EU-politicians had not, as I understand they did, deprived Eurostat of the authority to audit national accounts. If EU-authorities had been more aware that current account deficits can be much more dangerous to an economy than budget deficits and if they had treated those imbalances with the same care that they had intended to treat budget deficits with. And so forth.

If all of those if’s (and I could list more) had been observed, controlled and managed, well, then the Eurozone wouldn’t have been torn asunder despite its structural deficiences. So if that’s the lesson which one can learn from the first go-around, why not apply it to the second chance.

I don’t exclude Germany (and France) from any responsibilities. I once wrote that should the crash come and should I lose my savings, I would not blame Greece for that. I would blame the incompetence of EU-elites for having mismanaged everything so badly. But even after the crash, Greece will still be a country of about 11 million people and unless one wants most of them to migrate elsewhere, someone will have to come up with ideas how a country of 11 million people can take advantage of its hitherto totally underutilized competitive advantages and resources, and employ its people so that they earn salaries which allow a decent living standard and pay a fair amount of income taxes; whose employers pay corporate taxes and where the owners pay taxes on dividends.

Around the corner from where we live at the outskirts of Thessaloniki there is a dream palace which, I understand, was something like the King’s summer residence. There is at least one policeman on guard 24 hours a day. I guess his job is to make sure that no one can enter to see how the palace rots away. How about allowing those students who are looking for ways to make a contribution to fix up the place; get it into shape so that some kind of revenue-generating activity can take place there; have them organize such revenue-generating activities; promise them a share of the action. Perhaps even the policeman will quit his public sector job to join the students because it is so much fun to take part in an activity which holds promise and because his cut of the action may be more than what he is earning as a policeman now?

I am, of course, oversimplifying to make a point but I insist on my point that it is not impressive at all to me when one spends all one’s resources on trying to fix other people’s problems when there are so many “own” problems that can/should /must be fixed.

Friday, July 20, 2012

Is the EU getting exasperated with Greece?

I sense a tremendous change in published and public opinion in the German-speaking countries and this article from Reuters would seem to indicate that this exasperation may not be limited to the German-speaking world. Here is just one quote:

"Sources from both sides said the meetings reviewed a track record of two years of broken promises to international lenders ... Among a long list of failures, Athens has not completed any substantial privatizations and is behind on tax reform, restructuring the public sector and properly opening up markets and professions".

Less than half a year ago, back in February, Greece had pulled off the feat of being congratulated on the largest debt forgiveness in financial history. Everyone seemed extremely happy for having been able to forgive so much debt and very impressed with the professional handling of the case by Prime Minister Papademos. The shared feeling seemed to be that Greece was now getting on the right track. 

And then there was an election; and another election. There were election campaigns with all sorts of crazy things being threatened that Greece would do, and the world braced for what might happen after the election. The new government took over and discovered - surprise, surprise - that a lot of valuable time was lost due to those exercises in democracy and that the program had gotten off track. Once again. 

I watched a discussion on Austrian TV the other day. One of the participants went overboard praising the Italians. What a great people they were; how they took the need for reforms seriously; how they were taking bold action; etc. That in and by itself was o.k. but what really hit home was his closing sentence about Italians, that "they are not like those Greeks who complain all the time and get nothing done".

Normally, one would think that a new government deserves the benefit of doubt, particularly when the new government makes the kind of "appropriate noises" which the new Greek government has made. Nevertheless, it seems very much like the new government will not look into a lot of compassionate faces when they sit down with the Troika for the first time.

The nirwana of a banking union!

One of the silliest arguments I have heard so far is the idea that, in a European banking union, all deposits would be insured by essentially all banks thanks to an EU-wide deposit insurance. Can anyone please name me ANY domestic banking union anywhere in the world where ALL deposits are insured? All deposits are indeed insured but there is a minor catch to it: there is a cap on the amount of deposits which are insured (and that cap is nowhere very high).

What definitely makes sense is to have a centralized supervision of banks, particularly when centralized at the ECB.

What also makes sense is for the ESM to recapitalize banks, when necessary, but that will have to be coordinated in some form or fashion with national governments. Above all: recapitalizations are not loans to banks in trouble! Recapitalizations are what the term says: new capital is put into a bank in exchange for ownership commensurate with the amount of new capital.

The absolute no-no would be to allow shareholders whose bank is de facto bankrupt today to lean back and watch how tax payers' money is used to get their bank back in shape again!

Greece's current account: January-May 2012

The table below shows the development of Greece's current account in the period January-May 2012 relative to the same period the year before (in BEUR):





2011 2012
Revenue from abroad


Exports 7,7 8,6

Services (e. g. tourism) 8,8 8,7

Other income 1,3 1,3

Current transfers 2,9 3,0


---- ----

Total revenue from abroad 20,7 21,6




Expenses abroad


Imports 19,8 18,0

Services (e. g. tourism) 6,0 5,4

Other expense (e. g. interest) 4,4 3,3

Current transfers 1,8 1,8


---- ----

Total expenses abroad 32,0 28,5








Net foreign deficit (current account) -11,3 -6,9

The improvement continues: the current account deficit declined 40% (!) during this period! Imports declined 9% whereas exports increased 12%!

The discouraging fact is that - as before - after 3 or 4 years of crisis and so-called austerity measures, Greece as a country is still spending 1.320 Euros abroad for every 1.000 Euros earned abroad. That is a 32% excess of spending over income. This is much worse when only considering the trade account where Greece is importing 2.090 Euros for every 1.000 Euros which it is exporting!

The improvement came despite the fact that revenues from tourism, the very important revenue category, declined 14% over the previous year. On the other hand, one could have expected exports to increase by more than 9% given that the export base is low and that the Euro has devalued significantly over the previous year.

The repetitive question is, of course: have structural reforms been made to make sure that imports will not explode again if and when the economy picks up again? The Bank of Greece's answer to this question is "no".

Structural reforms - a buzzword invented by the Troika?

One of my readers recently reminded me of the Lisbon Agenda of 2000. I then remembered this outburst of European forward-thinking. When it was announced in 2000, I thought "I believe it when I see it!" In retrospect one has to say that one never saw all that much of it (with the possible exception of Germany). 

The aim of the Lisbon Agenda was to make the EU, by 2010, "the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion". The year 2010 was two years ago. Has anyone noticed recently that the EU is now the most competitive and dynamic knowledge-based economy in the world capable of economic growth with more and better jobs and greater social cohesion?

It would have been better not to be reminded of this farce because it only brings back to memory that, when it comes to forward-looking behavior, Europeans (not only the Greeks!) are great with words but very short on action and actual results. I remember a conversation I once had with a Mid-Western American about the differences between Americans and Europeans (he had broad business experiences in Europe). His assessment was: "Europeans are so brainy. They analyze things down to the smallest detail but in the process they tend to forget the action. We Americans are more action-oriented, perhaps sometimes the wrong action but, nevertheless, at least some action". 

Perhaps one could have phrased the objective of the Lisbon Agenda a bit differently, for example:

"We plan to build a modern and prosperous Europe: a Europe characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos!"

Replace the word "Europe" with "Greece" and you have the mission statement of the EU Task Force for Greece.

My reader, Bandolero, listed a selection of points of the Lisbon Agenda: 

* better regulation with compulsory business assessment for new legislative proposals;
reforms of social security systems;
* increased investment in R&D and innovation by Member States, universities and industry;
* reductions of company tax levels;
* better education on entrepreneurship;
* more flexible regulation of labour markets;
* implementation of internal market legislation.


In the Lisbon Agenda, they referred to such points as "policy initiatives". The Greeks now refer to them as "memorandum".

The fallacy is to consider efforts like "policy initiatives" or "memoranda" as something one does for others, like private creditors or other governments. If I had to make a policy statement, it would be that "there will always be a better tomorrow as long as a society has its basic values in the right place and the better tomorrow is not for private creditors or other governments; it is for our next generations!"

I can fully understand that Greeks presently no longer share the belief that there will be a better tomorrow. They have good reasons for feeling that way. One can analyze down the the smallest detail why it has come this far. Perhaps one will collect praise for good analyses.

What is required, however, are "policy initiatives" for a better tomorrow. I have expressed my opinion before that Alexis Tsipras has a wonderful way of putting credible policy initiatives into wonderful words. Personally, I think his policy initiatives would fail because they rely on an even greater role of the state in the economy. Others favor his policy initiatives on the grounds that they would really "run Greece into the ground" and then Greeks would be forever cured of romantic leftist dreams. And yet others, very prominent "others" I should add, believe that his policy initiatives are actually good ones.

We are not at that point just yet. The new government has laid out policy initiatives which remind me a bit of the Lisbon Agenda. If those policy initiatives take the course of the Lisbon Agenda, you might as well get the red carpet ready for Alexis Tsipras. If, however, good words are converted into excellent actions, there is still a chance that the better tomorrow will come about the "normal" way (rather than via the Alexis-Tsipras-cure).

Thursday, July 19, 2012

More on transfer unions...

All champions of a possible future European transfer union should take a look at the video which is at the bottom of this link (in German). The Bavarian TV had as guest to its regular round-table discussion the Bavarian Finance Minister to talk about the domestic German transfer union.

The German Constitution (Grundgesetz) stipulates that comparable living standards must be assured in all federal states. To achieve that, the differences in economic power of the individual states must be equalized. The respective law defines the methodology which is supposed to be used. The present arrangements expire in 2019.

All transfers together amount to 7,3 BEUR. Of that amount, the State of Bavaria (one out of 16 states) has the distinction of having to cough up slightly more than half of it (3,7 BEUR). Elections are coming up in Bavaria next year, so this is as good a time as any to start threatening a veto to the next transfer regulation.

What is so fascinating in the discussion is that the argumentation of the Bavarian Economy Minister is the same as that of Germany would be in a European transfer union. Just one soundbite: Berlin, the largest recipients of transfers, has instituted a "welcome grant" for new students. Bavaria, as one of the measures which it had instituted years ago to beef up its finances, had introduced a "tuition fee" at universities. So the Bavarian Economy Minister asks: "Why should we charge our students a tuition fee if that money is used by Berlin to give away a "welcome grant" for new students?" Right away, the moderator innocently asks whether this isn't the time to think of national German interests instead of egotistic state interests...

The Bavarian Finance Minister goes even further: "If we impose austerity measures on countries like Greece, we have even more reason to impose austerity measures on our fellow states!" Not a bad argument! He wants to tell his fellow states what they can spend money on and what not!

There are a couple of big differences between the domestic German transfer union and what a European transfer union would be. First of all, all the negotiators speak the same language; German. Secondly, they are all Germans and share the same national heritage. Call it "of the same blood", if you will.

Now, if you picture a future day where ministers from all EU-countries sit around a table to hash out the formula for calculating payments in the transfer union, my prediction would be that that discussion will be even more interesting than the one shown on Bavarian TV the other day!

Does history repeat itself?

On July 21, 2011, EU-elites announced that they had agreed on a "comprehensive package for Greece". Put differently, all Greek problems would be solved through that package. That is now almost exactly a year ago.

My initial reaction then was that it was a very good deal for banks, a more-of-the-same deal for tax payers and a deal of uncertain outcome for Greece. That outcome would depend on what Greece was going to do in the coming months.

And what happened?

Well, miraculously, virtually nothing happened. And yet everything quieted down as far as Greece was concerned. Either because summer vacation was in progress or because Italy started hitting the front pages or because the players involved thought that things would take care of themselves. That prompted me to write a post asking the question whether the Greek crisis was perhaps forgotten. To summarize my feelings then, I opened the post with the following sentence:

"Anyone who has spent a great deal of time over the last months making comments and/or offering possible solutions about/for the "Greek problem" could feel unemployed at the moment".

It seems to me that we are seeing something similar now. Ever since the new government was formed, things have been sort of quiet. Off the bat, the Prime Minister and another minister went to the hospital, creating a bit the impression that it wasn't so important whether they were there or not. Then the new government made its first announcements, most of them sounding really promising and some of them sounding like seeking an immediate fight with SYRIZA. But SYRIZA didn't take the bait. A few critical words from Alexis Tsipras and that was it. Is he perhaps also on vacation?

In short, one has to be a bit puzzled. There are two possible scenarios: either the government is so professional that it recognizes that, for now, it is best to work behind the scenes and get one's action plans worked out in detail before one goes public with them. That would be wonderful! Or the government is sort of doing, well, not much, if anything. Here is another quote from a year ago:

"As a result, more than ever Greece now has a chance to assume a lead role; to implement measures which inspire confidence that financial Armaggeddon can be avoided. On the other hand, if Greece ... leans back and thinks that somehow her problems will go away by themselves, then Greece will accelerate the chances of a financial Armaggeddon".

Well, we will know in due time whether this time around time is being used wisely. Last year it was not. Let's hope it is this time!

Monday, July 16, 2012

Don't overplay the soft point of Germans!

I have now been back to Austria after having spent about 3 months in Greece and I am being bombarded by the "other point of view". What is that "other point of view"? Let me try to summarize the feelings of my German friends which I have come across since my return.

"We didn't want to join the Eurozone and we did everything to avoid it. Greece, on the other hand, did everything to get in".

"We had a pretty high standard of living before we joined the Eurozone. Greece, on the other hand, achieved its standard of living after joining the Eurozone".

"We were essentially blackmailed into joining the Eurozone (the price for German unification). Since we couldn't resist, we made sure that our interest would be preserved contractually".

"Despite all of that; despite the fact that we had insisted from the start that the ECB would pursue monetary policies with the Euro like the Bundesbank had done with the Deutsche Mark; despite the fact that we had insisted on a no bail-out clause; despite many other things - we now find ourselves in a situation where we have to do exactly what we had been contractually guaranteed we would never have to to".

"It looks like we don't even have a say any more what we can do. It looks like the majority needs money; the majority thinks we have money; and the majority decides to take it from us. But we have to borrow that money!"

"While all of this happens, we are being blamed for being more or less re-incarnations of the Nazis".

"We hear such ridiculous claims that our standard of living is primarily due to the fact that we could exploit the poor Greeks; that we are now driving Greeks into poverty and suicides". 

I could go on.

As an Austrian, I have my own feelings about our neighbors to the North. Ever since the Prussian upstart Bismarck told the God-sent Habsburgs that they would not be part of the Unified Germany (even though the Habsburgs had been Holy Roman Emperors of German Nations for half of the Empire's existence), there has been a slight, shall we say, antipathy on the part of Austrians against Germans. We don't fight wars any more but once every 50 years or so, Austria gets to beat Germany in soccer and whenever that happens (like the 3rd goal of Cordoba in 1978 which kicked Germany out of the World Cup tournament), well, then Austrians experience moments of ecstasy.

Despite all of that, I think the Germans are being given the raw end of the stick (and they keep taking it!). It's like in an interpersonal relationship where you know your partner has one very soft point and you take advantage of that soft point and rub it in all the time to achieve your goals.

The soft point of today's Germans is the country's history. We are still seeing a country whose President once got clobbered (by Germans!) after he said that he was "proud of Germany". Why? Because it obviously was unfit for the President of such a country to be proud of it. When it comes to loving one's country, another President felt it necessary to clarify that he loved his wife but he didn't have to love his country. And yet another President felt it necessary to state that "Islam is part of Germany" just to make sure that he wouldn't make Germany subject to critique that it was anti-Islam. Where he got the idea from that Islam is part of any Judeo-Christian heritage, that he never clarified.

And now the German "guilt" is really being played by just about everyone who is after the perceived cash of Germany (which cash Germany has to borrow...). Particularly in Greece, the early part of the 1940s is being replayed with a vengeance. Sometimes I wonder how Greeks might feel if others replayed the latter part of the 1940s with the same vengeance. Perhaps asking questions like "What exactly happened at Meligala?" or "What was the Paidomazoma all about?"

Taking advantage of someone's soft point works from time to time and sometimes. Making a strategy out of it is never a good idea and it may eventually provoke undesirable reaction from the one who can no longer take the pain from his soft point. It might be worthwhile to read the following analysis by Dirk Schumacher, Senior European Economist of Goldman Sachs:

"At the core of the reluctance of Germany to agree to some form of debt mutualization is the fear that this will lead to lesser efforts or even an abandonment of the reform course. Attaching conditions to debt mutualization cannot overcome this problem since – as this crisis has shown – sovereign countries cannot be forced to stick to past agreements if the population turns against them. Thus, the reluctance of Germany to “sign up” at this point makes sense: writing a blank check without having the necessary controls in place to ensure that it is used appropriately is only going to create problems down the road. Despite these obstacles, there is a strong consensus in the political class that a break up of EMU would have an immensely negative impact on Germany. But this does not mean that Germany will try to save the Euro at any cost."

Is Mr. Alexis Papachelas a collaborator?

Everyone knows the feeling one has when one reads an article or commentary and afterwards one feels "makes sense what he/she writes". I tend to get that feeling everytime I read a commentary by Mr. Alexis Papachelas, executive editor of the Kathimerini. I had this feeling VERY strongly when I read his latest commentary. Essentially, Mr. Papachelas is criticizing that politicians who run for office spend all their resources on getting elected and getting their friends into positions of power, too, but as regards the job per se (i. e. running the country), they are very unprepared for it. Here is a quote:

"Greece’s parties and politicians have become accustomed to pulling all the stops in order to get elected without, however, having to do any of the work that comes with the responsibilities of public office. This cannot go on, especially at a time when every decision taken also involves the agreement of the representatives of the country’s lenders -- people who know their facts and figures all too well".

Now, Greece is not alone here. I could make the same criticism of many Austrian politicians. But the surprising thing to me is that this giant leap of problem-recognition comes from a Greek! And he criticizes Greek politicians and not those of other countries! What a different tune from that of Prof. Yanis Varoufakis' and his followers' hymn that there is nothing the Greek government can do to improve Greece as long as the Eurozone is run by such incompetents!

When - every once in a while - I post what I would consider reality checks in Prof. Varoufakis' blog, I get clobbered by the masses. I guess that's how one treats perceived collaborators.

Now, this raises an interesting question in my mind. If my views are considered as the views of a collaborator by the Varoufakis-crowd but I agree with the views of Mr. Papachelas, wouldn't logic suggest that this makes Mr. Papachelas a collaborator, too?

Is Mr. Papachelas a collaborator? And, if yes, a collaborator of what?

Thursday, July 12, 2012

How mighty is the almighty Germany?

The German sociologist/economist Gunnar Heinsohn drafted a Speech to Europeans to be given by Angela Merkel. The bottom line of the speech is: "We are finished".

Is Germany almighty or is Germany finished?

Well, certainly not finished but even more certainly: not almighty! One way to look at an economy is to ask whether it has the capacity to employ its people. Well, for most of the time since WWII, Germany has only been able to employ its people because it had/has so many customers outside of Germany. Let some of those customers break away and German unemployment will skyrocket.

Germany is now in its 3rd year of economic boom. Also, Germany benefits from extremely low interest rates on its public debt. And, last but not least, some of Germany's interest expense doesn't even flow through the budget because the debt is placed in automous institutions (like the KfW). And yet, Germany is still far from balancing its budget. Now if one can't balance one's budget in wonderful times like this, how is it going to be when the economy turns down?

Germany has built up a welfare state whose costs cannot be sustained on a long-term basis. Without things like Agenda 2010 or the increase of the retirement age to 67, the critical point would already have been reached.

If you are not worried by now, look at Germany's demographics and you will be scared. Today, there are 43 million working people in the age group 15-64 years. By 2050, that number will have declined to 33 million people. Germany is going to be a VERY old country!

But in one aspect Germany is in the same class as everybody else: it has to take up new long term debt in order to be able to pay off maturing debt (and interest).

"Ginetai" of Peter Economides

In this interesting interview with Peter Economides, the subject of his Ginetai comes up in connection with the Ellenikon project. Incidentally, Ellenikon sounds like a fascinating project/opportunity but I have one worry about it. In Austria, a project of that magnitude and with such implications all over the place would undoubtedly take a couple of decades until the final go-head is achieved. I hope Greece can be a lot more efficient than Austria!

The following statement caught my special attention: "Economides envisions the development becoming a microcosm, one that could point the way for the rest of the country, a place where everything works -- or at least works as well as anywhere else".

Well, that's actually the same idea as behind my concept of Special Economic Zones. The idea behind a SEZ is that, instead of trying to change the whole universe at once (which can't be done, anyway), you start with "pockets". Economides has a much better term for it: Microcosm! So I will from now on refer to them as Economic Microcosms (EM).

The beauty of such an EM is that it would be started from scratch. Consequently, everything there could be designed/implemented in such a way that it becomes most attractive for investors and investments (particularly foreign investors and foreign investments). If one weren't sure how it should be designed/implemented, one would simply ask the potential investors what they would find attractive and one would look around what other (successful) countries do. Presumably, it would be things like: excellent infrastructure; one-stop process to get all approvals for a new business within 30 days; exemption from all unnecessary bureaucracy; exemption from everything else which presently makes Greece an unattractive place to do business; liberalized labor regulations; etc. etc. Particularly foreign investors would also require some form of guarantee for the political risk of Greece (including the risk of a possible Euro-exit). That guarantee would probably have to come from outside Greece (from the EU?).

Johann Wolfgang von Goethe once wrote a short poem titled "America, you've got it better". In essence, he said that it is so much easier to start something from scatch than having to continually improve something which has existed for ages.

Greece right now ranks No. 100 on the "Doing Business 2012" report of the World Bank/IFC. To bring the entire country into the top-10 through normal processes will take decades. A single EM could be brought into the top-10 nearly overnight, possibly even to No. 1. 

As I thought about this, it came like an eye-opener to me: why does one not think about combining Ellenkion as a microcosm for near-perfect living and working with a microcosm for near-perfect doing business? There seems to be enough space available for a number of business parks where new (foreign) businesses could establish themselves and where many of the unemployed from the Greater Athens area could find jobs.

And the final beauty of such an EM is that one doesn't have to convince others (like the rest of the country) to accept the same regulatory and business framework as in the EM. If the EM didn't work successfully, no one would want to copy it. On the other hand, if it worked very successfully, if there were plenty of new jobs, if there were plenty of happy new employees, etc. --- well, then the rest of the country would begin wondering what it is that they do in that EM. And the business framework of the EM would rub off on the rest of the country over the years.

I am certain that the rest of the country would begin copying the EM. It's hard to change something by mandate but people almost automatically accept change if they can see proof that it will be for the better!

Wednesday, July 11, 2012

Hot topic --- Privatizations!!!

The new government has made privatizations its number one priority. I am not going to debate whether they should be a number one, two or three priority but a priority they should be. Not only as a measure in and by itself but, as importantly, as a potentially new mindset. A mindset that, particularly in times of a common market and a common currency, privatizations are nothing illegal, immoral or otherwise.

The Greek Default Watch blog has published an article about this topic, once again an excellent article. I will now add some points to it with my "Austrian perspective". Austria has a wide range of experiences with privatizations (good and not so good) due to the fact that there has been so much of the Austrian economy to privatize. Until the 1970s, Austria’s public sector accounted for over 50% of the economy (the reasons for that had to do with post-WWII issues, i. e. to protect against expropriations by the Soviet Union).

Post-WWII Austrian politics were based on a 2-party system where the two parties (People’s, Socialists) accounted for 80-90% of the vote. They soon discovered that, instead of fighting each other, it was much more comfortable to form a coalition and to divide the country fairly and equally between them. For that, they had entered into a written Proporz-Agreement which stipulated that all leading positions in the public sector were to be awarded proportionally, relative to the results of the last election. And once the leading positions were split proportionally, those leaders could make sure that all jobs below them followed the same logic. The following joke became popular: for each public sector position you need 3 people. One “black”, one “red” and one who does the job. Not that far from the truth! Obviously, the Austrian 2-party system was a bit extreme but the points which can be drawn from it apply everywhere, perhaps to a lesser degree.

So the first point I would add to GDWs points is: there is no way to avoid party influence in a public sector company. There will always be people for whom politicians “have to find a job; an ‘adequate’ position” and they will be placed in public sector companies. Therefore, public sector companies are split from top to bottom into camps along party lines (and often into separate cultures, too). Those who prefer to remain neutral really don’t do themselves and their careers a favor. What develops is the opposite of a meritocracy. Some of the results are: distrust, envy, unfair play, etc. In short, the quality of the public sector company as a social system deteriorates enormously.

Secondly, there is no way that a public sector company like in the Austrian scenario can be managed like a private sector company. First of all, the managements are political appointments and generally not experts at management. But even if they were, they can’t manage freely. The largest Austrian corporation at the time was the state-owned steel company Voest. It was public knowledge that the head of Voest’s workers’ council (Betriebsrat) had more to say than the CEO and his board members. Why? Suppose the CEO did something which the head of the workers’ council did not like. This head would then call the Chancellor of the Republic and complain. And now get this: the Chancellor of the Republic would accept the phone call of the head of the workers’ council of a steel company, listen to his complaints and then call the CEO of the steel company to give him a dressing-down for taking decisions without first having them approved by the workers’ council!

Thirdly, the public sector is a wonderful instrument to “shave-down” unemployment statistics. You simply have the public sector employ those who would otherwise be unemployed. An Austrian Chancellor of the "good old days" coined an unforgettable phrase in a speech to the workers’ council of Voest. At a time of national debate about the dangers of a rising public debt he pronounced: “And I repeat what I have said on many occasions --- a few billion more in public debt cause me a lot less sleepless nights than a few thousand unemployed would”. Standing ovations, of course.

That steel company eventually collapsed under its own weight and it cost tax payers enormous sums of money. Today, what used to be one Soviet-style conglomerate are more than a dozen privately-owned successor companies. The steel company (Voest AG; not a giant, though) has become one of Europe's most successful players in the steel industry. All the other companies are working profitably.

I hasten to add: it is not really the ownership per se which is the issue (I have seen excellently managed public sector companies, too). What matters are the motives behind the owners. A private owner might even be worse than a public owner if it is a brutal financial investor who has little interest in the long term viability of the company but top interest in maximizing his short-term financial profit.

The problem is: when the state is the owner, you have no choice over the motives. Politicians generally have the same motives. When you privatize a company you do have a choice of the new owners’ motives. You might reject the financial investor and prefer a strategic partner with long-term objectives (even if he pays a little less).

Whether or not the sales price is good for Greek public sector companies in the midst of today’s chaos is irrelevant, in my opinion. Any sale can be structured in such a way that the state can compensate for a perceived lower sales price through options on future profits. For example, for the setting of the sales prices one would establish a base case for, say, 10 years reflecting today’s rather depressed situation and give the state the option for additional benefits should the base case be exceeded during those 10 years.

For Greece, I think the most important argument for privatizations is the know-how transfer that goes along with it (know-how in ALL respects, not only technical know-how!). Put differently, a privatization which does not assure know-how transfer is not a defensible privatization. A multinational which extracts the R&D resources back to its own Head Office and leaves an operating shell in Greece should be discarded. A financial investor should not even be talked to.

The ideal investor would be someone who wants to build up competences in Greece. Perhaps not only for the Greek market but, more importantly, for regional interests. An investor who does not shut down when labor costs become cheaper in, say, Bulgaria. An investor who has a proven track record of a long-term business philosophy and who is prepared to make a long-term commitment to Greece.

Such investors do not exist? I believe there are a lot of them but perhaps many of them are not publicly-traded companies. Most such companies are privately-owned (some of Germany's largest companies are still family-owned). Such privately-owned companies typically pursue long-term business philosophies and do not change strategy with every turn of the market. Those are the type of companies which, I believe, Greece should place its bets on.


Addendum from personal experience
About 15 years ago, I assumed the position of Regional Director for the federal state of Salzburg for Austria's largest bank. It was no longer state-owned then but the principles of "party influence" could still be felt at all corners.

Under Austrian Corporate Law, the corporation is run by a management board headed by the CEO and supervised by a Supervisory Board. One can imagine that in the case of prestigious companies, the Supervisory Board includes very prestigious people. By law, the members of the workers' council must also be represented on the Supervisory Board.

I had in my own region my own regional workers' council. It was headed by the man who supervised the 5-person mail room. Possibly not the most challenging management task. It just so happend that this man had also been elected by his superiors in the workers' council to be a representative on the Supervisory Board and that he and the CEO shared the same party affiliation. So, I was in the unusual situation that a third-level supervisor on my staff was also one of the supervisors of my CEO (and a "party-friend" of his whereas I had no party affiliation whatsoever).

Having spent my previous career with Americans, the thought that I would not be the first person whom my CEO would come to see when he visited never even crossed my mind. Well, I had to learn in a hurry in connection with the CEOs first visit. I knew the CEO had arrived in the building but he didn't show up in my office. Upon inquiry, I was told that he had gone straight to the mail room to talk to the head of the workers' council and his staff (all, of course, sharing the same party affiliation). By the time the CEO came to me, he was already fully informed about all the ongoings in my region (and probably about my behavior as a boss as well...).

The first time I was floored. From then on I became accustomed to it (had to...).