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Tuesday, June 30, 2015

A German Journalist Blows His Stack!

Rolf-Dieter Krause is the Brussels correspondent of the German ARD. Age 64, he generally comes across as a balanced and experienced person who has seen a lot of things in his life. Yesterday, he participated in the "Hart-aber-fair" show of ARD. He was asked by the moderator if he could, if he made a great effort, still have some understanding for the Greek government. Below is his reply: 

I have no understanding (sympathy) for them. You know, there is one point from which I will not depart: politics must serve the people! But what this government has carried on over the last months serves those poor Greeks who now have to bleed not in the slightest way. And that upsets me in a way that I truly find it difficult to control myself.

This government is doing nothing for their people! That doesn’t begin with them, though. Why is it only in Greece that the programs have not worked? To answer that, one really has to go back a long way. In a way, all are to blame. The Social Democrat Papandreou at least made Greece honest when he admitted the falsifying of statistics and that his budget deficit was much larger than previously reported. For that honesty we have not treated him very nicely. Mr. Samaras, the Christian Democrat, first refused, at a time when a lot could still have been rescued, to form a national unity government. Europe’s Christian Democrats literally begged him to do so but they couldn’t force him. Even Samaras only implemented reforms when pressured from abroad. This issue of ‘ownership’ which is often mentioned, i. e. that a government acts on its own behalf instead of putting all the blame on outside parties, never struck roots in Greece. Samaras cut expenses. He rejected the Troika’s calls for greater social balance. He said that that was his responsibility. He told the Troika: “You get your numbers. How I achieve them is my decision”. Mr. Samaras rejected innumerable suggestions  and Europe’s Christian Democrats let him act freely.

And now these fellows from SYRIZA come on stage and start playing games with Europe and give the Europeans the runaround. And they indeed lead the Europeans a dance like a bear with a ring through its nose in a circus arena. I assure you that in this last proposal to Greece, there are points which the Bundestag will only approve with the fist in its pocket, if it ever does approve it. Particularly the CDU/CSU. There are now concessions which CDU/CSU never wanted to make. And I could not fathom that they would be so dumb as to not accept it. But they interrupted the negotiations. Right in the middle of them. They had been on the home stretch. The other Finance Ministers decided nothing. The Greek delegation received a call or an SMS from Athens and that was the end of it. They couldn’t even tell their partners why they had to stop negotiating.

And you know, anyone who acts like that when, at the same time, there are truly humanitarian crises in his country, is unbelievably irresponsible and should be sent to the devil. Yes! But the Greeks are the ones who have to do that!

Sunday, June 28, 2015

Alexis Tsipras Lost His Cool!

Ever since Alexis Tsipras became Prime Minister, I had been impressed by how he handled himself outside Greece's borders: cool, calm and collected. No intellectual arrogance; no moralizing from the high ground; not provocative. Actually, a nice fellow with the innocent charme of a newcomer. Sometimes I literally got the impression that Chancellor Merkel had developed a personal liking to this handsome young man. And Jean-Claude Juncker, of course, couldn't hold his affection back.

Friday evening, upon return from Brussels, he seems to have lost his cool, and I regret that. As much as I can sympathize with a national referendum, the decision seems to have come without due deliberation of the timing and ill prepared. To top it off: Tsipras' TV announcement was anyting but statesmanlike. He sounded more like a rebel with a cause.

I do not share the opinion that a representative democracy essentially outrules referenda because the voters select their leaders and those are charged with the responsibility of taking decisions. When Switzerland has to decide on matters of national importance, they often ask the people to decide via a referendum. Sometimes the people are smarter than their elected leaders. The government of a welfare state might decide on an additional week of annual vacation just to get votes. The Swiss people decided in a referendum that an additional week would cause economic damage.

But in addition to insufficient deliberation and preparation, there is another problem which one of my anonymous readers commented as follows:

"The referendum will backfire on Tsipras. On June 17, Tsipras was saying during Austrian PM Faymann's visit: 'I am not the type of man that who, when in difficulties, throws the ball back to the people. If there is an agreement, it will be the goverment that will lift the weight of the decision and the same in case of non-agreement'. In 2011, Tsipras was accusing George Papandreou that his referendum would be like 'playing dice with the country'."

There have been so many reports that it becomes difficult to differentiate between fact and fiction. FinMin Varoufakis allegedly commented in the Eurogroup that he expected a 'yes' victory at the referendum. This raises the question of how he could possibly not have struck a deal, any deal almost, if he knew that that's what the Greek people wanted?

This strikes me a bit like a cup final where the game is in overtime and neither side wants to take chances. Then there is a small mishap in the penalty area. The forward from the attacking team could just let it go by but, instead, he jumps on the chance to obtain a penalty kick and he gets it. 

Tsipras lost his cool for a short period of time. The creditors could have shown sympathy and helped him get out of the bind into which he had gotten himself. Instead, the creditors jumped on the chance to get a penalty kick and it now looks like they will successfully score.

Too bad. Really too bad!

Friday, June 26, 2015

Refugees: Austria versus Greece

I could not find any statistics about 'refugees' in Austria. What the government publishes refers to 'first time asylum applicants'. I assume that refuges who cross the border into Austria become automatically 'first time asylum applicants'.

From January-May 2015, Austria registered 19.571 first time asylum applicants. That's about 3 times the level of the previous years. The most important countries of origin were Syria, Afghanistan, Irak and Kosovo. Over 1.000 of the asylants do not have accomodations at this time. Essentially, they have to sleep on floors in asylum camps. The 19,571 first time asylum applicants represented about 0,2% of Austria's population.

For months, the Austrian government has debated what to do with those asylants without accomodations. Some proposed the erection of tents while others argued that housing asylants in tents was unworthy of a civilized country. The latest proposal was to allocated the 1.000 'homeless' to the regional districts of which Austria has 95. That would have meant about 10 per district. Yesterday was high noon to resolve this issue once and for all.

On the nightly TV news, one could see the most important representatives from the two coalition parties, from the Chancellor down, sitting around a huge table. There were at least 10 people on each side. And once again, the meeting was adjourned without a solution. Instead, both sides were blaming each other for playing politics on the backs of asylants.

I then switched over the the German ARD where they showed a report about refugees on the island of Kos. What is happening there truly defies description. According to Wikipedia, Kos has a population of about 33.000. If their refugees accounted for the same percentage of the total population as in Austria (0,2%), then Kos should have had at most 70 refugees so far this year. As it turns out, that's less than the number of daily arrivals.

And then the report showed how the locals did their best to take care of these refugees. How food was collected from hotels and how the locals put it into individual packages. Throught the report, it was obvious that the locals cared about the refugees and did their best to help them. Their motto seemed to be: we are living through tough times as a country but there is always enough to help people in need.

Watching that report, I couldn't help but think how distorted the view of Greece and Greeks has become in the process of the debt quarrel. It certainly wouldn't hurt if the negotiators in Brussels took time out to watch the ARD report. It might affect their judgment.

Wednesday, June 24, 2015

A Plan For Growth?

I fail to understand why Greece would have made the proposal which they sent to the EU on Monday this week. I read the letter which Alexis Tsipras signed and which was made public by Ekathimerini. I wanted to count how often the words "taxes", "rates", "contributions" occurred but I gave up. And whenever they occurred, it was in the context of increasing (instead of decreasing) them.

Higher taxes? Higher rates? Higher contributions? A recipe for growth? Well, I guess most people would agree that they are a good recipe for slowing down economic activity.

According to the reviews I read, this was the only way for the government to satisfy creditors without crossing its own red lines. At the same time, I read that these measures would take more money out of the economy than any of the previous memoranda.

Before the technocrats went to work, EU politicians expressed their enthusiasm about Greece's proposal. So much for the competence of EU politicians as regards understanding how growth works.

One almost has to be thankful to the IMF because they spotted right away that relying almost exclusively on revenue increasing measures to close a fiscal gap is about the worst thing which Greece could do at this stage of the game. Regrettably, there were no significant expense cutting measures.

One despairs. For once, Greece submitted a proposal which EU politicians liked but, on closer examination, it turns out the this proposal is worse than anything the Troika could have dreamed up.

Quo vadis, Greece; quo vadis?

Monday, June 22, 2015

An American Who Does Not Understand What's Going On In Europe

A retired American banker in his late 70s, once my boss at an American bank, sent me the following email. 

"What is it that I am not understanding about the so called "crisis"?

They have two options:

- accept Eurozone and IMF demands for pension cuts and tax increases in return for loans (why would anyone want to give them MORE money?).

- face bankruptcy and default (and then presumably get kicked out of the Eurozone and the Euro).

If they accept option 1, the politicians get removed from office and the country goes even more berserk -- big deal NOT.

If they go option 2, they are like many other countries and municipalities which have done so without having to commit hara-kiri.

I realize that like here in the U.S. during the early 2000's, money was easy and the European banks threw money at them (we all have made similar mistakes ), but everyone, including the Greeks, had to know that it was going to be difficult to impossible to have all those loans repaid.

And why is it so crucial that the Greeks be in the Euro? Will Europe fall apart if Greece exits the Euro?

Help me understand this. It seems entirely too simple to me." 

I told him that there was a long answer and a short answer to his question, and that the short answer was: Europe is quite different from the USofA.

Sunday, June 21, 2015

How Top Level Decision-Making Works (Or Does Not Work)

Much has been written about FinMin Varoufakis' all-encompassing proposal which he made at the last Eurogroup meeting and which is here. Varoufakis has claimed that the others didn't even pay attention to it. Schäuble has made the cynical comment that "if there was a proposal, then none of us understood it."

I would like to give my reaction to the proposal, not to the content of it but, instead, to its form. The issue is decision-making at top levels.

Top executives are not interested in prose. In fact, at the last bank where I worked, the management board had explicitly prohibited prose in board presentations. Only facts in the form of bullet statements and numbers, and all of it on only few presentation slides. Explanatory comments could be made by the presenting person (again in bullet statements and not in prose). When we had difficult deals for board approval, we would spend days finetuning the formulation of the bullet statements to make them conduicive to board approval.

It was understood that all facts and numbers presented had been thorougly substantiated and checked for plausibility by the technical staff. The presentation had to clearly point out what the board should approve and why, and what the consequences and/or alternatives would be if the deal was not approved.

If a top manager had presented to the board something like Varoufakis' paper, the board members would have exchanged puzzled looks. What's the point of all of this? Doesn't he understand that we are here to make decisions and that we are not a debating club? The credibility of that top manager would have suffered greatly.

My understanding is that Lazard's is advising Varoufakis. If they had been given the paper and asked to put it into the kind of form which top level decision-makers require, they would have done that within 24 hours.

Why did Varoufakis not do that?

Rescues Can Be Failures, Too!

Skiing in the Alps can be dangerous. Many skiers deviate from the official slopes, with or without professional guides. The authorities have marked dangerous areas with all sorts of red flags and red lines and those who cross them are fully aware that they do so at their own risk.

There are many avalanche accidents every year. Most, fortunately, have a happy ending but every once in a while skiers get submerged by the avalanche. Rescue teams show up immediately and, fortunately, in many cases their rescues are successful. However, there are quite often avalanche accidents where the rescue teams fail and casualties take place. And, every once in a while, there is an accident where rescue teams failed and where their failure may be due to mistakes in the rescue effort.

It is not unusual that the relatives of victims of avalanche accidents where mistakes of the rescue teams are insinuated, subsequently sue the rescue teams. And it can happen every once in a while that they win their case in court; i. e. the rescue teams are declared guilty under the law.

Which raises the question why rescue teams had to go out and rescue in the first place.

Friday, June 19, 2015

Don't Miss the Resistance Festival 2015!

An anonymous commentator brought to my attention the Resistance Festival 2015 which begins today at the Agricultural University of Athens and lasts until next Sunday. Judging from their website, there will be an extensive musical program. The website indicates nothing about special guests and speakers.

My commentator has inside information. He tells me the festival is practically hosted by SYRIZA with main speakers from the Greek side being journalists/producers from SYRIZA's radio, SYRIZA MPs and a member from SYRIZA's political board.

According to my commentator, there will also be the following foreign dignitaries attending, whether in an active role or not I don't know:

- Alvaro Garcia Livera (Bolivian Vice President)
- Luis Brito Garcia ("Venezuelan intellectual")
- Samir Amin ("internationally renown economist and activist")
- Tarik Ali (writer and activist)
- Inijo Ereggòn (political segretary of Podemos party, Spain)
- Erturul Kiutsiu (honorary president of HDP Party, Turkey)
- Muna Matari (People's Front, Tunisia)

Since the main subject of the festival is "Opening roads for the 21st century: Is a post-capitalist world possible?", one can be confident that the answer to that question will come out to be a resounding "YES, IT IS!"

Nikos Kostandaras: J'accuse!

"Let us not forget (however apt we are to blame others) that one of the main reasons Greece finds itself in this mess is the folly of improvisation and the lack of accountability of those in power, as well as the undermining of institutions that should have kept them in check. Such arrogance when our country’s future is at stake and such persistence from people who have never shown any achievements or skills in the past betray a deep disdain for everyone else. And while they disdain us, they claim to be the only ones who can talk on our behalf."

Anyone who has read Acemoglu/Robinson's book "Why Nations Fail" will remember one of the principal reasons which they cited: it's either good institutions or bad ones. In this Ekathimerini commentary, Nikos Kostandaras makes the above powerful accusation. "For a while," Kostandaras writes, "ministers, deputies and officials of the ruling parties and their supporters have behaved as if they have a monopoly on caring about the country’s future; anyone who disagrees with their policy is branded a 'quisling,' a 'creditors’ lackey' or a representative of a shadowy 'domestic troika.' While the government is incapable of convincing us that a rupture with our partners and creditors would not be catastrophic, it demands silence from those who worry."

On paper, SYRIZA's First Economic Manifesto of June 2012 was something worthy of discussion. The same applies to the Thessaloniki Program which formed the basis of what SYRIZA planned to do when in government. Furthermore, several of the documents which FinMin Varoufakis has published since assuming office are worthy of discussion. The major problem is not the content per se.

It is the sheer arrogance of an uncoordinated group of people who call themselves the Greek government which defies description and which destroys any credibility and confidence which there might be otherwise. They speak from the moral high ground about democracy and transparency but when a journalist publishes information which he received from the Bank of Greece, they quickly identify him as part of a conspiracy against the government. When the Bank of Greece, in accordance with its Statute, submits its Report on Monetary Policy 2014-2015 to the Speaker of the Greek Parliament and the Cabinet, its Governor gets blasted for the content of it and his firing seems to be only a matter of time. 

I first met my Greek wife 40 years ago and I have been travelling to Greece (more recently living there a good part of the year) since 1977. In short, I have met many, many Greeks both in Greece and abroad. I have never met a Greek in person who displayed the type of arrogance, the lack of polite conduct and the egomania which are displayed by members of the Greek government almost every day. I begin to wonder whether perhaps the Greeks I got to know were/are relicts of the past but I doubt it. Still, if the current Greek government are the yardstick of how Greeks want to be in the future, Greece will become a far less pleasant country.

Thursday, June 18, 2015

To Russia With Account Opening Forms?

If the Greek government is intent to default unless it gets its way, which is the way things seem to me, then I hope that they have prepared for the time after default.

One of the most critical aspects of default within the Eurozone will be to maintain the ability to make international Euro transfers and to collect incoming transfers. It could well be that the ECB will be 'nice' and continue to process Greek transfers but it could also be that some vulture funds jump the gone and start legal action à la Argentina.

The safest way would be to re-route international transfers through the banking system of a country which is sympathetic to Greece. Russia comes to the top of my mind. So if this has not been set up yet, then I hope that Alexis Tsipras is taking account opening forms with him on his trip to Moscow tomorrow so that the Bank of Greece can run its international payments safely through he Central Bank of Russia.

Preliminary Report Of The Debt Truth Committee

The Debt Truth Committee of the Greek parliament published its preliminary report yesterday. The Executive Summary is here. I have read the summary several times. Whichever way I slice it, it seems that the committee came to the conclusion that Greece's entire sovereign debt is illegal, illegitimate and odious.

Wednesday, June 17, 2015

Bill Rhodes No Longer Understands Today's Sovereign Debt Negotiations!

William "Bill" Rhodes, the world's doyen in the field of sovereign debt restructurings, had the following to say on Bloomberg TV:

"We are in a sense of gamemanship here and everything is being played out in the public rather than getting in a room, something that I was accustomed to for 25 years with so many debt restructurings around the world, and to say 'Let's get it done!'"

Why can the Greek government, the Institutions and the EU elites not follow Rhodes' advice?

Greece's Cross-Border Funds Flows 2006-2015

This article by Bulow/Rogoff explains very well what I have been trying to argue since the inception of this blog, namely: when examining the funds flows into Greece by institutional creditors (ESM, ECB, IMF, individual governments, etc.), one has to look at the ENTIRE ECONOMY and not only at the state.

Greek austerity has been defined as money being made available to the state as a borrower. The bulk of that money had to be used by the state to pay creditors. Still, according to the IMF, from 2010-12, 41 BEUR of the total of 247 BEUR which were lent to the state remained in Greece. Beginning in 2013, Greece registered primary surpluses which meant that the state did no longer have to borrow to finance its operations (only to pay creditors).

Assuming that the Greek state would have needed 82 BEUR to make a smooth transition out of its crisis, having received only half of that amount is truly austerity. But does that also apply to the entire economy? Bulow/Rogoff say 'no', and they show the numbers to prove the point.

From 2006-09, total inflows into Greece amounted to 72 BEUR, in those years notably from private creditors. That amounts to an average of 18 BEUR per year.

From 2010-13, total inflows into Greece amounted to 92 BEUR, now almost exclusively from official creditors. That amounts to an average of 21 BEUR (!) per year, i. e. more than in the previous period!

The situation changed in 2014 when there was a net outflow of 5,5 BEUR. Had the Fith Review been completed, Greece would have received 7,2 BEUR in 2014 and, again, there would have been a positive net balance.

Only in 2015 did the situation turn around and, in the first quarter alone, there were 13,3 BEUR net outflows. The reasons for that are well known.

So if the country of Greece were a family, that family would have done quite well until 2013: 72 BEUR in net inflows from 2010 until todate appear overwhelming. To make a provocative point: Versailles aimed at taking money out of Germany. In the case of Greece, the institutions put money into the country (albeit it not as much as might have been needed).

How do the above numbers square with the huge austerity being suffered by Greece? The answer is: it's not only the state which matters; above all, it's the entire economy which matters. The bulk of the funds inflow did not go to the state but, instead, to the banking sector. The fact that Greece received about 45 BEUR in EU subsidies since 2006 also helped.

Bulow/Rogoff compare Greece to the situation of Latin American countries when they hit balance of payments crises in the 1980s. Those countries needed to return to surpluses in the primary balance and the current account practically overnight. Greece did not. Partially thanks to the official lenders to the state but, much more, thanks to the ECB which continued to fund substantial current account deficits until early 2014 and, ABOVE ALL, phenomenal deposit flight. Bank deposits had reached almost 260 BEUR before the crisis and they are now said to be under 130 BEUR. Whoever the owners of those deposits are, they received Euros which they could only receive thanks to the funding by the ECB. Their Euros, to the extent that they haven't been spent, are now safe. The ECB's Euros are now seriously at risk.

Austrian Chancellor Faymann, A Lame Duck At Home, Steps Into The Greek Limelight!

Chancellor Werner Faymann will today be the first foreign head of government to visit Athens since Alexis Tsipras became Prime Minister. To me, Faymann is arguably the weakest Chancellor Austria has had since 1945; he cannot even manage his own party successfully, much less the entire country. So why even pay attention when such a political lightweight visits Athens?

As little sympathy as I have for Faymann as a political leader, regarding Greece he has made a lot of sensible comments. If I understand his logic correctly, he is saying what I had formulated as follows very early in the blog: "The only way to draw water from a dried-out well is to first dump the water into the well. That does not seem to make sense. The smarter way would be to fix the well."

Faymann has been making some very sensible comments lately. He criticizes the Greek government where such criticism is due but, as the saying in German goes: "It's the sound which makes the music". Faymann has chosen good sound. When asked of his opinion about Tsipras' accusing the IMF of criminal actions, his response was: "If one aims at a positive result out of negotiations, it is never useful to bad-mouth the other side". About the Greek government he said: "I start from the premise that someone who was voted into power will live up to his responsibilities".

Faymann has expressed - correctly, in my opinion - sympathies for the Greek government's rejecting 'some' of the demands by the Institutions. "The Greek people must not be overcharged!" He emphasized that ALL must pay their taxes and not only in small percentages. The state of law and institutional reliability must be improved. If the focus is put on those things, Faymann is certain, then the creditors will show more understanding for the poverty of many Greeks.

Faymann says that he has coordinated his visit with Jean-Claude Juncker and several EU heads of government. He expressed full support for the principle that agreements must be '100% respected'. However, he is concerned that the more one talks about a possible Grexit, the more one gets used to the idea of its happening. "One of the reasons I go to Athens is to emphasize that we are not interested in a Grexit".

"Greece needs a long-term plan in order to assure investors that the country will continue to remain a member of the EU", says Faymann. I couldn't agree more.

Monday, June 15, 2015

"Greek Default Does NOT Equal Greek Exit!"

It seems timely to reproduce below an article which FinMin Varoufakis had published in his blog on February 18, 2012: 

"Perhaps the greatest enemy of the eurozone, at this particular juncture, is an erroneous assumption: that a Greek default is inextricably linked to a Greek exit from the eurozone. The problem with this assumption is twofold: First, it prevents Europe from escaping a trap of its own making. Secondly, it is false.

By now, reasonable people realise that the Greek Bailouts do not work. Even though the Greek government (its overall incompetence notwithstanding) has managed to reduce its primary deficit by a whopping 9% (at a time of bitter recession), a loan package worth €240 billion (even if the debt write down known as PSI is successful) will have failed to arrest the steady rise of the  country’s debt and the inexorable shrinking of its national income. It is, thus, unsurprising that the EU and the IMF are at the end of their tether. The show can’t go on (with more loans that demand GDP-killing austerity to pacify the Northern parliamentarians who must approve them).

At the same time, the notion that Greece ought to leave the eurozone is unfathomable: while almost everyone would prefer Greece to have been outside the eurozone, the actual cost of severing Greece will prove equal to that of dismantling the eurozone itself painfully, slowly, catastrophically.

The two thoughts above cause Europe to behave like Buridan’s Ass. Meanwhile the eurozone, as a whole, is moving further along the path  of disintegration and generalised recession. However, this indecision and impasse is founded on an error: the fallacious presumption that Europe is constrained to choose between the bailout route and Greece’s exit. But there is a third way which is less costly for all and gives Europe a chance, at long last, to design a new path out of the Crisis not only for Greece but for all deficit countries (as well as of the ailing European banking sector): Greece must default within the eurozone!

The Greek state, let me remind you, is quite close to a primary surplus. With judicious top-down reductions wages and pensions, plus the issue of tax-bonds, the Greek public sector could finance itself for the foreseeable future. All that is needed is that the ECB continues to provide liquidity to the Greek banks. Some say that it cannot do this because it won’t be able to accept Greek government bonds as collateral (since the Greek state will have defaulted). True but irrelevant: Greek banks have already posted whatever government bonds they owned with the ECB for collateral. That creek has dried. Nowadays they are posting domestic mortgages and other such paper titles (which are, by the way, no worse in quality to those posted by Italian and Spanish banks). All that it would take to allow Greece to stay in the eurozone, in a better state than it is today (and less austerity for that matter), is the continuation of the present ECB policy toward Greek banks. As for those who argue that the ECB will take an aggressive stance, think again: the ECB will not knowingly take steps which will destroy the eurozone.

Naturally, while a defaulted Greece can easily (and optimally, under the present constraints) remain in the eurozone, a long term resolution of its insolvency will have to be plotted by Europe. But is that not the case anyway? Is it not time that Europe deals with the various insolvencies in its midst, rather than continue to push their under the carpet (like a spolit 5-year old)?

To conclude, Europe’s optimal strategy is to let Greece default, to allow the Greek government to find ways to live within its tax take for the next year or so and, at the same time, work out the Overall Solution to the euro crisis that was promised last year and never delivered. A Greek default will provide the clarity and the time-space to do this properly. The other two alternatives (more bailouts or a Greek exit) constitute cruel, unnecessary and unusual punishment. For the whole of Europe."

An Offer Which Greece Cannot (Reasonably) Refuse

It's time for the EU to make a final offer to Greece:

Debt restructuring: All official debt (ESM, ECB, IMF, bilateral loans) rescheduled with bullet maturities, 50:50, in 25/50 years.
Interest: Interest-free for 5 years with option to renew for another 5 years. Thereafter new negotiation.
ECB funding: Frozen at current levels for 5 years.
Reform requirements: None.
Condition: No new debt from any source without the Institutions' approval. Violation thereof is event of default.

Benefit for Greece: All of SYRIZA's dreams come true.
Benefit for official lenders: No one-time loss; insignifcant funding losses during interest-free period; no need "to throw good money after bad" going forward.

Sunday, June 14, 2015

Josef Ackermann & Alexis Tsipras

On the surface it would appear that Josef Ackermann (ex-CEO of Deutsche Bank) and Alexis Tsipras are strange bedfellows. But not necessarily so.

In the fall of 2011, when the Greek crisis was heading for boiling point again, Ackermann said in a CNBC interview the following: "Measures must be taken that sovereign loans are made risk-free again, which is what they should be!" Put differently: "Governments, bail us out or else!"

Ackermann was then in an advisory role to Chancellor Angela Merkel. This at a time when Deutsche was probably one of the most exposed banks in Greece worldwide. It's only fair to assume that he gave Merkel the same advice which he broadcast over CNBC. And, presumably, he added a subtle warning that, if governments would not bail out the banks, there would be a catastrophy.

Alexis Tsipras is now warning that there would be a catastrophy if no deal is reached.

Ackermann was in the role of a prudent adviser. Tsipras is in the role of a blackmailer. Life is all about perceptions...

Thursday, June 11, 2015

The Wealth Of Greece's Armed Forces

A couple of weeks ago, I came across a surprising story about the wealth of Greece's Armed Forces. Expecting that there would be quite a bit of media backlash about it, I waited before commenting on it. If there was any media backlash, I didn't see it.

Defense Minister Panos Kammenos informed the public that the Greek Armed Forces' wealth exceeds 32 BEUR in real estate property. In the back of my mind I calculated that this was equivalent to about 32 Hellenikon's. Quite a substantial amount of wealth! The real estate properties include large pieces of land, airports, airstrips, as well as many vacant buildings and army camps. Many of them are prime locations in islands and can be used for tourism purposes, while others can be farmed or used as renewable energy sources. Airports and airstrips can be used as commercial airports, private training facilities or for car races.

My first thought was how smart it was to brag about 32 BEUR of prime public real estate wealth at a time when one is telling creditors that one is bankrupt. On second thought, I wondered how many humanitarian crises one could solve by selling only 10% of that real estate.

Fortunately, Kammenos seems to be an astute businessman. The above property is currently generating 1,1 MEUR annual revenues. Kammenos has a plan how to increase revenues to 1,5 BEUR through leasing (property sales are ruled out). That would be roughly a 1.500% increase. If Kammenos worked for an investment bank, he would get a good bonus.

On reflection, I wondered whether the business of tanks & fighter jets is not quite a bit different from the business of real estate development. Should indeed a Ministry do its own real estate development or might it be better to house all public real estate in one company and manage it from there?

But now comes the final punch: "Talking to the press, the Defense Minister said that the revenues will be used for the benefit of the Greek Armed Forces staff."

If I am not mistaken, properties which are owned by the central government's ministries or divisions are owned in trust on behalf of the Republic; i. e. on behalf of all Greeks. Now here is a Minister who announces publicly that he will use revenues generated by property of the Republic for the benefit of his own staff? Well, I guess that's exactly what he did!

Tuesday, June 9, 2015

Return Greece To Financial Sovereignty!

Roger Cohen, die NYT columnist, hit it on the nail when he said in the article "The Greek Trap":

"Creditors could tell Syriza: You have a century to repay the debt, but now you’re on your own. Fix the country, whether inside the euro or out. Get foreign corporations to put their money in Greece. You want to try the Putin route, with Gazprom stepping in for the I.M.F., go for it! We’re off your back now — so find a way to make Greeks believe in Greece again without the ready excuse that Berlin, or the International Monetary Fund or the European Commission is to blame."

I have made similar proposals several times in the past except that I even went so far as to put the interest rate to zero (or very close to it) and/or even put a lengthy moratorium on interest payments. No reform requirements whatsoever!

The only condition: no new debt!

Ever since SYRIZA became an important political force (June 2012), the party has consistently declared itself as a champion of a balanced (or even slightly positive) budget. They stated that in their First Economic Manifesto of June 2012 ("reign in expenditures at around 45% of GDP and increase revenues to about 45% of GDP"). Alexis Tsipras repeated the mantra in his Thessaloniki Speech. And, again, it found its place in SYRIZA's economic policy paper "What the SYRIZA government will do".

FinMin Varoufakis later clarified that the above referred to the primary balance and not to the overall budget balance (i. e. without interest). His words were: "I can promise you Greece will - apart from interest payments - never again present a budget deficit. Never, never, never!"

Ok. If you don't have a primary deficit and you don't have to pay interest, everything should be fine!

Why no reform requirements? Many people, particularly foreigners, defend the thesis that Greece is unable to reform without pressure from the outside. Well, let Greece itself clarify that point instead of forcing it upon the country. If Greece can get by without reforms (assuming there is no interest expense), then let Greece get by without reforms. If Greece cannot get by without reforms, it will on its own come to the conclusion that reforms are necessary. If there is no new debt, Greece will be forced to balance its primary budget. If there is a problem, it will have to increase revenues or cut expenses, or a combination of both. The key is: Greece would have to decide that on its own!

So SYRIZA would have all their wishes fulfilled if there were no debt maturities and no interest payments. And what's in this proposal for the creditors?

The creditors gain the invaluable advantage of not having to write off Greek debt at once. They can spread their losses of principal over 50 years (or more). They would incur out-of-pocket losses by financing Greek loans without receiving interest on it. But that is a most manageable problem.

Greece's debt is around 310 BEUR. In today's interest environment, the average refinancing cost to creditors is probably no more than 1%. That would be a cost of 3,1 BEUR annually for ALL creditors. The annual cost to Germany, the largest creditor, would be around 800 MEUR annually. An amount which the Germans would hardly notice in their budget.

And in 50-100 years, 310 BEUR will be a lot less in terms of purchasing power and most certainly in terms of percentage of GDP!

Monday, June 8, 2015

Surprised By 5 Months' Of Negotiations?

Back in January of this year, only few people would have envisaged that back-and-forth negotiations, mostly over statistics and not over substance without any long-term financial solution, could drag on for 5 months or more. Only few people would have envisaged that and --- those who could were SYRIZA leaders.

I remember how, in the weeks running up to the January election, various SYRIZA leaders gave their views on how they thought the negotiations would proceed. Particularly Yiannis Dragasakis was very clear about that. He predicted that negotiations would run into the month of June, possibly until early July.

"That's impossible!", I thought at the time. Well, I was wrong and Dragasakis was right.

Friday, June 5, 2015

Cadastral Registration In Greece

My understanding is that the completion of the cadastral registration in Greece started in early 2014. More than 60% of the territory still has to be surveyed and the project should be completed by 2020. Almost 400 people are said to be working on that and the cost is expected to be around 1 BEUR.

To put this into perspective, I researched how cadastral registration was done in Austria.

The law for cadastral registration goes back to 1817 and it took 46 years to survey the entire area of the Austro-Hungarian Monarchy (100% completion). In total, the result was recorded on 164.375 individual maps.

Well, the territory of Greece is quite a bit smaller than the Austro-Hungarian Monarchy of then and we now have IT, but it seems to me that this staff of 400 has quite a job ahead of itself if it is to complete the project by 2020.

Greek Government Gets On Martin Schulz's Nerves

It was only a question of time until someone would lose his cool and say it. And it was a question of who that someone would be.

Well, that 'someone' was Martin Schulz, President of the European Parliament, and in Maybrit Illner's talkshow on ZDF, Schulz said the following to Giorgos Chondros who represented SYRIZA in the discussion:

"I would like to, if you permit me, say one sentence about the Greek government. They really do,from time to time, - please excuse me for saying so - they do get badly on my nerves, whether it is Mr. Varoufakis or someone else."

Thursday, June 4, 2015

With (Party) Friends Like This, Does One Need Enemies?

PM Tsipras article in Le Monde has received wide attention. I have now read a reply to it by Stathis Kouvelakis, 'a central figure in SYRIZA's Left Platform'.

Poor Alexis Tsipras! With (party) friends like that, he really doesn't need enemies!

Tuesday, June 2, 2015

Reality Check On Greece's Foreign Funding

Per April 15, 2015,

* the Bank of Greece owed foreign financial institutions (mostly Central Banks) a total of 98.770 MEUR, up from 43,972 MEUR in November of 2014
* the entire Greek banking sector owed the Bank of Greece 112.841 MEUR, up from 44.853 MEUR in November of 2014
* the entire Greek financial sector (including the Bank of Greece) owed foreign financial institutions (mostly Central Banks) 103.457 MEUR, up from 54.499 MEUR in November of 2014

If SYRIZA's strategy was to milk foreign financial institutions (primarily for the purpose of paying out domestic savers and buying T-bills) before giving them the shaft, that strategy certainly was successful.

Monday, June 1, 2015

FinMin Varoufakis' New Plan

Now this is interesting! FinMin Varoufakis announced, according to this article, a new plan for Greece's return to borrowing from markets: "The plan called for the issue of a low-interest, 30-year loan from the European Stability Mechanism (ESM) to replace the debt currently held by the European Central Bank (ECB), while simultaneously restructuring the rest of Greece's debt."

Prior to the January election, I had quite a few email exchanges with Varoufakis. He seemed to be interested in my opinion on this, that or the other. On his first day as Finance Minister, I wrote to him the following: 

"Repay all debt over 60% with a new bond with a minimum maturity of 50 years, a rate adjustable to a very low base so that the real cost of interest is close to zero (or zero) and an interest moratorium for 20 years. Close the deal ASAP and get on to work on all the other things which are much more important for Greece’s (and SYRIZA’s!) future than a haircut which will be followed by another haircut in the future. The key is to REGULARIZE the debt issue so that it doesn’t pop up every few months and distracts from real work." 

What's the difference between the two? Well, contrary to Varoufakis who now proposes to only take care of the ECB debt and restructure the rest, I proposed that the ENTIRE debt over the Maastricht level of 60% of GDP should be restructured (in other words: most of Greece's debt owed to official creditors). Also, Varoufakis talks about 30 years whereas I talked about 50 years. And I included a generous grace period whereas Varoufakis does not.

The critial issue is debt service. Or put differently, how much of an annual primary surplus should Greece be required to have. The government has carved the 1,5% of GDP in stone, so let's work with that.

GDP was 179 BEUR in 2014 (see page 9 of this report) and 1,5% of that would be 2,7 BEUR. However, linking a state expense to GDP is a questionable approach, in my opinion, because GDP does not have a direct correlation with the government's revenue base. Thus, I had suggested to link the interest burden to government revenues (out of which interest has to be paid).

In 2014, the Greek state recorded 50 BEUR in ordinary budget net revenue before tax refunds and privatization proceeds (see page 2 of this report). 2,7 BEUR (the 1,5% of GDP) would have been equivalent to 5,5% of such ordinary budget net revenue. Thus, by committing to allocate 5,5% of ordinary budget net revenue, an amount equal to 1,5% of GDP would have resulted with the benefit going forward that actual tax revenues would determine the interest expense burden instead of GDP statistics. 

A good deal for creditors because ordinary budget net revenue (the base for the interest allocation) should increase as the economy improves and tax reform becomes more effective. And a good deal for Greece, too, because having to allocate only 5,5% of ordinary budget net revenue to interest expense is really an unusually low figure. Initially, the resulting interest amount would probably only cover interest for private creditors but, as things improve, it would also provide interest income to the restructured official lenders.

Which conditions should the Institutions impose for such a restructuring? Really only one: not to assume any further sovereign debt without the Institutions' explicit approval. Non-compliance with this condition should be made an event of default.

There is only one small problem. To achieve a restructuring as outlined above, as Varoufakis now proposes, would have required a negotiating strategy diametrically opposed to the one which Varoufakis pursued from day 1. Instead of attempting to divide and conquer, one would have had to build partnerships based on trust and personal bonds based on confidence. 

Do I think that the Institutions (which were then still called Troika) would have gone along with such a restructuring? That depends. Partnerships based on trust and personal bonds based on confidence alone would certainly not have done the trick. 

First of all, the Thessaloniki Program (which had called for 11 BEUR for certain new expenses to be financed by 12 BEUR of totally uncertain new revenues) would have had to be adapted into a credible longer-term economic development plan for the Greek economy. A plan not for a year or two but, instead, for at least one generation. My favorite would have been the McKinsey Plan of 2011 but SYRIZA had totally rejected it at the time. That, however, does not free SYRIZA from the responsibility to develop its own equivalent of such a plan. Back in January of this year, Varoufakis fully agreed with me that such a plan was desperately needed and he said that the preparation of such a plan would be one of his highest priorities. I have not seen such a plan todate.

Secondly, Greece should have proposed to make the EU Task Force for Greece the central catalyst of all reform efforts. Of course, the Task Force should have been renamed into something like "The Greek Task Force with EU Support" and put under the direct responsibility of the Prime Minister.

And that's about it.

I firmly believe that, in the context of trustful partnerships and bonds of personal confidence, the above two strategies would have been sufficient basis for an overall agreement on the debt. That, to me, would have been a New Deal for Greece! (and not the repeated 'kicking the can down the road').