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Friday, December 30, 2016

Brussels And Greek Slot Machines!

Here is a good one to finish off the eventful year 2016. As the Ekathimerini reports:

"The European Commission has sent a letter to the government asking it not to implement a new regulation on the operation of video lottery terminals (VLTs), which OPAP has undertaken.

Dated December 21, the letter asks the government to forward its draft measures for the operation of the gaming market to Brussels and to freeze the application of the new VLT operation regulations, as the Internal Market Directorate-General argues the rules approved in October by the Greek Gaming Commission (EEEP) do not protect punters or society sufficiently."

Well, aren't we glad that Greek society is being protected by the EU Commission?!? With that kind of an efficient EU government, it can only be a question of time until Greece becomes sufficiently protected against illegal migration, etc.

Will Donald Trump Brand Germany As A Currency Manipulator?

A tweet by Yiannis Mouzakis drew my attention to an Analysis of Donald Trump's Economic Plan and a brief comment which was made on page 15 of that White Paper:

"A similar problem (of currency manipulation) exists because of the European Monetary Union. While the euro freely floats in international currency markets, this system deflates the German currency from where it would be if the German Deutschmark were still in existence.  In effect, the weakness of the southern European economies in the European Monetary Union holds the euro at a lower exchange rate than the Deutschmark would have as a freestanding currency. This is a major reason why the US has a large trade in goods deficit with Germany – $75 billion in 2015 – even though German wages are relatively high."

This issue is well know to many Europeans. The Southeners blame the North for having an exorbitant privilege and the Northeners tell the South that they knew what they were getting into when they joined the Eurozone. Both are right, in a sense, but neither side has a solution for the problem.

Now that Donald Trump will soon be President, this may all change in the near future. Trump has talked a lot about currency manipulators during his campaign, always with great passion and with promises for retaliative action, but his targets have been mostly China and Japan. Not once has he mentioned Germany but that was probably more by default (i. e. not knowing how the Eurozone works) rather than by intention.

An outsider to the Eurozone is probably certain that the Euro cannot be manipulated to the advantage of any one country because the truth is - it can't. However, it rests in the structure of the Eurozone that the Euro becomes too strong a currency for some countries (i. e. Greece) and too weak a currency for others (i. e. Germany).

Trump will probably tweet immediately that Germany should urgently revalue and France, Italy & Co. should devalue. This will be followed by another tweet where he says that his advisors have now explained to him that neither can Germany revalue nor can France, Italy & Co. devalue. At that point, Trump has probably realized that the Euro is a huge problem.

"Donald Trump has promised to use his Treasury Department to brand any country that manipulates its currency a 'currency manipulator'. This will allow the US to impose defensive and countervailing tariffs if the currency manipulation does not cease" - states the White Paper. Well, this is going to be an interesting situation!

Will Trump's Treasury Department brand Germany as a currency manipulator? It really can't because Germany isn't. But one can certainly brand Germany as the beneficiary of currency distortion which comes as a result of the structure of the Eurozone.

It would be an irony of history if the elitist defenders of the Euro were to be told by an American con man to stop pretending and to start fixing the structure of the Eurozone! That'd be something interesting to watch!

Tuesday, December 20, 2016

From Beer To Mountain Tea

The Financial Times calls this article about two Greek companies "Hangover cure and clutching at straws drive Greece's export sales". One of the companies produces a low-calorie soft drink derived from Mountain Tea ("Tuvunu"). The other one ("Matrix Pack") makes polypropylene drinking straws. Both are small but allegedly very successful companies.

Tuvunu caught my attention because it was mentioned that they belong to the Macedonian-Thrace Brewery from Komotini, makers of the Vergina Beer. A brewery in Komotini? That triggered a bell. Something in the deep corners of my memory told me that I had read something about this before. And then I remembered.

In January 2011, the NYT had published an article titled "What's broken in Greece? Ask an entrepreneur!" It told the story of Demetri Politopoulos, a Greek American from Manhattan who had this idea of returning to his home country in order to start a brewery in Northern Greece. That was the plan. The result was that he lost over 5 MUSD in the first years of operation.

I remember that, when reading the article, I felt very sorry for the man because I felt sure that it was only a question of time until he would be forced to cut his losses and return to the US as a poorer man. So much greater my joy to read that apparently he has succeeded, Greek intricacies notwithstanding! Congratulations!

Friday, December 16, 2016

Uproar About A 616 MEUR Christmas Present

According to the Ministry of Finance's State Budget Execution Report, Greece's primary surplus for the period January-November 2016 was budgeted at 3.553 MEUR and it came out at 7.449 MEUR. That's a surplus in the surplus of 2.896 MEUR, or 110%. Greece has now decided to take 616 MEUR out of that unplanned surplus in the surplus of 2.896 MEUR, or 21% thereof, for a one-time payment to recipients of low pensions.

In the world of business, this would be called a bonus. Management exceeded expectations by 110% and the board decides that management is deserving of a bonus in the amount of 21% of the excess. In the world of investment banking, management would not be satisfied with only 21%.

If the EU had been smart, it would have anticipated events and acted pro-actively instead of reacting later. That the State Budget would have a significant surplus over the planned surplus has been in the coming for months. And one does not have to be a prophet to predict that, when there are unexpected surpluses, voices will come out claiming a piece of the action. Particularly when there are battered pensioners. Particularly at Christmas time.

If the EU had been smart, it would have proposed to Greece something like the following: "Your State Budget has seen a terrific development this year (that would be the praise part). We think that a portion of this unexpected surplus should go to the most needy in your society instead of your creditors (that would have been the bonus part). We propose 25% thereof."

The way things happened, the EU has fallen into a trap laid out by PM Tsipras. He did the right thing (reward the most needy in society at Christmas time) but he did it in such a way that the EU would have to violently object to it (by not consulting them beforehand and, thereby, violating the agreements). The net result of this: it is now Tsipras who is the human politician to whom the most needy in society are more important than greedy creditors. And it is the EU who are the bad guys. Well done, EU!

Below is an article which I had written about the distribution of the primary surplus 4 years ago.

Wednesday, December 14, 2016

Special Economic Zones in Serbia?

Why Germans invest in Serbia and Romania, but not in Greece.

“'In Romania and Serbia a new German investment is made every week,' said the head of the German-Greek Chamber of Commerce and Industry, Michalis Maillis, deploring the unwelcoming conditions for investments in Greece."

"Unlike Greece, Romania and Serbia are seen as investor-friendly countries. While Greece is 60th in the Doing Business 2017 chart, which ranks countries according to the ease of doing business there, Romania stands in 36th spot and Serbia in 47th."

"Serbia introduced serious incentives for the increase in employment in July 2014, and both Serbia and Romania operate special economic zones with incentives for investing in them."

To make a long story short: just type "zones" into the search box on the right hand side and you will find much of what I have written about Special Economic Zones. 

Tuesday, December 13, 2016

For Once, The IMF Got It Right!

"Greece’s debt is highly unsustainable and no amount of structural reforms will make it sustainable again without significant debt relief. Similarly, no amount of debt relief will allow Greece to return to robust growth without reforms."

Well, this article titled The IMF is not asking Greece for more austerity really nails the issues which Greece is confronting and which Greece needs to handle successfully in order to return to growth. Just one minor addition appears appropriate:

The IMF always reminds the world that Greece needs debt relief but it never accepts the notion that such debt relief should also come from the IMF itself. After all, the IMF's loans are by far the most expensive portion of all official loans to Greece. If only the IMF's debt relief came in the form of lowered interest rates, that would also be a contribution!

Monday, December 12, 2016

Where Did Bail-Out Money Come From And Where Did It Go To?

The European School of Management & Technology (ESMT) is a Berlin-based business school founded and sponsored by large corporations. It published a White Paper on the sources and uses of the bail-out funds for Greece as part of the first and second programs (2010 & 2012). The draft version of the White Paper can be found here. Major points:

* 216 BEUR were distributed as part of 2010/2012 bail-out's.
* 139 BEUR thereof were used for debt service (principal and interest).
* 37 BEUR thereof were used to recapitalize Greek banks.
* 10 BEUR thereof were used as incentives for the 2012 PSI.
* Finally, 10 BEUR thereof, or roughly 5% of the total, were used for the budget.

It should be noted that an IMF calculation differs from the above to the extent that the IMF claims that a total of 247 BEUR were disbursed, of which 41 BEUR (or roughly 17%) were used for the budget and the remainder of 206 BEUR for debt-related items.

* in the first bail-out (2010), Slovakia did not participate and Ireland and Portugal were separate bail-out beneficiaries and thus did not provide funds.
* disbursements under the first bail-out totaled 73 BEUR, of which 53 BEUR came from the EU and 20 BEUR from the IMF.
* 34 BEUR of the first bail-out remained undisbursed.

* in the second bail-out (2012), 154 BEUR were disbursed of which 142 BEUR came from the EU and 12 BEUR from the IMF.
* this 154 BEUR included 11 BEUR disbursed to and later returned by the HFSF, bringing net disbursement to 215 BEUR.

Productivity In Comparison

The below graph measures the amount of GDP generated in one hour's worth of work.


Like any statistic, it has to be taken with a grain of salt. Ireland, for example, is at the top of the list because it has European headquarters of firms like Apple and Facebook where not too many people are employed and work. But still, the numbers do give a general picture.

Friday, December 9, 2016

That "Inhuman Logic Of The Market"

PM Alexis Tsipras had the TV world as his audience when he gave a eulogy at Fidel Castro's funeral services. Tsipras used this opportunity to denounce before the world the "inhuman logic of the market". And he added neoliberalism, too.

Nevermind that market and neoliberalism, as the latter is understood today, can be quite different things. In fact, one could argue that the original idea of neoliberalism, as developed from late 1930s onwards, is almost the opposite of that neoliberalism which, today, is being accused, often with good reason, as the cause of all economic evil. Neoliberalism came to life in the late 1930s as an attempt to find a Third Way between the conflicting philosophies of classical liberalism (complete laissez-faire) and socialism. In the decades that followed, the term neoliberal tended to object to the complete laissez-faire doctrine of classical liberalism, and promoted instead a market economy under the guidance and rules of a strong state, a model which came to be known as the social market economy (Ludwig Erhard).

As regards the market, Mr. Tsipras should be happy for it. Politically, if there hadn't been a free market for votes in Greece, Tsipras might never have become Prime Minister (on the other hand, the Castro's might not have remained in power if there had been a free market for votes in Cuba). Economically, the market begins with the street markets in Greece. There is no better way of seeing how a market works than spending a couple of hours at a Greek Λαϊκή. A wonderful experience of observing supply and demand in action. The more the forces of supply and demand, the forces of reasonable competition, are restrained, the more one becomes subject to arbitrary (and perhaps unfair) judgments of others (or, as one of the founders of the original neoliberalism would have said: subject to the coercion of others).

Having said all that, my point is still a different one here. Mr. Tsipras has been touring the capitals to persuade foreigners that Greece is a wonderful place to do business, a great place for foreign investors, perhaps even a nirwana for private enterprise. And here is my question:

Will denouncing the inhuman logic of the market be conducive to accomplishing this objective? Or perhaps not?

Tuesday, December 6, 2016

Eurogroup's Debt Relief - Much Ado About Nothing?

In its Statement on Greece, the Eurogroup announced the following measures which are to be understood as debt relief:

* The smoothening of the EFSF repayment profile within the current weighted average maturity of up to 32,5 years;
* The waiver of the step-up interest rate margin amounting to 200 bps related to the debt buy-back tranche of the 2nd Greek program for the year 2017;
* The use of the EFSF/ESM funding strategy as markets allow to reduce interest rate risk without incurring any additional costs for former program countries. This measure will be implemented through: (i) exchanging the EFSF/ESM back-to back notes supporting the bank recapitalization loans to Greece, (ii) the ESM entering into interest rate swaps to mitigate the risk of higher market rates and  (iii) introducing matched funding for future disbursements to Greece under the current program.

In a commercial bank, loan approval competencies depend on the size of a loan. A small loan might be approved by two officers of the bank, a very large loan might require the approval of the entire board. When changes to the terms of an approved loan are to be made, the same competencies which were required to approve the loan have to approve the changes. Unless...

Oftentimes, changes to loans which required the approval by the entire board may be so minor that it would be a waste of time and resources to involve the entire board. Thus, there is normally a definition of minor changes which can be approved by, say, only two officers of the bank.

The above measures which are understood to be debt relief fall into the category of minor changes. The smoothening of the repayment profile is only required because an appropriate smoothening was not implemented at the outset. To forgo a future margin hike of 200 bp is nothing other than foregoing an unrealistic and inappropriate margin hike. And to use derivatives to convert interest rates from floating to fixed is something every corporate treasurer does every day.

So is this really much ado about nothing? Not really. There are some advantages which make Greece's debt sustainability appear a bit better (or less bad) than before. But it is amazing that 18 Finance Ministers are required to approve such changes.