Follow by Email

Thursday, February 9, 2017

The Bitch Is Back!

Suddenly, the Greek crisis is back. Or so all the media have reported in recent days. In actual fact, the Greek crisis is neither back nor has it ever been gone - it's just there!

The question is only whether the crisis is dormant or coming back to life. It is dormant when there are no 'decision points' (no major payments due, no major deadlines to be kept, etc.). When a new tranche has just been disbursed with a new review date set in 6 months, one can rest assured that there will be no Greek crisis until 6 months later. When there are decision points all the time, there will be a Greek crisis all the time. We are now, once again, approaching decision points. And the bitch is back.


As always, the Greek Analyst nails it above. I think even if all of Greece's debt were forgiven, the problems would continue. They wouldn't be felt for a number of years because, starting from zero, Greece could again start borrowing heavily. But that wouldn't change the process: as soon as a decision point comes up, the crisis returns.

Marcus Walker of the WSJ put together a coherent thread about the timeline of the Greek crisis where he traces Greece's problems to the fiscal mismanagement from 2002-09. Not quite! I believe that today's Greek crisis has its origins back in the early 1980s when two tectonic movements reinforced each other: the spendthrift policies of the PASOK/Papandreou (father) government and the financial benefits of having joined the EU. This is not to blame PASOK alone. On the contrary, PASOK started it and when ND came to power, they tried to be a cheap copy of PASOK.

Until there is a general acceptance of this development on the part of the Greek government and the Greek people, Greece will be in crisis for the simple reason that one only changes behavior if one realizes that one has done wrong.

As long as those who uncover and correct scandals are sued by the Greek government while those who caused the scandals walk free, the Greek crisis will not be 'owned' by Greeks.

Footnote: Interestingly, in most of the private conversations I have with Greek friends there is agreement on the above.

Tuesday, February 7, 2017

The Challenge Of Understanding Greek Statistics

Only recently had I commented on the most favorable preliminary state budget figures for 2016. I had reported that the "state" recorded a primary surplus of 4,4 BEUR in 2016, compared with 2,2 BEUR in the year before and a target for the year of 2,0 BEUR. By all standards, a rather sensational result.

What matters in the final analysis, however, is the "general government" of which the "state" is the largest component (other components: "state, local governments", "social security funds", "other non-consolidated items"). I thus concluded that, for 2016, the "general government" would look even better than the "state".

Yes, but with a question! Below is the table for the "general government" in P+L format:


The message is short: revenues (mostly taxes) went up quite a bit and expenses went up a bit less so that there was a significant overall improvement over the previous year. In 2015, the primary surplus was 3.993 BEUR (after adding 5.690 BEUR interest expense back into the overall deficit of minus 1.697 BEUR).

In 2016, the primary surplus was 5.007 BEUR! (after adding 5.260 BEUR interest expense back into the overall deficit of minus 253 MEUR).

That would be all fine and dandy if the same figures always remained the same and if they all added up. Half of the confidence of an analyst derives from the fact that the same figures are always the same and that they always add up.

The primary surplus of the "state" in the preliminary state budget figures was 4,4 BEUR (see here). When one looks at the break-down of the general government figures, on the other hand, the primary surplus of the "state" is only 701 MEUR. Perhaps - and most probably - one "state" is not the same as the other "state" but it would be good to be explained the difference.

My overall prediction that the "general government" would turn out even better than the "state" proved correct. I doubt that the major discrepancies described above represent incorrect figures because, after all, all figures come from the same source (Ministry of Finance). My guess is that the discrepancies are a matter of categorization and presentation, which often happens, but it would be useful to be explained what they are.

Friday, February 3, 2017

Donald Trump - Saviour Of The Eurozone?

“I had in a previous career a diplomatic post where I helped bring down the Soviet Union. So maybe there’s another union that needs a little taming" - so mused Ted Malloch recently. He is allegedly President Trump's preferred choice for US Ambassador to the EU.

The response came from the EU parliament in a letter to the EU Commission: “The prospective nominee expressed his ambition to ‘tame the block like he brought down the Soviet Union’, eloquently supported dissolution of the European Union and explicitly bet in the demise of the currency within months".

Malloch's views seem to be current thinking in Washington because President Trump himself had recently said similar things in an extensive interview.

This could be terrible news for the Eurozone. Or - it could be excellent news!

Whether it is a family, a state, a currency union or a political union - they may internally be torn by infights but as soon as there is a threat from the outside, they typically close the ranks and become unified. What if the new attitude out of Washington brought the EU elites to senses and made them realize that they have to take some real decisions if they want the Eurozone to survive?

And if they hadn't wanted the Eurozone to survive before, after the musings of President Trump and Ted Malloch, they should now certainly feel fired up! If for notother reason than to show the bullies in Washington that Europe has teeth, too.

Wednesday, February 1, 2017

A Debate About Germany's "Exorbitant Privilege"

Exactly one month ago, I published the article "Will Donald Trump brand Germany as a currency manipulator?" As we know since yesterday - the answer is a resounding YES!

It was not (yet) the President himself who did it. Instead, his new head of the National Trade Council, Peter Navarro, launched the missile which will severely impact European economies in an interview with the FT. The Guardian and The Telegraph also reported on the issue.

Navarro's argument is as simple as it is correct: Germany enjoys and 'exorbitant privilege' as a member of the Eurozone: (a) thanks to the weak countries, the EUR is much cheaper for Germany than a separate DM would be, thus making German exports easier; (b) thanks to the weak countries, the EUR, which is too cheap for Germany by virtue of its structure, has devalued 30-40% in recent years against the USD, making the benefit for Germany even greater; and (c) thanks to the weak countries, capital has flowed into Germany like a tsunami, allowing the German state to save billions in interest expense every year.

Where Navarro is wrong is when he blames Germany for manipulating all of this. In actual fact, Germany's 'exorbitant privilege' derives from the structure of the Eurozone and not really from actions or decisions on the part of the German government. Thus, it would be unfair to blame Germany for it. What Germany can indeed be criticized for is that it doesn't give the Eurozone much in exchange for enjoying that 'exorbitant privilege'.

It also needs to be pointed out that Germany is not the only beneficiary of the structure of the Eurozone. One could probably generalize and say that the Euro is too cheap for all of Northern Europe and too expensive for all of Southern Europe.

Responses from the European side to Navarro's statements have been rather weak so far. Chancellor Merkel issued some commonplaces about the ECB's acting independently. Other German commentators are bluntly saying that if only all the other countries had behaved like Germany, ALL countries would share the same 'exorbitant privilege' (which is equivalent to adding arrogance to ignorance). There have also been musings out of Brussels that Navarro does not understand the Euro. When this turns into real negotiations, the European side will have to be much better equipped with arguments than thay are now.

Progressive European economists and commentators (from Yanis Varoufakis on down) have made Navarro's point for years now. It will be very interesting to observe whether they hold on to their views now that the Trump administration is also making their point.

Thursday, January 26, 2017

Another Boost For Foreign Investment?


There has been extensive discussion in this blog about foreign investment. Of late, the discussion has focused on the question whether foreign investment is a rip-off of the country or a benefit for it. One case in point has been the Trainose deal where - in the opinion of some - immense value of the Greek nation was given away to an Italian investor for a song, i. e for 54 MEUR.

The Ekathimerini now reports that this give-away deal may not come to fruition after all. Allegedly, the Greek government has neglected to amend to ministerial decision for the transaction in accordance with the agreement between the two parties upon signing.

If that is true, it certainly brings to mind the not too distant episode where the government tried to pull a fast one on Cosco only to be caught in the act by the Chinese investor.

"How can Greece attract foreign investors?" is a question very frequently asked. The much easier to be answered question is "How to scare foreign investors away?"

Tuesday, January 24, 2017

Why A Current Account Deficit Again?

The improvement in Greece's current account over the last years has got to be one of the great success stories amid the financial catastrophe. The current account deficit had gotten as huge as 36 BEUR in 2008. A staggering figure both in absolute amounts as well as in relation to GDP (about 15%). Anyone predicting at the time that Greece would succeed in bringing the current account into balance would have been considered a dreamer.

However, and literally on a straight line, Greece reduced the current account deficit from year to year only to reach a surplus of 206 MEUR in 2015! A smashing success in terms of numbers. Not in terms of economic effects because the improvements came mostly via curtailing imports instead of expanding exports.

And now it looks very likely that the current account may again have returned to deficit in 2016. The final figures are not out yet but by end of November 2016, there was already a deficit of 171 MEUR (a surplus of 990 MEUR a year earlier) and December is typically a negative month. Thus, 2016 will in all likelihood see a current account deficit between 500-1.000 MEUR.

What is happening here?

It seems prudent to wait with a detailed analysis until the figures for the full year are out. Based on the figures for 11 months, a few observations can be made: (1) it seems that tourism, while a record year in terms of number of visitors, was not such a record year in terms of net receipts; (2) it seems that regular exports (excluding oil and shipping) declined whereas regular imports increased; and (3) other income from abroad which is not specifically defined in the preliminary figures seems to have declined significantly, too.

But those are only the answers. What are the reasons for these declines?

Skeptics about Greece's enormous current account improvement have always argued that it came about by way of killing demand for foreign products and not as a result of structural changes (import substitution, export promotion). The warning was that the current account would quickly return to deficit once the economy stabilized because demand for foreign products would then return.

Could it be that Greece's return to a current account deficit in 2016 signals that the economy (the official one, the black one or both) has stabilized in 2016? That perhaps demand returned and was directed at foreign products?

Friday, January 20, 2017

Primary Surplus 2016: Ministry of Finance vs. Bank of Greece

If the numbers below are too small to read, one has to follow this link.


The above is the preliminary budget execution bulletin for 2016, as published by the Ministry of Finance. Whenever there is a table with many numbers, the first questions are: Where is the bottom line? Where are the numbers that matter?

The bottom line is the second line from the bottom where it says "State Budget Primary Balance". One has to hasten to add that this is NOT the (in)famous "primary balance" which is always cause for contestation between Greece and its creditors. It is "only" the primary balance of the "state", not of the "general government". The figures for the general government have not yet been published (they include, in addition to the state, local governments, social security funds and other non-consolidated items). For 2016, it can be expected that the "general government" will look even better than the "state" alone.

The bottom line says that the "state" recorded a primary surplus of 4,4 BEUR in 2016. In the previous year, in 2015, the equivalent number was 2,2 BEUR. The target for 2016 had been a primary surplus of 2,0 BEUR.

In short: the Greek state doubled its primary surplus from 2015 to 2016! And it exceeded the target by 1,2 BEUR!

Assuming a GDP of about 180 BEUR, the state's primary surplus represented 2,4% in 2016. The percentage for the general government can be expected to be even higher.

All of this would be fine and dandy if the Bank of Greece had not come out with the following press release on January 19, 2017 (i. e. yesterday):

"In January-December 2016, the central government cash balance recorded a deficit of €3,569 million, compared to a deficit of €3,359 million in the same period in 2015. During this period, ordinary budget revenue amounted to €48,941 million, compared to €45,607 million in the corresponding period of last year. Revenue of €43 million regarding Securities Markets Programme (SMP) income transfers from the Bank of Greece is excluded. Ordinary budget expenditure, including expenditure of about €3,850 million for the repayment of arrears, amounted to €51,143 million, from €48,043 million in January-December 2015."

Here is the table published by the Bank of Greece which shows a primary surplus in the state budget for 2016 of 1.948 MEUR, compared with a comparative figure for 2015 of 3.490 MEUR.

I am sure that there are convincing explanations why there is, in actual fact, no discrepancy between the figures, only between reporting formats but it would certainly be helpful to be informed about what these discrepancies/explanations are.