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Wednesday, May 31, 2017

The Lure Of Grexit - Debunked!

An author by the name of Leonidas Stergiou published an analysis in the Ekathimerini under the title "Why depreciation is the wrong medicine for the Greek economy". It is, for once, an objective discussion of the pro's and con's of a Grexit for the Greek economy. Stergiou takes issue with the premise voiced often by FM Schäuble: Greece should return to the Drachma, adjust its economy and when a new equilibrium is reached, Greece could return to the Euro. Schäuble's argument is that an adjustment of the Greek economy cannot be avoided and, given that, it would be far less painful to make that adjustment with the Drachma as currency instead of the Euro.

Leonidas Stergiou says that Schäuble is wrong, and he makes very good points to support his argument. His key point is:

"Harsh reality together with economics teach that the devaluation of a currency may help, provided that the country does not import more than it exports, and mainly that it does not import a lot of raw materials or intermediate materials that have to be processed. A country with such issues that proceeds with depreciation will be plagued by inflation. ... So in a country with a negative trade balance that imports a lot of raw materials, depreciation raises production costs and creates inflation. The raised production costs annul part of the competitiveness that was achieved by the depreciation. Should the inflation be transferred to salaries, then all the gains from the depreciation will be lost because, in the end, nothing became cheaper."

So for all those who would be hoping that a return to the Drachma would make their lives more comfortable, Stergiou serves a grand disillusionment:

"In other words the measures mandated by the memorandum would be inevitable and would have to be implemented strictly – but without the funding that came with the memorandum. In any case, right now there is internal devaluation taking place within the eurozone. If Greece did not have the euro, a tough economic adjustment program through austerity measures would still be necessary. Otherwise, the inflation due to depreciation would offset the benefits of the competitiveness after the depreciation. Now, Greece in the euro area cannot depreciate its currency in order to make its products and services more competitive. But it could directly reduce the prices of all components of the domestic GDP. To put it simply, if you cannot increase the purchasing power of others, you must decrease your own."

And Stergiou concludes with a condemnation of the Greek government (or rather: all Greek governments since the crisis broke out):

"Greek governments have preferred to accept austerity measures particularly through tax increases and reductions in pensions and wages rather than proceeding to reforms and speeding up the implementation of the MoUs. Instead of this, they entered into long-term and overnight negotiations with the troika in an attempt to postpone the political cost of the reforms for later. Thus, the recession period was prolonged, the debt increased, the financing needs remained unmet. This tactic leads to new MoUs and the prolonging of the recession period and increases the the chances of spiraling into recession and default. On the other hand, without a new MoU, a default can be considered a certain outcome."

Sunday, May 28, 2017

Greek Pensions - Dreams Turned Sour?

Under the heading of "They stole my money", the Ekathimerini reported about 4 cases of pensioners who feel that they have been 'destroyed' by the various pension cuts of the last 7 years. There is no question that a very large number of Greeks have ridiculously low pensions (below 500 Euros!) but if the average Greek pension is almost as high as the average German pension, as the IMF states, that can only be explained by a high number of pensions significantly above the average and/or by a high number of pensioners who do not fullfil today's pension criteria.

My understanding is that the 'reformed' pension criteria are now: ordinary retirement age 65 and minimum contribution years 40. Also, the survivor's pension is 50% of the original pension. I would guess that those are rather standard criteria in today's Europe.

One should review the 4 cases in the above article with a focus on the following questions:

1) At what age did the person retire?
2) How many years did the person work/contribute?
3) In the case of survivor's pensions, how high would the original pension have been?

When one reviews the 4 cases with the above questions in mind, one would come to the conclusion that there have indeed been drastic reductions but when looking at these 4 pensions as they now are after allegedly 13 pension cuts, one can only conclude that perhaps the Ekathimerini did not chose the best examples of how much many pensioners are suffering today.

The following 2 statistics about Greece's approximately 2,6 million pensioners also merit consideration:

* 633 thousand pensioners (24% of the total) are over the age of 81 and their average monthly pension is 712 Euros (compared with average Greek pensions of 890 Euros).

* 727 thousand pensioners (28% of the total) are below the age of 65 and their average monthly pension is 1.028 Euros. Put differently, pensioners below the new legal age of 65 account for almost one-third of the entire pension expense.

Wednesday, May 24, 2017

Current Account Vs. Fiscal Results

An anomaly is developing in Greece's domestic and foreign accounts. The historical trend was one of double-deficits, i. e. a deficit in both the budget as well as the current account. Makes sense in as much as a budget deficit increases domestic demand, puts money into the economy, increases imports and, in consequence, leads to a current account deficit.

Since 2010, austerity has taken money out of the economy leading to the well-known collapse in domestic demand. Greece turned a giant primary deficit into a surplus and, simultaneously, turned a giant current account deficit into a surplus in 2015.

In 2016, the primary surplus exploded as more money was taken out of the economy (taxes, etc.). However, an anomaly began: despite this further erosion of domestic demand, the current account went from a surplus of 205 MEUR in 2015 to a deficit of 1,1 BEUR in 2016. This trend now continues in 2017 where the government continued to run a primary surplus (albeit not a large as the year before) while the current account drifted more into the negative territory.

Below are the figures for Greece's current account in the first quarter of 2017, compared with the same period of the previous year. Also, the month of March is compared for both years.

In BEUR.

January-March March
2017 2016 2017 2016
Revenue from abroad
Exports 6,7 5,5 2,6 2,0
Services (e. g. tourism) 3,6 3,0 1,3 1,1
Other income 2,6 2,5 0,6 0,8
Current transfers 0,9 0,7 0,2 0,2
------ ------ ------ ------
Total revenue from abroad 13,8 11,7 4,7 4,1
Expenses abroad
Imports 11,8 9,7 4,5 3,5
Services (e. g. tourism) 2,6 2,3 0,9 0,8
Other expense (e. g. interest) 1,4 1,5 0,4 0,4
Current transfers 0,5 0,6 0,2 0,2
------ ------ ------ ------
Total expenses abroad 16,3 14,1 6,0 4,9
Net foreign deficit (current account) -2,5 -2,4 -1,3 -0,8
Trade balance -5,1 -4,2 -1,9 -1,5
Services balance 1,0 0,7 0,4 0,3
Other balance 1,2 1,0 0,2 0,4
Current transfer balance 0,4 0,1 0,0 0,0
---- ---- ---- ----
Net foreign deficit (current account) -2,5 -2,4 -1,3 -0,8
January-March March
2017 2016 2017 2016
Exports "Other Goods" 4,7 4,3 1,8 1,6
Imports "Other Goods" 8,4 7,8 3,2 2,8
---- ---- ---- ----
Balance of goods excluding oil and ships -3,7 -3,5 -1,4 -1,2

Gone are the days of positive surprises with Greece's current account. What is even more disconcerting is the trend: the 2017 deterioration started noticeably in the month of February (January had actually been an improvement) and led to a whopping deterioration of 500 MEUR over the previous year in the month of March alone.

But the real question is: where is the money coming from to pay for this rather dramatic increase in imports? There is no significant increase in employment, no known increase in wages/salaries, certainly no increase in pensions and the increase in unpaid taxes would suggest that people are financially very strained.

I repeat the question: Where is the money coming from to pay for this rather dramatic increase in imports?

Saturday, May 20, 2017

A Plea For Greek Elites!

I had never heard of Mr. Aristides Alafouzos before. Like many foreigners, I have practically zero knowledge of the Greek elite (political, economic, social or otherwise) except for those who are in the media all the time. Whether one likes the term 'elite' or not, every society, even a communist one, produces its own elites. Some are artificial elites (i. e. hereditary or appointed), others are natural ones (meritocracy, charisma, etc.).

I learned about Mr. Alafouzos through two obituaries in the Ekathimerini (here and here). It seems clear that Mr. Alafouzos was one of the natural elites.

There is a German saying which cannot well be translated into English: "Wie der Herr, so das Gescherr". One translation might be: "Like master, like man."

Henry Ford II was known to be a CEO who would slap his top executives in their faces (almost literally). During his reign at the Ford Motor Company, managers all the way down to the supervisory level were known to slap their subordinates in their faces (literally speaking).

Other CEOs are of the gentleman kind and the culture in their companies will undoubtedly be gentleman-like. In fact, culture is very much influenced by the elites.

Based on the two obituaries, I have no doubt that Mr. Alafouzos formed and shaped a culture in his companies which corresponded to his own values. While he is now dead, cultures tend to survive for quite some time.

I have always wondered what kind of a society Greek society would be if the elites of Greek society (of the Alafouzos kind) came more to the forefront, played a more significant role in society. Some of the things we see these days on TV, like physical fights in the Greek parliament, are clearly the worst of Greek society.

Why can't we see more of the best of Greek society?

Tuesday, May 9, 2017

The Gut Says: "Greece Is On The Rebound!"

My wife and I always spend springs (typically 2 months) and autumns (up to 4 months) in Greece. I admit that the microcosm in which we move may not be typical of all of Greece but it is always the same microcosm: a mixture of big-city life in Thessaloniki, visits to villages, trips to tourist areas in Chalkidiki, travels throughout Northern Greece, etc. This microcosm may not reflect Greece overall but it serves well as a basis to measure trends. And here is my surprise for you:

Greece is on the rebound, no doubt about it!!! I first had that feeling last spring and it intensified last fall. After having been here for 3 weeks this spring, I am now convinced. I sense a level of positivism if not optimism which I haven't sensed since 2010. In the villages, I see 1-person shopmen who suffered terribly in the past and who now say that they have quite a bit of work. Some of them even in the construction industry. For my car service, I used to get an appointment at Hyundai with a week. Last spring it was already 10 days and this time around it was a little over 2 weeks. I see traffic jams in down-town Thessaloniki which I haven't seen since 2010, and this at gasoline prices 30-40% higher than in Central Europe! When I look out at the Thessaloniki harbor, I now see up to 10 freighters loading and/or unloading freight. I could go on and on. If the official stats do not show that, it's because the official stats miss a lot of reality.

Barring unforeseen surprises, Greece will sign a deal with creditors soon and it is likely to start benefiting from the ECB's QE. Today, I even read that they are thinking about placing a bond in the markets next June. If some of that (or even all of that) really happens, there will be a lot of positive news about Greece. And positive news will feed upon itself, particularly when a record tourist season reinforces such positive news every day. The steady decline in Greek bond yields will also be a continuous reinforcer of the good news. Financial investors will start wondering whether perhaps they might be missing the bottom of the crisis to make good deals. That, too, could feed upon itself.

I have no facts to offer but my gut says that Greece is on the rebound. The key variable for increased economic activity in Greece is the net inflow of foreign capital. Foreign capital does not always flow on the basis of hard facts. Oftentimes, if not even very often, it is the 'leading steers' that make the herds move. It would only take a few 'leading steers' to set a trend in motion. Who knows? We may soon see the financial herds turning around and 'discovering Greece' anew!?!

Mind you, I don't believe that Greece today is a much better place to do business than 7 years ago. But once the herds start moving, they never pay attention to such details. Neither do I think that the bottom of Greek society will benefit all that much from the herds. As Adam Smith said: "The problem with fiat money is that it rewards the minority that can handle money." I recently read that about 1,5 million people in Greece are without income and assets. I don't think miracles will happen for them.

But there will be a fairly large section of society which will benefit from the renewed bandwagon. As I said, I don't think it will be a new start in a fully reformed country. Not at all!

But I think that there is a good chance that we will soon see a renewed herd movement. Essentially a repeat of the past. When money comes into Greece, Greece does well. The better Greece seems to do, the more money comes into Greece. And I am fairly certain that the herd will start moving again soon.

Until the next 'sudden stop' happens...

Trade Balance: Bank Of Greece vs. ELSTAT

Much publicity has been given to the fact that ELSTAT reported an increase of 36,2% in Greece's trade deficit in March of this year (versus March 2016). The numbers are distorted by oil and ship transactions but even without those, the trade deficit increased 6,6%.

While this is interesting information, it always reminds me of a question which I have been trying to get an answer to for years, albeit without success, namely: why do ELSTAT and the Bank of Greece report trade figures which differ quite substantially, sometimes even enormously. For example, for 2016, ELSTAT reported a trade deficit of 18.705,0 MEUR whereas the corresponding figure from the Bank of Greece was 16.581,0 MEUR. A difference of that magnitude can certainly be considered as enormous.

Will I ever get an answer to this question?