Sunday 20 December 2009

PASOK takes first steps for serious anti-corruption investigations

I am happy to give credit to PASOK where credit is due. Last Thursday, 128 PASOK MPs tabled a request to Parliament to establish four investigative committees:

• For the manipulation of share prices on the Athens Stock Exchange for the period 1999-2008
• For the Siemens bribery scandal
• For the structured bond scandal
• For the Vatopedi land exchange scandal.

Kathimerini reports that the Siemens file is re-opening and investigation re-starting after the Supreme Court found the information was missing and the case was badly handled.

The Hellenic Parliament has also recently publicised its report on the Vatopedi land exchange scandal on its website. I’m going through the file this week.

I was also pleased by the resignation of Deputy Minister Dinos Rouvlias last week.

These are all steps in the right direction. I sincerely hope that the motion to re-open these cases is approved by the Parliament, and criminal and civil responsibilities allocated. Better times ahead? Or just another smokescreen?

Wednesday 16 December 2009

The Incredible Citigroup Tax Exemption

Yet more good news out of Washington this week (I speak ironically, of course). The Washington Post reports today (U.S. gave up billions in tax money in deal for Citigroup's bailout repayment) that Citigroup will retain its tax exemption on losses carried forward once the government exits the company.

Binyamin Appelbaum writes:

The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.

While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.

The news gets better: a photo caption in the same article reads that Citigroup incurred $ 38 billion in losses. The change in the IRS ruling allows Citigroup to claim $ 38 billion as a tax exemption against future profits.

So let’s get this straight:

• Citigroup was saved thanks to a $ 45 billion government bail-out, of which $ 25 billion was converted to equity (which is now being sold);

• Citigroup additionally received a $ 306 billion government asset guarantee;

• Citigroup has been making obscene profits from the $ 1 trillion in low-interest "quantitative easing" credit window from the Fed at an interest rate between 0.25%-0.50%, as well as the Fed's purchased of mortgage-backed securities;

• Citigroup now get a further $ 38 billion tax exemption from losses carried forward.

The irony is why this should be happening. There is no objective hurry for the government to exit Citigroup and thus forsake a fair compensation for its role in saving the company. The reason is buried a little further down in Appelbaum’s article:

The banks say the strings attached to the bailout, including limits on executive compensation, have restricted their ability to compete and return to health. Executives also have chafed under the stigma of living on the federal dole. President Obama chided bankers at the White House on Monday for not trying hard enough to make small-business loans.

The Obama administration also is eager to wind down a program that has become one of its largest political liabilities. Officials defend the program as necessary and effective, but the president has acknowledged that the bailout is "wildly unpopular" and officials have been at pains to say they do not enjoy helping banks.

So if I read this correctly, the reason the government is granting the tax loss is due to two reasons:

a. So Citigroup can pay higher bonuses to its incompetent bankers, who caused this mess in the first place, and

b. So Barack Obama's popularity ratings can improve?

I’m amazed there has been no further reaction from the American public. Although I would like to express on this blog exactly how I, personally, feel about this, my professional obligations and basic courtesy preclude me from doing so.

All I can safely say is that this appears to be an obscene give-away. What US individual taxpayer has ever been allowed to carry forward a $ 38 billion tax exemption for losses?

The only way this transaction will make Obama more popular is if people don’t understand what’s going on, or forget what happened by mid-term elections next year. I don't believe either of these events is going to happen: people do understand what is going on, even if they don't understand all the details, and people will react in the next elections.

Some questions to consider:

• Do we now really believe there has been no quid quo pro for the massive amounts of electoral contributions the financial sector gave the Obama campaign last summer?

• Do we now really believe that financial sector regulation is going to work?

• Should we claim to be surprised if the “average American” outside the Beltway is furious with the Obama Administration and Wall Street?

A while ago, I wrote about how much money I could make running a customer-focussed bank in Greece. I think I'm going to work at Citigroup instead. Communism never had it this good.

Tuesday 15 December 2009

The North Waziristan Conundrum

The New York Times reported today (Pakistan Rebuffs U.S. on Taliban Crackdown) that Pakistan’s army was refusing to open a new front against the 12,000-odd Taleban forces led by Siraj Haqqani, a member of the Quetta shura and erstwhile leader of North Waziristan. Three main reasons are listed for this refusal:

a. Pakistan is already engaged in open warfare in South Waziristan, and cannot afford to open a “third front”;

b. Pakistan’s intelligence service has long had Haqqani as an asset, and is positioning itself for influence in Afghanistan after the US withdraws;

c. Pakistan needs a loyal counterweight to prevent an “encirclement” by India, which is investing $ 1.2 billion in Afghanistan.

It shows just how twisted the logic has become when the article reports that

"It considers Mr. Haqqani and his control of broad swaths of Afghan territory vital to Pakistan in the jostling for influence that will pit Pakistan, India, Russia, China and Iran in the post-American Afghan arena, the Pakistani officials said."

Really? What could be so interesting about Afghanistan that would cause all these countries to “jostl[e] for influence?” Afghanistan has few resources, and conspiracy theories about Caspian Sea oil pipelines aside, there’s practically nothing there worth fighting for. Any benefits will be far less than the costs.

To compound the irony, Siraj Haqqani’s father, Jalalludin Haqqani, received weapons from the CIA, channelled through Pakistan’s Inter Services Intelligence, during the Soviet invasion of Afghanistan. The son is now fighting against his father’s former paymasters.

But leave it to the ISI to come up with a convenient solution:

"Because Mr. Haqqani now spends so much time in Afghanistan — about three weeks of every month, according to a Pakistani security official — if the Americans want to eliminate him, their troops should have ample opportunity to capture him, Pakistani security officials argue."

Yeah, you can find him at the Khost Burger King every Thursday at 19:00.

You have to pity the United States: it bombed it’s way through Afghanistan in 2001, thinking it would be just another quick military campaign. It would now like nothing more than to withdraw, but withdrawing is perhaps a worse option than staying. In the meantime, the US taxpayer channels billions of dollars in aid to Pakistan each year, but sees the Taleban firmly entrenched on Pakistani territory, with no apparent solution to get them out, with the Taleban using this territory as a safe haven from which to attack US forces in Afghanistan. With friends like this, who needs enemies?

At one point in the very near future, it’s clear that public support for continued US and European engagement in Afghanistan will no longer be possible given the multitude of contradictions and fundamental irrationality of the current situation.

Friday 11 December 2009

Five Questions to the Prime Minister on Corruption in Greece

Two days ago, the head of Transparency International Greece briefed the televised Cabinet of Ministers meeting. Among other points, he mentioned that Greece had among the lowest ratings on corruption of any EU Member State. The Prime Minister responded by promising a renewed fight against corruption. Yesterday, the Prime Minister met with the President, and repeated various promises to fight corruption.

Since this issue is suddenly a priority, I’ve like to ask five specific questions on specific incidents of corruption or questionable practice that have occurred, but for which it seems that not a single member of government has been prosecuted.

Testimony of Greek and German officials made during the prosecution of the Siemens corruption scandal in Germany indicate that over a period of 17-20 years, Siemens payed bribes of between EUR 2 – 6 million per year in Greece. The estimated total amount was between EUR 80-100 million, depending on different sources of testimony. This money was payed to political parties, staff of the Hellenic Telecommunications Organisation and others, in an attempt to swing public sector contracts.

Both main political parties are implicated in the scandal. Individual Members of Parliament are also implicated. In the case of PASOK, testimony of a former PASOK MP indicates that part of these bribes were paid directly into the PASOK party treasury (which PASOK of course denies).

Question: Does PASOK intend to investigate this matter and assign criminal prosecution? This past spring, it called for a full investigation. Now that it is in government, will it continue the investigation? Will any criminal responsibilities be assigned?

Between 2008-2009, the Vatopedi land exchange scandal erupted in Greece. In this scandal, the Vatopedi Monastery traded marshland to which it had questionable, even false, title deeds, for prime land in Athens, Thessaloniki, Halkidiki, and many other locations. The land exchange was made possible apparently due to a first decision during the prior PASOK administration, but gained speed and was finalized during the previous ND administration. The value of public land involved is conservatively estimated at EUR 120 million: at actual construction rates, it will be far higher.

Question: What steps is PASOK taking to reclaim the land, assign criminal responsibilities to the various parties involved, and ensure that this never happens again? On a related matter, what steps is PASOK taking to tax land owned by the Church, from which it is currently tax-exempt? This was a key electoral promise of PASOK in the October 2009 elections, but we hear nothing of it now.

Ministry of Culture / Zahopoulos
In late 2007, news came of the Zahopoulos scandal, a sordid affair in which journalists were allegedly attempted to be bought off in return for dropping their coverage of the business and personal affairs of the former Secretary General of the Greek Ministry of Culture. Equally importantly, though it was not reported as extensively, was the revelation that the Ministry of Culture, as a beneficiary of OPAP (the state lottery organisation) funds, was spending this money “off the books” on a range of highly questionable publications, conferences, events and staff remuneration.

Question: Is all OPAP money properly accounted for? If we want to reduce “public waste”, are we sure that off-budget income is actually being used for the public, as opposed to the partisan, benefit? Is PASOK going to perform a forensic audit on money spent by the Ministry of Culture which did not derive from the central government budget to determine if the money was well-spent? Will any criminal responsibilities be assigned?

Structured Bonds
In 2006-2007, it emerged that several state pension funds had been purchasing structured bonds which, before the funds became final beneficiaries, traded hands 3-4 times (each) from the time the pension fund had decided the purchase, until the final transaction. This was done to general commission income for multiple intermediaries. JP Morgan, for instance, is reputed to have earned EUR 14 million on a EUR 280 million bond, and at least two other intermediaries earned similar amounts before that bond was finally “sold” to the pension fund. Testimony-or rumours?-circulating in Greece at the time claim that part of the proceeds of these commissions flowed directly into the coffers of one of Greece’s political parties.

Question: Has PASOK taken steps to ensure that Greece’s tremendous debt burden is being purchased through transparent auction? In the current reform of the pension system, is Minister Loverdos taking steps to improve the financial competence and oversight of the state pension funds?

Parliamentary Immunity
The greatest source of immunity from prosecution for public corruption occurs because every Member of Parliament has a statute of limitations on crimes committed while in office which extends to the life of that Parliament. When a new Parliament is sworn in, the statute of limitations ends. This means that any MP who becomes a Government Minister receives a “get out of jail free” card for any crimes committed while in office.

Question: What steps will PASOK take to end Parliamentary immunity and institute real accountability for crimes committed by MPs and Ministers?

The confidence of the average citizen would be greatly restored if we saw any serious action being taken on these issues. Unfortunately, it seems that, as in many other cases, there is one law for the political elite, and one law for the rest of the country. The only difference, perhaps, is the degree of immunity offered, and what you have to pay for that immunity.

Thursday 10 December 2009

A Better Plan for Restoring Greek Consumer Liquidity

The vast contradictions in Greek government policy regarding the financial and banking sector were on full display in yesterday’s televised Cabinet Meeting. The Cabinet session was opened with an impassioned plea by the Prime Minister that—due to problems inherited from the previous government—Greece had lost its credibility in international markets, and was in danger of losing its territorial integrity. Unfortunately, he didn't say much about what he was going to do about it, except that they were working hard on the issue.

This was eventually followed by Dr. Louka Katselli, Minister of Economics, Development and Shipping, who presented a draft law on restoring liquidity in the Greek market. On the one hand, I was struck by the background to the presentation: it was made on Powerpoint, and it involved consultations with over 1,000 citizens. This is a good first step towards more rational policy-making.

On the other hand, the bill is logically incoherent. Among its major provisions are a court-ordered moratorium on personal debt payments, a restructuring of personal debt, and a forgiveness of a small part of debt for the chronically unemployed or other at-risk groups. While these are all worthy goals, I couldn’t help but be struck by the overall incoherence of government policy:

• On the one hand, the government has pumped EUR 28 billion into the Greek financial system, with the demand that banks lend money to SMEs and individuals. Banks have done this.

• Despite the fact that banks have received this financing, as well as additional credit lines from the ECB, at an extremely low rate (the ECB benchmark rate is 0.5%; Greek banks have higher lending rates), they are loaning this capital onwards in the Greek market at a minimum of 7% for certain corporate loans; 10%+ for corporate overdrafts; 10% minimum for consumer loans, and 22% for credit card loans. Thus, the banks are making record profits on public money.

• The government now steps in and says, “Hold on: because you’ve lent too much, to people who are not really qualified to take on a loan, we will now force you to restructure the debt.” The immediate question which arises is: “What did you expect?” Did the government really believe that lending money to Greek consumers, most of whom are on fixed incomes, or are operating micro-enterprises in a disastrous market environment, is a sustainable solution to Greek problems? Yet both main parties have repeatedly called for more bank lending.

• If the government is worried about liquidity, how will it handle the contradiction of encouraging lending on the one hand, and then penalising banks for lending on the other? What is the impact of moral hazard on personal financial decisions? We already have a country where people build houses even though they know they are illegal: they figure these houses will all be legalised in the future anyway. Are we now entering the same territory with consumer lending?

• If the government wants to avoid the issue of credit defaults or excessive interest rates, it has to tighten credit policy. In fact, it has done precisely the opposite. Real estate loans, for instance, are now given for 100% loan-to-value, in an attempt to shore up the real estate market (another over-leveraged, over-supplied sector). Credit cards are approved for practically anyone who applies. Between the 20:00 evening news and the 23:00 late news programmes on Greek TV, you will probably see 75 advertisements for consumer loans—especially popular now that Christmas is here.

• The idea that the Greek court system will be in a position to handle debt restructuring and moratoria is a joke. Given that 21% of Greeks live (in terms of official statistics) at the poverty line, and given that thousands of people will be expected to take advantage of this law, it is inconceivable that the court system will be able to handle the burden. Court cases are already 5-7 years late due to the tremendous backlog, and frankly, from what I know of most judges in the Greek justice system, this is going to turn into an ideological rubber stamp process than a real assessment of debt forgiveness.

I have two sets of recommendations for solving the root cause of the problem, which is in fact two problems. The first problem is that most Greek consumers and businesses are overleveraged: they have too much debt, at a too-high interest rate, and no way to repay the debt even under normal business conditions. The second problem is that the Greek state, which controls 40% of GDP in public expenditure in Greece, is the largest problem in terms of liquidity: it does not pay its bills on time.

The suggestions are the following:

1. Rationalise credit policy
Taking on more debt will not solve the crisis. The government needs to tighten consumer credit policy, at least for consumers who are over-leveraged. Lending money to banks to lend onward at predatory rates merely postpones the problem. The government should implement three simple and temporary rules:

a. That any new credit offered to Greek consumers or companies using ECB or Greek government public capital should be at a preferential rate: perhaps about 4% per year.

b. The government should make available a consumer debt refinancing line at preferential interest rates, offered through the major banks. Thus, a consumer who owes Eurobank EUR 20,000 at a 10% rate, would be able to borrow EUR 20,000 from this credit line to repay Eurobank, and would be charged a preferential rate—perhaps 4%. This would simultaneously (i) solve the problem of non-performing consumer and credit card loans in the Greek financial sector, and (ii) generate a small but substantial interest income for programme management. Greek banks could have an additional benefit from a small processing fee—perhaps EUR 50—for each application, paid for by each loan applicant.

c. That any credit offered to Greek consumers or companies using capital of any resources should use a mandatory credit rating on the borrower, using accepted international practise. Thus, there should be no further consumer lending if the consumer already has consumer or credit card debt of over 35-40% net annual income.

2. The Government must promote liquidity beginning with itself
In order for the government to increase liquidity in the market, it should consider the following policies:

d. The government itself should pay its debts to suppliers on time. At over 40% of GDP, the government is the largest contractor in Greece. In some sectors, it has not paid vendor invoices for over 48 months. It does not even pay the salaries of its permanent and temporary staff on time.

e. The government should allow a 12-month moratorium or restructuring of debt owed to government entities, including for income taxes and/or social security taxes. This should be interest-free.

f. The government should increase the minimum wage by 15%, should decrease all social security obligations by employers and employers, by an equivalent percentage, and should increase the tax-free bracket to EUR 15,000 per adult, regardless of family status. This will result in greater take-home income for wage-earners, which can be used to pay down debt or otherwise maintain their standard of living.

These six measures would do more to increase liquidity in the market and solve the problem of excessive leverage than any others. The main problem, of course, is that the government does not have the funds to undertake any of these initiatives. This is the root cause, for instance, why the government takes 48 months to pay a vendor for hospital equipment.

I therefore suggest the ECB and the Greek government cooperate to issue a quasi-sovereign loan of about EUR 20 bln, to be released in four tranches of EUR 5 bln each. This loan would be made to:

• A consortium of major Greek banks, co-headed by the National Bank of Greece and the Central Bank of Greece.

• The ECB loan rate would be 1%; the loan capital would be used for credit re-financing under points a-b-c of this proposal.

• Each tranche would be released per quarter, and subject to the proper monitoring and due diligence of loan refinancing and loan repayment.

• The loan would avoid the central budget: it would be made directly to the Central Bank of Greece, for setting up credit lines in the major banks. It would not require an act of Parliament or any government interference of any kind, which would likely slow or cripple the loan policy.

• The Greek banks would agree to accept early loan repayment for outstanding principle and only that interest levied until date. In exchange, they would receive an immediate capital injection through loan refinance by ECB capital, and assured income from a processing fee of EUR 50/application. This would also help stabilise their balance sheets, account for non-performing loans, and hopefully restore their credit ratings after the Fitch downgrade.

• The spread of 3% (between the ECB base rate of 1% and the onward loan amount of 4%) should be used for by the Central Bank of Greece and the participant banks for setting up the programme, monitoring repayments, and eventual future credit interventions in the Greek banking system.

I believe that such a plan would, in the short term, increase liquidity, stabilise credit risk and shore up the balance sheets of a significant portion of Greek consumers and banks. If the programme is successful, it can easily be replicated for micro-enterprises and SMEs and extended further to consumers. But it should be implemented in tranches, and its deployment carefully monitored and audited to make sure that neither the Greek banks nor the Greek government take unfair advantage with the financial resources provided by the ECB.

Wednesday 9 December 2009

Fitch Downgrade Greek Public Debt; Sends ASE down 6.1%

By unhappy coincidence, Fitch downgraded Greek sovereign and bank debt yesterday from A- to BBB+, the lowest level in the Eurozone. The press release was released at 07:47 EST, about the same time as I was finishing my forecast of Greek public debt. The Fitch downgrade sent the Athens Stock Exchange into a 6.1% tailspin as foreign and domestic investors took flight.

Fitch’s announcement reads:

The downgrade reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery. Though it is probable that fiscal adjustment under the auspices of the Stability and Growth Pact will be sufficient to forestall penalties under the Excessive Deficit Procedure (EDP), Fitch's current assessment is that the government debt burden is likely to rise to close to 130% of GDP before stabilising. Given the poor historical track record of public finance management, Fitch is not convinced that the substantive pension reform and other measures necessary to contain public spending pressures and broaden the tax base will be sufficiently strong to materially reduce debt over the medium- to long-term and hence Greece's vulnerability to future adverse shocks.

While Fitch believes that the government's target to narrow the fiscal deficit by 3.6pp of GDP to 9.1% in 2010 is achievable, the lack of substantive structural policy measures reduces confidence that medium term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilised and then reduced over the next three to five years. Present government proposals rely more heavily on revenue-raising measures, particularly moves to counter tax evasion - where the pay off is highly uncertain - rather than current spending where structural fiscal weaknesses are most acute. About half the proposed cuts in the deficit rely on temporary one-off measures, while little of the recent fiscal deterioration can be attributed to the economic downturn, which has been relatively mild, or to support for the financial sector which has been minimal.

There is little to contradict this judgement, either in Greece’s 2010 budget, or in its historical record of public revenue and expenditure management.

Bloomberg carried an interesting article today on the impact of the downgrade on the Athens Stock Exchange. I personally believe that this is panic selling, and that some Greek stocks are now at very attractive investment valuations. The ASE should rebound within the next week, perhaps sooner.

But the long-term problem persists. The debt forecast I published yesterday shows almost no signs that the public debt will fall to sustainable levels, i.e. certainly below 100%, and preferably below 75%. I will run one more forecast using the government’s forecast for annual deficit levels, once these are published in January.

Tuesday 8 December 2009

Forecast of Greek Debt to 2015

As part of our corporate planning, I’ve been developing a forecast of Greek public sector expenditure, revenue, debt and GDP to try to understand how the economy will develop over the next 5 years.

This is more than just a simple forecasting exercise: over the last 6 years, I’ve become deeply disturbed by the inability or unwillingness of successive administrations to address this issue. If Greek debt continues to rise at on its present track, we can expect a continuing fall in national competitiveness and possibly a technical default on debt payment in the next few years.

Either way, the reputational damage to my firm will be significant. I can’t imagine how we can bid on new work as a Greek investment advisory consultancy, when Greece has the highest debt-to-GDP in the Eurozone, and has consistently flouted EU regulations since its entry in 1981. After one point, it won’t matter how good our proposals are: we will have no credibility as a service provider associated with Greece.

This forecast, together with a number of other factors, will be used to make a decision on whether to remain headquartered in Greece or not. I would therefore appreciate any comments of feedback on this model, its assumptions or its outputs.

My base case model for Greek debt is seen below. All data has been based on Eurostat stastistics, accessed from the Eurostat website on 8 December 2009. For 2009 estimates, I have relied on general press reports that (a) the annual deficit will reach 12.7% of GDP, and that (b) public debt will reach approximately 120% of GDP. My model captures the deficit target but not the public debt target.

The base case model is based on the following assumptions, and provides the following results:

• GDP (market rates) falls by 1.5% in 2009 and 1% in 2010, before resuming positive growth in 2011. GDP rises from EUR 239 bln in 2008 to EUR 286 bln in 2015.

• General government revenue rises from EUR 97 bln in 2008 to EUR 120 bln in 2015. This is achieved through a crack-down on tax evasion and higher tax collection. Government revenue as a share of GDP rises from 40.6% of GDP in 2008 to 41.9% of GDP in 2015—a historic high in the Greek economy. Specifically, I’ve estimated a fall of EUR 7 bln in 2009 as an effect of the recession, and an increase of EUR 5 bln per year thereafter as the economy rebounds and tax collection efforts take hold.

• General government expenditure rises from EUR 115.5 bln in 2008 to EUR 169.6 bln in 2008. In 2009, expenditure rises by EUR 5 bln in line with spending promises and measures already undertaken by the two administrations. Thereafter, government expenditure rises by 5% per year. This is lower than historical expenditure growth, and again in line with government promises for higher spending on education, healthcare and salaries and pensions. Government expenditure reaches 56.4% of GDP in 2015.

• The annual deficit widens to EUR 30.4 bln in 2009, or 12.9% of GDP. The deficit continues to increase in absolute terms every year, reaching EUR 41.1 bln in 2015. The deficit calculation shown here is the difference between government revenue and expenditure, and does not reflect additional income gained from privatisations or other measures. Unfortunately, it also does not reflect the rising interest income the Greek government must pay for its debt: I estimate that in the base case, the expenditure and revenue changes of this type will cancel each other out.

• Total public debt rises from EUR 237 bln in 2008 to EUR 483 bln in 2015. As a share of GDP, it rises from 99.2% of GDP to 169%.

I have also tried to estimate annual interest payments on outstanding debt, using a relatively low interest rate of 3%. This is below the historical average. Under this scenario, annual payments rise from EUR 8 bln in 2009 to EUR 14.5 bln in 2015. At this stage, interest payments account for 12% of general government revenue.

The forecast results are shown graphically below; my data set follows.

This admittedly simple forecast provides a number of disturbing conclusions:

a. Greece does not have a serious plan to reduce long-term debt. PASOK’s electoral promises and the early signs of its policy are aimed at managing electoral expectations and balancing this with Greece’s national obligations to the European Currency Union and the Stability and Growth Pact. Reducing the annual deficit from 12.7% of GDP in 2009 to 9% in 2010 is a start, but much more radical deficit and debt reduction measures will be needed if the total debt is to be reduced. Neither PASOK nor ND have announced any meaningful measures in this respect.

b. The public expenditure calculations provided here are based on current spending: they do not include the costs of financing long-term, unfunded liabilities such as the need for public financing of social security obligations (for retirement and healthcare funds). The expenditure calculation does not directly include the costs of higher debt financing, particularly if interest rates rise (as they are expected to do). We can therefore expect public expenditure to rise by at least 5% per year.

c. The public revenue forecast is below the historical average between 2005-2008: perhaps higher expenditure could be booked, although it is difficult to see how: privatisation income is falling; the construction market is frozen; VAT cannot easily increase. Nevertheless, I ran a scenario in which government revenue increases by EUR 10 bln per year from 2010 onwards. The results are seen in the figure below:

d. Raising government revenue by EUR 10 bln per year from 2010 onwards is not considered realistic. This would bring total revenue as a share of GDP to 52.4% of GDP in 2015, up from 40.6% of GDP in 2008. A rise of some 12% in 7 years is extremely difficult to imagine.

e. The only scenario in which debt falls to below 100% of GDP would be one in which revenue grows while expenditure is stable (or falls). In the next scenario, I plot a EUR 10 bln rise in revenue per year, against stable government expenditure. This would be sufficient to bring the debt-to-GDP ratio down to 84% in 2015. However, such a scenario is clearly impossible to imagine: it is equivalent to eliminating 5% of Greek public sector expenditure every year for 6 years. Desirable, but highly unlikely given the current political party in power, and given the factors already discussed: rising interest rates, unfunded liabilities, etc.

Greek public sector debt will continue to rise under the PASOK administration. Assuming this government lasts for 4 years, I estimate that by 2013 public debt will have reached over 150% of GDP, unless drastic policy measures are taken. This would require a fundamentally new budget approach at the end of 2010, once the [current] economic crisis is in its final stages in Greece. No such current approach is discernable at any level of the government.

Because we receive so little from the Greek public sector, and because it is clearly destroying our country, my own decision on where to base my company in the future will be made in early 2010. I would welcome any comments or opinions which could help me revise my opinion, or the data I have presented here.

Monday 7 December 2009

Giving away Iraq

The withdrawal of US forces from Iraq continues. The Washington Post ran an article today ("Millions worth of gear left in Iraq") on the effort to move or dispose US equipment during the withdrawal of forces: part of it is being donated to Iraqi forces. The cap is apparently $ 30 million per facility, with 280 facilities affected.

Besides the discussions over whether this equipment could be used in Afghanistan or some other theatre, it’s interesting to reflect that the $ 30 million presumably relates to depreciated US dollars. Assuming an air conditioning unit, for instance, has spend 3 years in-country (or 3 years from the date of sale to the US military), it’s already lost 60% of its value, assuming a 5-year depreciation term. So the $ 30 million in depreciated terms could be as high as $ 150 million in new purchases.

Assuming a mid-range of $ 75 million per facility for newly-purchased equipment, and multiplying by 280 facilities, then the US taxpayer is looking at a give-away of $ 21 billion. It probably won’t be that high: let’s assume it’s only half this estimate. That’s still $ 10.5 billion.

And, in one of the final, humiliating codas of the US invasion and occupation of Iraq, as soon as US soldiers leave, the facilities are looted. The Post article writes:

Some U.S. military officials worry that much of the equipment left behind could be looted. A U.S. officer whose unit turned over a Joint Security Station in Baghdad to the Iraqi army this summer said Iraqi soldiers looted the facility within hours of their official departure.

"When we returned to the outpost the next morning, most of the beds had already been taken, wood walls and framing had been pulled and several air-conditioning units had been removed from the walls, leaving gaping holes," said the officer, who spoke on the condition of anonymity because the event reflects negatively on the Iraqis.

Weeks later, the Caterpillar generator the Americans left behind was barely working, the officer said.

It’s interesting to note that in the United States, over 65% of all US federal government revenue derives from personal income taxes. Which means that this give-away is financed by—who else?--the US taxpayer. A frightful waste of money. Except, of course, for the lobbyists, contractors and perhaps even government officials who all earned their commissions from the process.

As with the phantom weapons of mass destruction, here goes the phantom reconstruction of Iraq. I wonder what will happen in Afghanistan when the US withdraws?

Sunday 6 December 2009

The Costs of Poor Customer Service

I’ve often wondered how much money I could make if I had the capital to open a truly customer-focussed bank in Greece. To put this question differently: how much money is my prime bank losing because it is not concentrating on my needs?

We’ve been at the same bank since 1997, when the small Credit Lyonnaise chain was bought out by Eurobank. Every year, our corporate account in Greece brings in a 6-digit figure in billings from foreign clients. It’s all legitimate income: consultancy fees from development banks, chambers of commerce, manufacturers, business schools and other clients, and it’s all declared.

We have no uncovered banking debts, not delayed payments, no credit problems. We do not use cheques, so cannot bounce them. We are not on any black lists or credit watch lists. We declare our income, corporate and personal, in Greece.

In all this time, our bank has never once called me to ask me if I would like another product: a corporate credit card, a corporate overdraft; a higher credit limit on our personal visa cards; a life insurance policy. Nothing: not a single attempt at analysing our corporate and personal financial needs, and taking the initiative to offer something we could actually use.

The idea of personal contact is a joke: our enterprise account managers at the bank last an average of 18 months in our branch before they are rotated out somewhere else: Melissia, Elefsina, maybe Timbuktoo. Yet whenever I call the bank to ask a question, I get the standard response: “Who do you speak with in this branch?” I inevitably tell them the name of one of the lowest staff on the food chain–the nice, quiet fellow responsible for international bank transfers—because he’s the only one who hasn’t changed in all the time we’ve been banking at this branch.

This deliberate policy of ignoring customer needs carries a major financial price. I’ve become so fed up with the lack of basic courtesy and professionalism at Eurobank, that when it came time to take out a mortgage, I did a careful survey of all the other banks in Greece, and decided on Ethniki, the National Bank of Greece.

Now, think carefully about this. Ethniki will earn interest income of about EUR 275,000 on a 25-year mortgage of EUR 300,000, plus a further EUR 36,000 in mandatory homeowner insurance. That’s more than Eurobank will make off all our financial products—credit cards, corporate account, personal accounts, etc.—in about 550 years.

Does Ethniki have better customer service? Of course not. It happened to have a better mortgage product. I estimated the difference on interest costs over the life of the loan at about EUR 23,000 when compared with Eurobank. I would have been willing to negotiate with Eurobank to give them the chance of meeting this offer, if only I had the confidence that Eurobank gave damn about me. Since it does not, I did not, and we are now banking elsewhere.

None of this is rocket science. I'm sure Eurobank has a Customer Relationship Management (CRM) module on its banking network. I'm sure that if they wanted to, they could rank their customers by product, and do a quick cross-sale or up-sale analysis. They can even do it without software: it's simple. The failure is one of management: management cares about the bank; it does not care about its customers.

As long as we focus on individual transactions or gaining individual sales at the expense of the customer relationship and the customer’s needs, we will lose. Today’s world calls for careful planning, analysis and the reassurance that decisions made today will have a beneficial impact one, five or twenty-five years from now. Few companies in Greece seem to understand this; fewer still do something about it.

Thursday 3 December 2009

The Afghanistan Surge

On December 1st, President Barack Obama took the long-anticipated step of sending an additional 30,000 US combat troops to Afghanistan. This will raise the total US troop commitment to between 100,000 – 105,000 troops, taking into account the 71,000 already in the country. NATO and other allies have an estimated additional 42,000 troops in Afghanistan.

I was struck by the negative reaction by Michael Moore and other liberals. Obama’s actions are somehow seen as a betrayal of core ideals, as war-mongering. Many commentators stated that Obama’s speech could have been delivered by George W. Bush. Take a look at the opening paragraph of Michael Moore’s November 30th letter to Barack Obama:

If you go to West Point tomorrow night (Tuesday, 8pm) and announce that you are increasing, rather than withdrawing, the troops in Afghanistan, you are the new war president. Pure and simple. And with that you will do the worst possible thing you could do -- destroy the hopes and dreams so many millions have placed in you.

Yet a surge of troops in Afghanistan has been a core platform of Obama’s election campaign. The plan to draw down troops from Iraq and re-deploy combat brigades to Afghanistan has been one of his earliest campaign pledges, as his website still shows:

Barack Obama will refocus our efforts on Afghanistan. He has a comprehensive strategy to succeed in Afghanistan with at least two more U.S. combat brigades, more resources and training for the Afghan Army, and a comprehensive development strategy.

What strikes me most of all is that the American public has perhaps finally realised that the war in Afghanistan is increasingly difficult to justify. On the one hand, the elected “government” of the country has lapsed into unbridled corruption and in many cases collusion with the Taleban. On the other hand, the situation in Pakistan is dire, all denials by that country’s government notwithstanding. All these facts have long been known to anyone with even the most cursory interest in the matter.

The costs of a combat deployment of 100,000 US troops in Afghanistan are likely to exceed $ 100 billion per year, using the rule of thumb that each 1,000 troops cost about $ 1 billion. This does not include the costs of replacing or repairing damaged equipment, treating long-term casualties, etc. Taking all associated costs into account, I doubt that this engagement will be any “cheaper” than Iraq, as some commentators have said in recent months.

Another interesting point: the lessons of the Iraq surge have been incorporated into the current plan for Afghanistan. There are resources for development, although these are a small proportion of the amount spent on military operations. There are sufficient analyses and policy statement on the causes of terrorism and extremism, methods of countering them, and ways forward, dating all the way back to the original Afghanistan Compact of 2001.

What remains to be seen is whether the West has the political will and the financial resources to actually implement these lessons. I sincerely doubt that it does, and I do not say this as a means of criticism, but of simple, rational evaluation of costs and benefits.

At one point, the alliance that is fighting in Afghanistan will have to decide whether it can afford to sacrifice men, blood and treasure to this conflict, for which it has no real strategic reason to be in which could not be better addressed by other means.

My feeling is that this point occurred in 2005-2006 for the majority of countries involved. It is only the self-interest of individual politicians that has sustained the level of troop commitment until now.

My predictions for the next two years: the surge will partially succeed, but 18 months will not be enough to create the conditions for lasting peace and prosperity needed to provide stability to Afghanistan. In contrast, the Taleban and Al Qaeda will play a waiting game in this time until political costs force the inevitable retreat of western troops.

In these 18 months, we will see higher casualties from IEDs and other indirect attacks than by open combat between western and Taleban units, and we will see that even 30,000 additional troops will not be able to “clear and hold” the ground in the south east of Afghanistan. The 1,500 mile border with Pakistan will continue to be porous. Despite active combat operations, I expect US fatalities to remain [relatively] low in this period, perhaps on the order of 150-200 troops.

Conditions in Pakistan and Afghanistan will deteriorate in terms of governance and political involvement. In Afghanistan, I doubt President Karzai will make any meaningful reform of the public sector or the involvement of warlords in governing the country. He will probably use every opportunity to criticize the west to detract attention from the real problems of the country. He will become increasingly despised and denigrated in the western media.

In Pakistan, I would not at all be surprised to see a new military dictatorship within the next 24 months, either in open or concealed form, and a new arrangement reached with Taleban groups to halt open warfare between the Pakistani Army and the Taleban. It is regrettable that neither Presidents Karzai or Zardari appear to be able to unify their own countries, at least in terms acceptable to western public opinion. But there are no easy answers to this issue.

The ultimate question is: “Is it worth it?” The easy answer is “no.” Bringing peace and stability to this area will take at least 25 years and civilian spending of at least $ 25-30 billion per year in excess of military spending. I don’t see any signs that anyone in the West is prepared for such a commitment, and indeed, most countries are considering their exit options. The US surge itself has a built-in expiration date.

However, you also have to ask what other options exist. Are we really prepared to exit Afghanistan and usher in a new dark age as the country sinks back into the pre-Taleban, Somali-like condition it was in before the Taleban consolidated control? What happens to Pakistan, and its 100-odd nuclear warheads? What happens to neighbouring countries such as Turkmenistan or Uzbekistan, which will be the next dominos to fall?

Difficult questions to answer. No such discussion can make up for even one life lost. On the other hand, very few such discussions highlight the good taking place on the ground in Afghanistan by international development efforts, or outline what should be done to expand these efforts so that within a generation, they can provide a lasting effect.

We seem once again condemned to launch grand initiatives destined to end in failure. Is the right course to try in the face of overwhelming odds, spending hundreds of billions of dollars and “sacrificing” hundreds of lives? Or to withdraw in the face of overwhelming odds, thus spending tens of billions of dollars and condemning thousands of lives to death and repression?

Wednesday 2 December 2009

Going Postal in Terpsithea

One of my favourite Ukrainian sayings is that “no good deed shall go unpunished.” And indeed, since my blog post praising the Hellenic Post (ELTA) Office staff at The Mall appeared, I suppose it was inevitable that a catastrophe would occur. And it did. Let me explain:

On Monday, November 23rd, we sent a project invoice to a client in London using ELTA’s registered, express courier service. We’ve done this several times in the past, without any problem.

This past Monday, November 23rd, I called the client to see if the invoice had been received. After being bounced through four different departments, it was ascertained that the invoice had in fact not been received, and that the final deadline for accepting documentation for payments this year was on Thursday.

So, I logged onto ELTA’s Track & Trace service, and found, to my vast surprise, that the invoice never made it out of the country. On November 25th, the package was marked “Return to Sender” by the Central Post Office. Since I had not received the package back, I had to try to find it by calling ELTA and trying to sort out what happened.

There was no telephone number for the ELTA office at The Mall, so we drove over. The normally helpful office manager switched very quickly in typical Greek public sector mode:

“Please call the ELTA customer service number. They are responsible.”

I had already called the ELTA customer service number three times: no one bothered to pick up. (This is a classic procedure in the Greek public sector)

So the ELTA lady escalated: “Well, there’s nothing we can do. It must have been your fault – you probably didn’t write the sender’s address correctly.”

“Absolutely not,” I said. “First of all, the envelope was printed, not hand-written. Secondly, you (or your staff) hand-wrote the postal ticket, not us.”

“No sir, that’s impossible. We never do this!” She responded vehemently.

Bullshit. Every time I’ve ever been to an ELTA office for a registered letter, the staff fills out the ticket. But there was nothing to do. It was like a brick wall had descended: deny all culpability, blame the client. Any further rational discussion was futile: I didn’t want to “go postal” in my favourite post office.

This morning, I had sufficiently recovered my calm to call the Halandri post office (our office address is in Halandri). It took literally 10 minutes to explain the situation to a succession of disbelieving ELTA employees. Their first response?

“Call the ELTA Customer Service line!”
(I’ve already tried this – the system says it’s been returned to sender)
“What’s your address?”
(Pentelis Avenue – it’s in your jurisdiction)
“Why didn’t you send it from here?”
(What difference does that make?)
“Well, I’ll check, call back in 10 minutes”

…10 minutes later….

“I haven’t found it. Why do you assume it’s here?”)
(I told you – the ELTA Track & Trace system says “return to sender”)
“You have to call the office where you sent it!”
(I did – they say you have it)
“You have to call the Central Post Office!”
(I tried – the system says you have it)


Finally, I was got them to log onto the ELTA Track & Trace System.

“Oh yes, I see it! It was returned to the Terpsithea Post Office.”

Stunned silence. Terpsithea? Where the f**k is Terpsithea? That’s somewhere down by Glyfada, nowhere near our office.

“OK,” I said, trying to control my panic “can you give me the telephone number of the Terpsithea Post Office?”

“No, I’m afraid I can’t. I don’t have the number” said the ELTA lady.
"Well, I’m actually on the road, can you just log onto ELTA’s website and find the number there?"
“No, I can’t do that either: we don’t have internet access here.”

OK, I gave up that avenue of approach. So I called 11880, a Directory Assistance line.

“Terpsithea … where’s that?” asked the phone guy.
I nearly lost it at that point, but managed to be constructive. “So what should I do?” I asked.

“Try the Glyfada Post Office – here’s the number.”

So I called the Glyfada Post Office. “Hello, can you give me the number of the Terpsithea Post Office”? "Sure," said the lady, "it’s 210-961-5251.” I was amazed.

I called the now-famous Terpsithea Post Office. “Yes?” another bureaucratic lady responded. I launched through the explanation, and got the typical responses:

“Call the Central Post Office!”
(The line doesn’t work – they already told me it’s here)
“Why would it be here – you don’t live here!”
(I know, but this is what your system says)
“We don’t have the system to check this”
(Can you please try – this is really important….)
“OK, please wait until someone responsible has time to look into this.”

Minutes passed. I had the nightmare vision of canceling a really important meeting, driving down to Terpsithea, and starting to scream. Then someone picked up the phone.

(Yes, I’m trying to track a package which is lost….)
“You have to call the ELTA Customer Service Line, 800118200.”
(I tried – no one answers – the system says the package is there.)
“But we don’t have any such record”
(But the system says you have the record – check the tracking number)
“No, I see no record of this in our post office. You must go back to the post office from which you sent it.”
(But I already did this - they said you had it.)
“But we don’t have it – you have to go back to the post office where you are registered.”
(But I did this – they said you had it.)
“But why would we have it?”
(Because that’s what the system says!)

This was apparently good enough for her: if the system says it…it must be true. So she looked through her records. Nope, nothing on hand from Navigator, for London, to be returned.

Another conversation ensued. Finally, she had the inspiration and the initiative to look back in her hand-written log.

“Oh yes,” she said. “We found this package in our post office on November 26th, and sent it on to London.”

I was stunned. I didn’t know whether to laugh or cry. Perhaps both. The best part came just 30 minutes ago, when my client confirmed that yes, they did receive the package.

What I can’t understand in all this process is what’s more absurd: the fact that ELTA sent the invoice to Terpsithea, which has absolutely no relation to me or my business, or that ELTA has a Track & Trace system which apparently I know how to use, but few ELTA staff do, and which apparently doesn’t work anyway.

Luckily, the package got through in the end. No good deed goes unpunished. And, it seems, perhaps no bad deed goes unrewarded either. Now, if only I can get paid!

PS As a public service, take down the following telephone numbers:

ELTA Office, The Mall
ELTA Customer Service Line
ELTA Customer Service Line (internal)
210-335-3373, 210-335-3100
ELTA Office, Halandri
210-681-2230, 210-684-1650
ELTA Office, Glyfada
ELTA Office, Terpsithea