Sunday 17 June 2012

Greek Election – Next Steps

As of 22:30 Sunday evening, New Democracy is showing a wider poll result over SYRIZA. Antonis Samaras has made a victory acceptance speech at the Zappeio. Alexis Tsipras has telephoned Antonis Samaras to concede victory, and made a masterful speech a little while ago.

The wild card is now PASOK, which has stated that it will not participate in a government which does not include the participation of SYRIZA and Democratic Left (DIMAR). SYRIZA, in the meantime, has already declared that it will not participate in a government with New Democracy. 

Evangelos Venizelos is apparently trying to maximise his pivotal position, but as with Antonis Samaras prior to November 2011, risks destabilising the entire electoral results.

Given this [apparent] conclusion, it is difficult to see how the next government will be formed without another 8-10 day negotiation period. It is really a pity that Greece’s political class, or segments thereof, are once again negotiating for their own benefit, rather than for the benefit of the country.

The latest electoral results from the Ministry of Interior:

Political Party Share of Vote, % Seats in Parliament
New Democracy 30.21 130
SYRIZA 26.38 70
PASOK 12.62 34
Independent Greeks 7.45 20
Chryssi Avgi 6.9 18
Democratic Left 6.05 16
Communist Party of Greece 4.48 12
Total 94.12 300

© Philip Ammerman, 2012

Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. He works in the field of investment management and due diligence in Europe, the former Soviet Union, and the Middle East.

Channel 4 News Interview

Philip Ammerman was interviews on Channel 4 by Jon Snow on the Greek Elections.

© Philip Ammerman, 2012

Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. He works in the field of investment management and due diligence in Europe, the former Soviet Union, and the Middle East.

Second Exit Poll Estimate

The second exit polls (21:00) have been announced by Greek public television, based on consolidated results of several polling companies. These show an increase in New Democracy's support.  

NET Exit Poll
Political Party Share of Vote, % Seats in Parliament
New Democracy 29.5 128
SYRIZA 27.1 72
PASOK 12.3 33
Independent Greeks 7.6 20
Chryssi Avgi 7.0 18
Democratic Left 6.2 17
Communist Party of Greece 4.5 12
Total 94.2 300

The Ministry of Interior shows electoral results counted at 21:30:

Political Party Share of Vote, %
New Democracy 30.61
SYRIZA 25.87
PASOK 12.96
Independent Greeks 7.41
Chryssi Avgi 7.0
Democratic Left 6.01
Communist Party of Greece 4.4
Total 94.21

Should these numbers materialise, a government coalition of New Democracy and PASOK will render 161 seats, enough for a Parliamentary majority. However, PASOK is now saying it will not participate in a government without SYRIZA. 

I suspect final vote will be much closer between ND and SYRIZA, particularly once Athens and Thessaloniki votes are finally counted, and it may still be too early to discount a SYRIZA victory. 

© Philip Ammerman, 2012

Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. He works in the field of investment management and due diligence in Europe, the former Soviet Union, and the Middle East.

First Exit Polls in Greece

The first exit polls in Greece have been published. NET has the following results:

New Democracy          27.5% - 30.5%
SYRIZA                       27% - 30%
PASOK                        10-12%
Independent Greeks      6-7%
Chryssi Avgi                 6-7%
Dimokratiki Aristera    5.5 - 6%
Communist Party          5 - 6%

Results are likely to change: there was a last-minute surge of mainly younger voters seen at many polling stations. Observers report that these may have been SYRIZA voters. These results are based on counting of about 5,500 votes from a sample of 8,000.

Saturday 16 June 2012


Rage – Goddess, sing the rage of Peleus’ son Achilles,
murderous, doomed, that cost the Achaeans countless losses
hurling down to the House of Death so many sturdy souls,
great fighters’ souls, but made their bodies carrion,
feasts for the dogs and birds,
and the will of Zeus was moving toward its end.

The Iliad, translated by Robert Fagles

Reading the immortal opening lines of The Iliad, I understand why so many voters in Greece will cast their votes tomorrow for SYRIZA.

In contrast to the May 6th election, the majority of people I know who have shared their electoral preference with me will vote for SYRIZA. These are people with multiple university degrees and serious work experience in Greece and abroad.

Why? Quite simply, the reason is rage.

There is rage at the political and economic elite of Greece, who for thirty years has pillaged the country, and now claims to be its saviour. New Democracy’s electoral position of “vote for us and the Euro, or for bankruptcy and the drachma”, is rank hypocrisy. It was New Democracy’s policies between 2004 and 2009 which led to Greece’s financial collapse. Many of the same people in the Karamanlis governments from this time remain in New Democracy, and are now vying for election.

There is rage at the fact that the mix of policies advocated by the Troika has failed the Greek people so miserably. As long as austerity was restricted to the public sector, it was bearable. But the Troika’s demand to end collective bargaining agreements and reduce the minimum wage has catapulted millions of private sector workers into wage slavery in a country where labour laws have never been properly enforced. Given that neither bank loans nor rents nor cost of living has been “devalued” in line with wages, one wonders exactly how this policy of impoverishment was supposed to work.

There is rage at the fact that Greece has been forced into a series of false choices by its European partners, and then condemned as being lazy and feckless by those same partners. Every Greek knows the story of defective German submarines and the bribes given to Greek politicians for these. Every Greek knows of Germany and France’s insistence to sell frigates, planes and tanks to Greece as a condition of the first bail-out. 

There is rage at the fact that Greece was lent money at 5% in the first bailout by France and Germany to refinance French and German banks at face value, at a time when these same discounted Greek bonds by 30-40%. 

There is rage at the fact that the ECB has lent banks EUR 1 trillion at 1%, so that these same banks can buy government bonds at 6%, while credit in the domestic market has evaporated, and many of these same banks are shorting both Greece and the Euro.

The results will be clear on Sunday evening. But whichever party is elected, it is difficult to see how the shining promises of European solidarity and a common future can be restored after what has happened—and continues to happen—in this country. 

© Philip Ammerman, 2012

Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. He works in the field of investment management and due diligence in Europe, the former Soviet Union, and the Middle East.

Sunday 10 June 2012

A Brief Comment on Greek Polling and the June 17th Election

The sign with the hundred drachma note in our neighbourhood grocer asks "Perhaps its time has come?" 

The second parliamentary election in Greece will be held one week from today. Several Greek parties held general press conferences today, while most print and broadcast media as well as online channels are understandably focussed on this event.

There are two points regarding the upcoming Greek elections which I believe will be crucial for understanding the outcome: the interpretation of pre-election polling results, and actual voting on election day.

In terms of pre-election polling: Most public polls show a lead for New Democracy over SYRIZA by about 1.5-2%. My understanding is that confidential polls ordered by New Democracy show much the same result.

However, these results are often based on voter intention, i.e. they answer the question “Who do you intend to vote for in the next election?” If voter expectations are taken into account, several polls show a clear lead for SYRIZA. Voter expectation is based on the question “Who do you think will win the next election?”

Why is voter expectation important? In the United States Presidential elections, for instance, voter expectations are thought by some researchers to provide a more accurate prediction of electoral outcomes that voter intention (see Rothschild and Wolfers: Voter Intentions versus Expectations. Wharton Business School). Testing for voter expectation is also a subtle means of reducing subjectivity, as it requires the respondent to forecast a generalised result, rather than an individual preference, as well as to account for potential imponderable or intangible factors, such as voter motivation.

This second point, voter motivation, is quite important for interpreting events on polling day. To put it mildly, I see very little “grassroots” activity by the two major parties, PASOK and New Democracy. In contrast, SYRIZA, KKE and Chryssi Avgi appear to have very motivated ground operations in Athens. My evidence for this is anecdotal, but nonetheless significant:

·    For one week now, SYRIZA has been airing television advertisements on nearly all major channels. SYRIZA also has been buying billboards, not least of which are in bus stops—a clever move, given the likely demographic-political background of voters targeted by these adverts.

·    For two weeks now, there have been any number of small public gatherings by SYRIZA, KKE and Chryssi Avgi in the north-eastern suburbs of Athens, as well as in the centre. On the road to Marathon, for instance, each weekend there are groups of activities handing out fliers. In the centre, I have seen Chryssi Avgi marches in small but visible numbers, as well as SYRIZA events.  

In contrast, I have seen no new media or ground operations by the two mainstream parties. This may be due to economic reasons—it is well-known that both parties have a debt of over EUR 250 million. But I believe it is also due to the fact that in the case of PASOK, the party is collapsing with the flight of unionists and other activist members to SYRIZA, while in the case of New Democracy, there appears very little that can be done on a mass movement scale in the main cities. In contrast, ND leader Samaras is on a tour of regional cities, where he polled higher in the May 6th elections.

The conclusion of these observations is that:

·    A get-out-the-vote (GOTV) operation this Sunday will be crucial to success. In this respect, I expect SYRIZA to have the edge, because they appear more motivated and more organised in terms of sheer numbers and rage, particularly among younger voters.

·    A major factor in determining whether “undecided” voters vote will be the weather. In the May 6th elections, approximately 30% of the electorate did not vote. Given that summer weather has arrived, I expect that this number may remain stable or may increase, and that this too will be in favour of SYRIZA.

·    Finally, a main factor before the elections will be the element of rage. This is turning into a main campaigning tool of ND, SYRIZA and Chryssi Avgi, and is leading to different kinds of scaremongering and negative PR in an effort to motivate their respective party voters.

The economic situation is Greece is worsening dramatically. While seasonal employment may rise during the summer tourist season, all long-term macroeconomic and microeconomic indicators are worsening. In this economic depression, a second election is being waged which is resulting in a greater polarisation between voters and unrealistic expectations being created through shameless demagoguery and mistruths on all sides of the ideological spectrum.

The June 17th elections will most likely result in another split parliament, with a weak government formed which will likely be led by a weak SYRIZA coalition, but which may be led by a weak New Democracy – PASOK coalition.

The determinants of this election will be the weather, the share of non-voters and the extent to which the parties can motive their supporters to vote on election day. These three points indicate that there may be a higher probability of a SYRIZA victory than what may be expressed in the polls to date. (This may change in the last week of the campaign, which we understand will be vitriolic). 

The problems of economic and political governance remain, and will be amplified by the very tactics used in this election, as well as by the intractable political and social issues of Greek society and the Greek state. Political fragmentation and divisiveness have been embedded at a systemic level: it is doubtful that any single party, or coalition of parties, will have the political unity necessary to pass through the structural reforms that Greece so urgently needs. It would also appear that this fragmentation will last for a significant period of time, leading to inevitable economic consequences.  

To put it bluntly, one could conclude that these elections, or rather the political activities which define the inalienable democratic right to an election, are contributing to the problem rather than to the cure.

© Philip Ammerman, 2012

Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. He works in the field of investment management and due diligence in Europe, the former Soviet Union, and the Middle East.

Friday 8 June 2012

The European Redemption Pact and Moral Hazard

In November 2011, the German Council of Economic Experts has suggested a European Redemption Pact (ERP) as a means of addressing the Eurozone financial crisis. Under this scheme, which is quite similar to the Modest Proposal published by Yiannis Varoufakis and Stuart Holland in November 2010. In the German proposal, the Eurozone countries would pool their debt obligations over the Maastricht criterion, i.e. for that debt portion over 60% of GDP. The amount over 60% would be jointly guaranteed by the entire Eurozone. In the Varoufakis / Holland proposal, the inverse would occur: the European Central Bank would issue Eurobonds guaranteeing the first 60% of debt-to-GDP of all Eurozone countries. 

In the German proposal, any country not receiving support from the European Financial Stability Fund would be able to “pool” their debt in a new financial structure, which would receive a joint guarantee by every non-EFSF Eurozone member. (We note that Greece, Ireland and Portugal are already in the EFSF and are thus presumably prevented from participating).

Each Eurozone country would be able to participate contingent on:

a.  Introduce a constitutional “debt brake”, i.e. a constitutional commitment to reduce debt to the Maastricht level or below;

b.  Introduce a specific national economic plan with ring-fenced special tax provisions to debt service of both its 60% debt-to-GDP and its debt guaranteed by the ERP.

c.  It would have to sign over 20% of gold and foreign exchange assets in its central banking system as collateral for the ERP guarantee.

The German Council gives the example of Italy, which it estimates would have to assure a primary surplus of 4.2% of GDP, assuming Italian GDP grows at 3% per year, the ERP has a refinancing cost of 4%, and Italy has an average 5% for its remaining debt.

This proposal is quite similar to the revised Modest Proposal of Varoufakis and Holland. In the Modest Proposal, the first 60% national debt limit would be refinanced using  pEuropean Central Bank bonds. The Modest Proposal includes a commitment to growth, via loans provided by the European Investment Bank (EIB), as well as a commitment to austerity. 

Both proposals accept, but fail to account for, how the political and financial fundamentals of such a plan would work.

It is worth remembering that at the heart of any financial transaction or system is the assumption of trust and confidence. Absent this condition, no amount of loan covenants or collateral guarantees will induce a borrower and a lender to enter into an agreement, let alone respect it. This problem is currently magnified (a) between Eurozone member states, and (b) between the Eurozone and the rest of the world.

Let’s take the political dimension first. Within the confines of the Eurozone debate, the Germans are portrayed as martyred taxpayers while the Greeks are condemned as spendthrift liars and thieves. Whatever the truth of the situation, Europe’s politicians have sufficiently poisoned the well of intra-Eurozone trust to the extent that it is now impossible to conceive of a German taxpayer agreeing to pool liabilities in this way.

Outside the Eurozone, there is similarly little confidence that the 17-member currency union has either the financial or the political nous to get in front of the problem, rather than trail haplessly behind it. There is also little evidence that the International Monetary Fund has a handle on the situation, judging by its record to date, and by recent remarks by its Managing Director.

Let’s now look briefly at the financial dimension. In the Varoufakis / Holland proposal, the authors presume that the ECB will guarantee the first 60% of debt:GDP. This will require a massive increase of the ECB’s balance sheet assets, which are already dangerously over-exposed from its direct purchases of sovereign debt and its Long Term Refinancing Operations (LTRO) (and prior liquidity operations).

An ECB guarantee will only function as long as the Eurosystem central banks take steps to expand their asset base accordingly, while possibly increasing the ECB balance sheet independently. Although this is possible, it will encounter important financial and practical difficulties in the current climate.  

In the German ERP proposal, the idea is for an expanded EFSF/ESM to be created which would issue guarantees for refinancing. This plan is slightly better in that (a) the EFSF countries are presumably not included, and (b) there is a 20% collateral post as a specific resource allocated to this fund. Furthermore, it counts a 4% ERP refinancing cost, which is important in the current market. Most cash assets have fled to havens which render a negative interest rate after inflation.

This does not answer the question whether the 20% collateral post will be sufficient, or whether new collateral will have to be raised (particularly in light of Eurosystem commitments to the ECB). But at least this is a measurable indicator by which an interested analyst could run various forecasts and simulations.

The deep problem with the ERP is the same as that of the Eurobond: it makes each Eurozone country jointly and severally liable for the debts of another Eurozone country. This is difficult to imagine in the current political environment. It is also difficult to imagine objectively: debt brakes and other frills aside, there is very little evidence to suggest a country can be induced to maintain acceptable debt levels over time. Particularly over the next 25 years, when Europe will have to cope with dramatic demographic changes, and the damage these will create on national pension systems. 

My conclusion is that Europe is not ready for such a move. On the one hand, it there is no political credibility for it, either within or without the Eurozone. On the other hand, I have to ask why a standard debt work-out process is so objectionable. This is hardly a new feature of economic life, and in private sector occurs on a daily basis. Thus:

·    If Spain fails to recapitalise its banks, it should let its banks fail, and find other ways of managing the fall-out for the benefit of its individual depositors or other “innocents”;

·    If Greece fails to get its public finances under control, it should default on its public debt, with all the consequences this implies for current public spending and private consumption.

I fail to see how increasingly complicated financial support schemes remove the moral hazard implicit in investment decisions made by governments or banks (or German owners of Spanish vacation homes). Since they do not remove either moral hazard or basic human behaviour, it is clear to me that neither a debt brake or a ring-fenced tax system will survive over time. There will be myriad future opportunities to fiddle with public or private expenditure over time, and particularly given the inevitable decay of the European social model in the next 20 years.

Let me reiterate my comment on moral hazard: both the Modest Proposal as well as the ERP suggest, and indeed are based on the idea that lasting changes to human behaviour and debt incurrence are possible as a result of an Eurozone financial structure. I see no evidence for this either from economic history or from current affairs.

If we take the Greek case, for example, one would assume that if “virtuous decisions” were possible, the entire political class would have been replaced. In fact, the political class is intact, and pursues the same failed policies and political tactics.

If we take the Spanish case, we see exactly the same situation. The management of Spanish banks that over-lent are still largely in place. The owners of Spanish property are still in place. The desire to invest in property remains high, whether as a distressed asset, or as a “dream home”. These same factors have led to so many property booms and busts remain – European system or no system. It has nothing to do with a debt brake or regular public spending.

As a result, I am in favour of using classical debt work-out tools, either at the public or private levels, to resolve this crisis. In my opinion, the well-meaning but flawed attempts by Eurozone officials to solve the crisis by setting up support mechanisms prevent a timely and cost-effective resolution to the crisis. Their efforts would be better deployed in creating temporary social support mechanisms rather than by increasingly complex and morally questionable bail outs of the banking system which has contributed so much to this crisis.

© Philip Ammerman, 2012

Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. He works in the field of investment management and due diligence in Europe, the former Soviet Union, and the Middle East.