Saturday 31 January 2015

SYRIZA Crosses the Line

News on Friday was dominated by the press conference held by Yanis Varoufakis, Greek Minister of Finance, and Jeroen Dijsselbloem, head of the Eurogroup (and Dutch Finance Minister).

There are two elements about this press conference which need to be assessed. The first is the purely theatrical aspect designed for the audience of SYRIZA’s political supporters. This occurred at the end of the press conference, after kind words of “constructive meetings” and “mutually beneficial relationships” had been uttered.

Yanis Varoufakis made a statement to the following effect:

We will cooperate with the International Monetary Fund, the European Central Bank, and our Eurozone partners. However, we will not cooperate with the Troika, which, according to the European Parliament, we consider a “rottenly constructed committee”.

(You can see his statement here, in Greek, at starting at 14:00).

There are two things obviously wrong with this statement. The first is that since SYRIZA has no problem with the IMF, ECB and Eurozone creditors on a bilateral basis, complaining about the Troika is illogical. They are exactly the same organisation; the staff of the monitoring missions are employees of the creditors. You can’t accept the legitimacy of the parent organisations (IMF, ECB, EC) but challenge the legitimacy of the monitoring team.

In fact, what SYRIZA is complaining about is its disagreement with a monitoring mechanism for the loan agreement. And this is equally a non-starter. No European or multilateral creditor will lend money to Greece without conditions.

The second is that the insulting nature of the statement and the body language was obvious to anyone watching the press conference. Look beyond the obvious fact that Varoufakis is insulting Dijsselbloem, who acts as the Eurozone creditors’ head of the Troika.

Look at the following stills from the press conference (taken from the Kathimerini media gallery):

Still 1: Varoufakis in his final statement

In this photo, Varoufakis is still playing by the normal script of a press conference, but is delivering his “rotten committee” statement.

Still 2: Varoufakis laughing

In this photo, Varoufakis is chuckling as the simultaneous translaction catches up and Dijsselbloem realises what has been said.

Still 3: Shaking Hands

In this still, Varoufakis and Dijsselbloem shake hands. The Greek finance minister is dressed in a casual manner which is inappropriate for this process. Dijsselbloem leaves without statements.

The political theatre here is obvious: Varoufakis against the Troika. But beyond the theatrics, let's look at the second element of this event: the substance of Varoufakis' declaration. 

1.     Greece will not request an extension of the current programme, and will only negotiate on the basis of a new programme it will define.

2.     Greece will not accept any form of loan conditionality which would be monitored by a monitoring mission from its official creditors. (If you disagree with one Troika, you will disagree with another).

3.    Despite his sophistry about “the European Parliament” defining the Troika as a rottenly constructed committee, Varoufakis has deliberately and gratuitously insulted Greece’s Eurozone partners.

If we take these facts at their face value, then the conclusions are clear: there will be no additional funds disbursed for Greece. It will have to default on its debt by February, and will find it impossible to pay for regular government operations, let alone SYRIZA’s campaign promises.

The damage done by this press conference is clear:

·        While mainstream press were praising Greece’s “valiant stand against austerity” (fundamentally misunderstanding the key issues in Greece) at the beginning of the week, by Friday night opinion had started to harden against Greece and SYRIZA, and will continue to do so all next week.

·        Nearly all Eurozone partners, together with the IMF and ECB, have warned that while debt maturities can be extended, there is no question of a debt write-down. Ireland, Portugal, Spain, France, Germany, Netherlands and Finland have come out against a write-down, as well as against a European debt conference. Wolfgang Schauble stated very coherently thatWe’re prepared for any discussions at any time but the basis can’t be changed. Beyond that, it is hard to blackmail us.”

·        Yanis Varoufakis himself left Saturday afternoon for Paris for emergency talks with the French government, trying to put out the fires his statements had caused. He was originally scheduled to leave next week. 

SYRIZA does not seem to understand some fundamental points about the operations of sovereign states or financial partners:

a.      Insulting your official creditors, who have lent you € 252 billion of public funds to correct your own mistakes, is not a good idea. It is certainly not a good idea when you are about to ask them for additional loans and a write-down.

b.      SYRIZA has never explained how it will pay for its campaign promises, let alone manage the Greek economy. At least not in any realistic terms. And aside from a barrage of ad-hoc policy measures announced this week, they have still not announced their policy plan in Parliament. (It is expected this weekend or Monday).

c.      You can’t manage relations between financial sector partners with the clever sophistries and empty platitudes with which you teach an undergraduate seminar on Marxist economics.

d.      It is pathetic that after 2.5 years waiting for the day they would take power since the May-June 2012 double election, SYRIZA is not better prepared, with a real, means-tested plan for implementing their policies and managing Greek debt.

As a result of this press conference, expect to see a major hardening of the European response over the next few days. Minister Varoufakis will no doubt claimed he was “misquoted”, and he has already back-pedalled or claimed he was misquoted several times over the last few days. But no serious creditor believes that Greece will present a “mutually beneficial solution”, and they are tired of Marxist double-speak and empty rhetoric.

Also as a result of this press conference, and the events of this past week:

·       Expect bank deposit withdrawals to accelerate. We should have a complete estimate for January 2015 soon, but preliminary reports have mentioned withdrawals as high as € 20 billion (Lorenzo bini Smaghi in the Financial Times).

·       Greek banks now need to increase their Emergency Liquidity Assistance (ELA) support from the Greek Central Bank. Given the confusion over SYRIZA’s real intention, expect the European Central Bank to restrict further ELA, unless Mario Draghi is feeling unusually generous. I would not be. Greek banks are now technically insolvent, largely due to the actions of their own government.

·       Foreign and domestic investors are already taking flight. The Athens Stock exchange plummeted. Several major projects were either cancelled by SYRIZA or put on hold by the investors.

Alexis Tsipras and Yanis Varoufakis came to power with 36% of the national vote, in an election with a 36% absention rate. That is to say, they have won 2,246,064 votes, which is only 27% of all votes cast, and only 20.8% of the Greek population. One would have hoped that they would govern with humility and carefully-considered actions given the magnitude of the crisis and the fragility of their own support. One would hope in vain.

© Philip Ammerman, 2015

Friday 23 January 2015

The Day After: Likely Developments Following a SYRIZA Election


Elections in Greece are scheduled for January 25th 2015. This article outlines a baseline scenario for the consequences of a SYRIZA election and its political and economic aftermath. Assuming SYRIZA abides by its electoral promises and no Troika compromise occurs, we forecast a hard default by May 2015.

SYRIZA Electoral Promises
SYRIZA’s core electoral promises were proclaimed at Alexi Tsipras’ speech at the Thessaloniki International Trade Fair. An English language summary can be found on SYRIZA’s website here.
Several electoral promises are the main drivers of the economic scenario. We distribute these between multilateral promises (those dependent on foreign creditors) and unilateral promises (those theoretically capable of implementation based on a national parliamentary majority).
Multilateral Promises
  1. An immediate write-down of 50% of Greece’s existing debt, excepting (theoretically) the IMF portion
  2. A moratorium on repayment of the remaining debt, and linking debt repayments to GDP growth
  3. Reclaiming the Nazi occupation forced loan from Germany
Unilateral Promises
  1. Eliminating the ENFIA property tax and replacing it with a tax on large property holdings
  2. Raising the minimum wage to € 751 per month
  3. Restoring public sector wages and employment
  4. Social programme and revisions to the tax code with total expenditure or revenue impact over € 10 billion
SYRIZA prices the cost of its programme at € 11.4 bln and anticipates revenue of € 12 bln. This estimate is faulty, because its public spending increases and revenue cuts are front-loaded, while a large share of revenue increases are back-loaded. This is seen in three main areas:
  1. Tax arrears collection: we do not believe SYRIZA will be able to collect € 3 billion in tax arrears in 2015. In fact, cancelling the ENFIA tax and lack of clarity over the remaining tax code changes will increase tax arrears and reduce revenue.
  2. Combatting tax evasion and smuggling: while these are very worthy goals, it is doubtful whether they can lead to the [unstated] revenue target within 2015.
  3. The “comfort pillow” of € 11 billion from the Hellenic Financial Stabilisation Fund cannot be seized by SYRIZA. HFSF is a private organisation; the “comfort pillow” concerns EFSF bonds that cannot be monetised in the absence of prior EFSF agreement. (See our previous analysis of HFSF here).

SYRIZA Implementation Assessment
Our core scenario see the following likely results of a SYRIZA attempt to implement its electoral promises.
  1. Given the lack of financial reserves, SYRIZA will have to achieve a negotiated solution within approximately 1 month of election, i.e. by March 1st 2015. As already reviewed, Greece does not have the financial reserves to pay for debt redemptions past February 2015. SYRIZA’s estimates that it can negotiate for 6 months are fantasy.
  2. The Eurozone / Troika partners will not accept either a unilateral write-down of 50% of debt. This has been explicitly stated by nearly all decision-makers within the Troika (Germany, Finland, Netherlands, etc).
  3. Debt reprofiling based on GDP-linked bonds is also a fantasy. The key issue is not the debt:GDP ratio, but Greece’s ability to service its debt. A rising GDP does not result in higher tax revenue or a balanced budget, and has not done so in Greece for years due to tax evasion, corruption, nepotism, protection of different interest groups, high public sector spending, etc. This is clearly illustrated by the fact that Greece has run high deficits even during the boom years, and in fact these deficits were a main cause of the current debt crisis.
  4. Germany will neither accept responsibility for the Nazi Occupation-era loan, nor repay it.
As a result, all of SYRIZA’s unilateral promises will result in failure. The negotiations to this point will take between 1-3 months. At this point (or earlier), SYRIZA will either have to perform a 180-degree U-turn on policy, but at this time it will be too late at least for 2015 debt redemption. This is explained further below.
In terms of unilateral promises, a presumed SYRIZA or SYRIZA-coalition government in Parliament will be able to push through different laws, which will front-load the revenue collapse in Greece. Specifically, we forecast minimum revenue losses of a € 6 billion within 6 months of initial SYRIZA law-making, and total revenue losses of at least € 10-12 billion in 2015.

The Issue of Timing
The comments made in the last two paragraphs should illustrate the danger Greece will find itself in by March-April 2015.
  • The failed negotiations with the Troika will take at least 2 months (to end-March). In this time, Greece has to make debt payments in excess of € 5.1 billion, which it does not have, unless it delays other schedule public sector payments (payroll, pensions).
  • SYRIZA will not have the € 7.6 bln final installment of the second bail-out package, nor the € 11 bln HFSF “comfort pillow” it is relying on to service its debt and ongoing government expenditure during the negotiation period, which it has stated will last for 6 months.
  • SYRIZA’s first laws and wider policies will have the effect of tearing a € 6 bln hole in 2015 central government revenue, or over 10% of the annual total, by May 2015. This will be manifest in slowing tax payments; growing tax arrears; etc.
  • The bank run will continue. Current deposit outflows in January 2015 are possibly as high as € 7-8 billion. Yesterday’s daily outflow alone was estimated at € 1 billion. The four systemic Greek banks have all requested additional Emergency Liquidity Assistance (ELA) from the Greek Central Bank.
  • No other creditor will step up to bail out Greece. Press reports that China or Russia will finance Greece are a ludicrous fantasy. Besides having their own fiscal problems, Chinese and Russian policy-makers are not stupid. They will not fund a country that has just refused to honour prior sovereign debt commitments to its Eurozone partners.

The Crisis – European Policy Response
Unless SYRIZA does a 180-degree U-turn by February 28th, calls back the Troika inspectors, and applies for a third Memorandum with supplemental funding, Greece will face a hard default of debt redemptions between March and May 2015.
At this point, we anticipate the following European policy response:
  1. The European Central Bank will stop accepting Greek government bonds as collateral from Greek private banks for ECB loans.
  2. The € 15 billion ELA cap by the Greek Central Bank will be maintained: no new ELA will be approved.
  3. No Greek government bonds will be purchased under the ECB’s QEIII.
  4. The final installments of the second bail-out will not be disbursed.
  5. The Troika monitoring team will not return to Athens.
Taken as a whole, these steps will require the Greek government to finance its operations and SYRIZA’s political platform solely using its own financial resources. There will be a dramatic spill-over effect into the private sector, creating a major fall in economic activity, and major cancellations by foreign tour operators for incoming tourism.
Assuming the deadlock drags on, then we can expect the following additional measures:
  1. No new European Union structural or cohesion funds will be released to Greece. Greek national involvement will be frozen pending a resolution of the dispute.
  2. Taking a page from the EU’s response to the Austrian Freedom Party’s inclusion in the Austrian government in 2000, there will be a formal or informal freeze on relations with Greece. This may be expressed within certain EU institutions, or on a bilateral level by certain Eurozone Member States.
It will be interesting to see if Finland exercises its collateral call option on its share of Greek debt.

The Crisis – The SYRIZA Response
The magnitude of such a default and its impact in Greece will be significant. Besides the impact on private sector operations and tourism, it should be clear that labour migration will rise, tax revenue collection will fall, and corporate closures and relocations will increase. This will create an additional revenue hit of € 6-10 bln by September 2015. The Greek banking sector will be technically and practically insolvent. SYRIZA will have to implement one or more of the following responses by May-June 2015:
  1. A daily and monthly limit on cash withdrawals from Greek banks will be effected.
  2. A ban will be in effect for most electronic bank transfers abroad: transfers over a certain limit will be banned; others will be subject to Ministry of Finance or Greek Central Bank approval.
  3. By April or May, the government will no longer be able to honour its cash commitments within Greece. It will stop paying private sector contractors: delays will eventually reach a minimum of 6 months; quite possibly 18 months.
  4. By June or July, the government will have to begin paying public sector salaries and pensions partially in promissory notes or government bonds.
  5. Should the crisis continue, SYRIZA may have to take steps to bail-in bank depositors, probably those with over € 175,000. This will be cast as a populist measure, and there may be an exchange of cash deposits for government bonds.

Leaving the Eurozone
We do not believe that Greece will leave the Eurozone. The scenario described above is for a hard default within the Eurozone. Not only is Eurozone membership irrevocable: there exists no practical, legal mechanism to eject a country once it has been admitted.
Moreover, there are three important points to consider:
  1. Leaving the Eurozone does not eliminate Greek debt. Greece cannot unilaterally convert its Euro debt into “New Drachma Debt”: this is a decision that would have to involve its creditors. Even if a “New Drachma” were to be implemented, the debt would remain linked to the Euro-New Drachma Exchange rate. So for all intents and purposes, devaluation will not work, unless it is a form of devaluation that results in hyperinflation in Greece. There is a very real misperception in the Greek press that Eurozone exit = immediate debt write-off. It does not.
  2. Greece will probably continue to operate in the Eurozone by issuing a parallel currency in the form of government bonds or promissory notes. The only real limitation to Eurozone membership in practical terms is governed by the European Central Bank, and its requirements for private banking operations as well as actual cash and central bank reserves in the country. All of these can be bypassed by promissory notes, which of course would immediate lose most of their value, but might be tradable.
  3. Greece remains part of several free trade agreements, notably the European Union and the World Trade Organisation. It is part of a widely inter-connected global economy. Its borders are porous. This means that black market currency operations, smuggling and other phenomena will only grow as the domestic economic climate worsens. Try as it might, SYRIZA cannot shut down Greece’s borders, screen every cargo truck in transit, or every tourist, who might be bringing in currency or black market goods.

Macro and Fiscal Impacts
Should the hard default scenario occur as we describe it, the likely impacts will be:
  • A GDP decline of at least 10%
  • Central government revenue falls from € 51 bln in 2014 to € 40 bln in 2015
  • Incoming tourism falls by 20-25% visitor arrivals and revenue
  • Greek exports and imports fall by a significant magnitude as credit instruments are no longer available
  • Poverty levels will increase
  • Household and corporate debt will increase; non-performing loans will increase
  • Unemployment increases
  • The banking system becomes insolvent.

Will SYRIZA Adapt?
In recent weeks, SYRIZA’s leader Alexis Tsipras has been making superficially moderate statements. He recently suggested that Greece would not secede from NATO, and that any decisions on debt would be a decision made together with European partners. In a recent opinion piece in the Financial Times, he stated that
A Syriza government will respect Greece’s obligation, as a eurozone member, to maintain a balanced budget, and will commit to quantitative targets.
He did not, however, explain how SYRIZA would honour or service its existing debt.
These moderating statements frequently clash with those of SYRIZA members. Yiannis Varoufakis, for instance, yesterday stated in an interview that SYRIZA would make Wolfgang Scheuble “an offer he can’t refuse”, and that the alternative to debt write-off was “death”.
SYRIZA’s political messages for its domestic audience have continued their triumphalist, maximalist tone. These messages will play a direct role in getting the party, which is actually a coalition of 13 groups and independent politicians. Whether Alexis Tsipras can continue to moderate a party that is so apparently drunk on its own success, and so seemingly ignorant of the real world outside the ivory tower, remains to be seen.
Unless the normal reality of Greek public and private sector operations are suspended, it will not be possible for SYRIZA to implement its Thessaloniki programme and the other maximalist policy goals its leaders are promising to Greek voters. European leaders have indicated that no further debt write-offs are possible. Threfore, it is highly likely that unless SYRIZA drops its pledge to write-down 50% of the debt and urgently finds ways to service the existing debt in conjunction with the Troika, Greece is bound for a hard default within the Eurozone in the next 6 months.

(c) Philip Ammerman, 2015
Comments or requests for information can be addressed to: info[at]
This article was originally posted on Navigator Consulting Group

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Wednesday 21 January 2015

Are Greece’s creditors really loan sharks?

I’ve lost count of the number of times I’ve heard Greece’s creditors referred to by local media and politicians as usurers or loan sharks (τοκογλύφους). According to Meriam Webster, a usurer is defined as a person who lends money and requires the borrower to pay a high amount of interest

The idea that Greece’s debt burden is too high is at the centrepiece of SYRIZA’s political promises (to implement a haircut of 50% of the total debt; to restructure the rest and link it to GDP growth).

But what does it mean for debt to be unmanageable? And who is responsible? There are no fixed definitions here, but let’s look at a few interesting points.

Greek Debt and Interest Rates

The current Greek debt level is listed by the Public Debt Management Agency at € 321.7 billion as of 30 September 2014. According to the provisional 2014 Budget Execution Bulletin by the Greek Ministry of Finance, Greece’s 2014 central government expenditure was € 54.967 billion, of which interest expenditure was € 5.569. Therefore, two key ratios* are:

·       Effective Interest Rate: 1.7%
·       Interest Share of Central Govnt Expenditure: 10.13%

United States Debt and Interest Rates

The United States Federal Debt was approximately $ 18 trillion at the end of December 2014. According to Wikipedia, US Federal Government expenditure was $ 3.77 trillion in FY2014. According to TreasuryDirect, the United States paid $ 430.8 billion in interest costs in FY2014. Therefore, two key ratios* are:

·       Effective Interest Rate: 2.4%
·       Interest Share of Central Govnt Expenditure: 11.6%

Comparing Greek and US Debt Costs

Just to make sure the full import of these calculations is understood:

·       Greece has a lower effective interest rate than the United States on its public sector debt.
·       Greece pays a lower share of its annual government budget to service the interest on that debt.

United States
Government Expenditure
€ 51 bln
$ 3.77 tln
Interest Costs
€ 5.57 bln
$ 430.8 bln
Effective Interest Rate
Interest Budget Share

So are Greece’s creditors loan sharks?

If we assume that Greece’s creditors are loan sharks, then we need to make the same assumption for all buyers of US Federal debt.

In a word, no, they are not. There is nothing usurious in an effective interest rate of 1.7%. Particularly not when Greek 10-year bonds are yielding 9.36% on 10-year GGB today.

Why can’t Greece Manage its Debt?

So the question remains: if Greek effective interest rates and debt service amounts are lower than in the United States, why can’t Greece manage its debt?

The first obvious reason is political instability. To put it mildly, the latest tactics and statements from both SYRIZA and New Democracy have caused investors to shun Greek debt as well as Greek equities since September 2014. And rightly so. The result of these tactics is a necessary and perfectly understandable aversion to lending more money to the Greek public sector.

The second reason is government incompetence in the area of tax collection. This is seen in at least three major examples:

a.     In April 2014, there were € 68 billion in private sector and household taxes owed to the government which could not be collected.

b.     In recorded instances of tax evasion, notably the Lagarde List or the list of Greeks who purchased property in London, successive governments have refused to do a systematic tax audit.

c.     The resignation of the Director for Revenue Collection Haris Theocharis in mid-2014, and the refusal of the government to appoint a new director, as well as recent distortions in the Greek tax code, indicate the true state of affairs. 

The third obvious reason is that Greece hasn’t reformed its public sector or implemented real structural reform. A good example of this is headcount reduction and restructuring in the public sector. What headcount has been achieved has mainly been done via early retirements, which simply shifts costs from the central government payroll to state pension funds. Of the 322 organisations that have been identified as useless, not a single one has been closed. The labour reserve has been a total failure.

The fourth reason is that what investments have occurred in Greece have been delayed. Three major privatisations, for instance—the Astir Hotel (€ 400 million), Hellenikon (€ 915 million), and the regional airports lease (€ 1.23 billion)—have taken place, but have not actually been completed. This means that investments of approximately € 10 billion are being held up due to public sector bureaucracy. There are many more examples of private sector investments which have been blocked by intractable public sector decision-making.


Today, the debate on Greek public debt remains convinced—in the total absence of facts and logic—that the Greek debt is unmanageable. The reality is far different. Greece’s debt is sustainable providing the public sector mobilises around real reforms: making the public sector more efficient; promoting investments; reducing needless red tape; promoting employment and entrepreneurship. Although almost every single political party claims allegiance to these objectives, not a single one appears to have a plan for them. The quality of public debate worsens with each week. Whether this is deliberate misinformation or simple ignorance, the result does not bode well for the future.  

(c) Philip Ammerman, 2015
This article was originally published on Navigator Consulting Group

* Note that the interest paid in 2014 reflects interest costs from 2013: the calculation of Greek and US debt ratios is done using the same [incorrect] temporal distribution. Greek budgets are done on a calendar-year basis (1 January – 31 December). US budgets are done on a fiscal year basis from 1 October – 30 September.