Yes, but…

Reading the headlines this Monday morning, I’m struck by the fact that in what concerns Greece, one could conclude that if we really analyze the motivations and mindset behind certain statements, everyone is right, but everyone is also wrong.  

The creditor countries, led by Germany and The Netherlands, are right that Greece has failed to deliver what are euphemistically known as its “reform programme.” However, they are wrong to state that no reforms have taken place at all, as we see in many statements made in the press this past week. Illustrative is that of Jean-Claude Juncker in today’s Financial Times:

“If we were to establish that everything has gone wrong in Greece, there would be no new programme and that would mean that in March they have to declare bankruptcy,” he warned.

The fact is that not only is the central government within 2.5% of GDP of a primary surplus, but that public sector headcount has been reduced by approximately 100,000 people in the past 2 years. Public sector wages and pensions (the latter cover the entire society) have been cut by a minimum average of 20%. The semi-governmental sector is being scales back and prepared for privatisation. There have even been privatisations, albeit on a limited basis, which have brought EUR 1.5 billion into government coffers in an extremely adverse market environment.

We can treat the presumed negotiating positions of Greece’s political leaders in the same way. They would like to avoid the latest Troika demands, which include cuts in the private sector minimum wage, cuts in the 13^th and 14^th salaries, and the further reduction of 150,000 public sector staff. Their reasons for doing so are obvious: these policies will worsen the recession. This is definitely true: in and of themselves, these measures will undeniably worsen the recession in the short term, and will lead to Greece missing yet more of these vaunted “reform targets”.

But over time, these measures could be supported, provided certain conditions are met. For instance, the demand to reduce the public sector by a further 150,000 staff is not new: the condition has been agreed by the previous PASOK government over 14 months ago. Given that the public sector has been turned into a vast, low-productivity patronage machine, something must be done. Since the Greek parties refuse to do something about it, e.g. provide a realistic, means-tested plan for a productive public sector, the Troika is pressing ahead with its demands. “Power abhors a vacuum”, as the saying goes.

Similarly, the elimination of a 13^th and 14^th salary does not, of itself, imply lower wages: unions and employers are free to re-adjust a wage on a 12-month basis at the same level as the previous 14 month salary. Whether they will do this is, of course, debatable.

We can also debate the logic of the Troika in demanding these conditions. On the one hand, lower wages would be an advantage in some labour-intensive sectors such as agriculture or tourism. On the other hand, any reduction in wages at the present time will lead to lower tax revenue and higher business closures in Greece. Furthermore, the state of labour inspections in Greece are so poor that many businesses employ illegal labour, violate labour law (e.g. on maximum work hours) and under-report wages.

The elimination of the minimum wage is likely to lead to lower salaries and lower consumer spending (and therefore lower tax revenue), no matter what. In all this debate, however, it’s surprising that the Troika doesn’t address a key issue in Greek wage competitiveness, which is the high social charges faced by employers and employees (average 44% IKA tax for salaries employees).

So the first question I have to ask this morning (and all through the weekend), is why the insistence? Why is the Greek side insisting that they are locked in a struggle for survival, when this has been known for some time now? And why is the Troika insisting on measures which will have a short-term deleterious effect?

For the Greek side, and by this, I mean the political representatives in government, the answer is pretty clear. The same political class that has led Greece into this mess is now charged with leading it out. What better way than to create an external enemy and man the barricades against it? Yes, they may be right in many respects, but … they knew this was going to happen, and they are collectively and individually responsible for it. With each new crisis their apparent indispensability becomes more apparent—this has been clear since the disastrous referendum idea in October 2011.

From the Troika side, I detect a real uncertainty on how to proceed. The debate has become politicised in northern European creditor countries, where the elected leadership feels they have to bash Greece in order to save it. This tactic has already backfired, and it will only get worse. Another problem is detected at the level of the ECB, which has a totally different perspective and legal framework, and is more concerned with bank stability than anything else.

And from the IMF: the only thing new in the policy prescriptions it is implementing is that they are in Greece. We’ve seen so many of the same policy failures in Africa, Latin America or Asia, that it’s difficult to recount the similarities of the Greek “reform” programme to historic ones. One difference in Greece: there is no scope for lowering tariff barriers to free trade (a traditional IMF concern), given that Greece is a member of the Eurozone and WTO. Instead, the IMF is coming at this from a different angle: non-material “liberalisations” of pharmacies, taxies, public notaries and other professions which will do absolutely nothing to solve the problem in its current form.

Nikos Xydakis has summarised the current situation well in his Kathimerini article on Sunday:

As the first victim of the euro crisis, Greece is being subjected to mutually exclusive and conflicting panaceas concocted by weak leaders and irresponsible technocrats who are feeling intimidated and constantly being defeated by global markets.

Precisely because there is no clear solution, I expect both more austerity, and more financial crises. I expect both PSI and a further bail out to be approved, but to be so unworkable as to result in many further years of recession, low growth and missed targets in Greece. This will, however, lead to certain economic benefits in some sectors of the economy. 

The problem is not being solved; the root causes are ignored. This is seen in Greece as in practically all of Europe. We are a long way from returning to a pro-growth market equilibrium on sustainable terms, to the extent where I wonder if it will be possible to do so, at least for a long period of time.

(c) Philip Ammerman, 2012 

Navigator Consulting Group 

www.navigator-consulting.com 

Has Angela Merkel gone stark raving mad?

The normally sure-footed German Chancellor may be exhibiting signs of a disease common to politicians who’ve been in office for some time. This disease is called different things in different languages, but the root cause is a loss of touch with reality after years in political power.

On Friday, a German policy paper was released which advocated the appointment of a “European commissioner” for Greece, who’s job would be to monitor spending, and implement a policy whereby any income in Greece would first be used for debt service, with anything remaining to be used for normal operational expenditure.

This proposal, redolent of new economic order proposed by force of arms not so long ago by another German, has stirred up outrage not only outside Germany, but even within it. Members of her own Christian Democratic party spoke out against it, as did political leaders across the political spectrum. Martin Schulz, President of the European Parliament, stated that the idea of yet further austerity in Greece was absurd, as the current recession was driven by Troika policies. Merkel was forced to backtrack upon arriving in Brussels this afternoon, but it’s clear that the fiesta is not over.  

A second proposal was also apparently leaked over the weekend, which maintained that Angela Merkel would appear together with Nicolas Sarkozy at the latter’s campaign rallies for the French presidential elections. As reported by The Guardian:

Hermann Gröhe, general secretary of Merkel's Christian Democratic Union (CDU), confirmed at the weekend that she would "actively support Nicolas Sarkozy with joint appearances in the election campaign in the spring".

It is hard to think of a worse proposal, although there have certainly been a record number coming out of Berlin lately. There will be two likely winners from such an event: on the right, Marie Le Pen. On the left, Francois Hollande.

These two proposals, as ridiculous as they appear, are unfortunately a sign of weakness on the part of Germany’s Chancellor. She knows that domestically there is absolutely no appetite for a second Greek bail-out, despite the commitments she and her Minister of Finance have made at various European summits. Her only option is to “bash” Greece in hopes of saving it. This is an old tactic: it dates back to early 2010.

Furthermore, it’s also clear that if Francois Hollande wins in April/May 2012, the famed Merkozy engine that’s been running the Eurozone’s fiscal policy probably runs off the tracks, all protestations by Hollande to the contrary. Given these problems, as well as slowing European and German growth, I can imagine that Berlin is clutching at straws.

Yet on the Greek side, the crisis is deepening. I sincerely doubt that political leaders will be able to make any further austerity commitments before a national election. Yet these are now being demanded by the Troika, despite past IMF comments that "further austerity should be avoided." 

Furthermore, any election held will likely result in a coalition government with widespread, violent resistance by the opposition, leading to yet more policy paralysis. And in the meantime, the real economy is worsening, with real unemployment far above 20%, record company closures and emigration, declining consumer spending and further recession.

Worsening the sense of the impossible is the fact that neither the government nor the Troika is doing a very good job of communicating either the policy objectives of the reform programme, nor the actual implementation record of these goals. Look for a “balanced scorecard” for Greece, and you will look for a long time without result. The only source of monitoring is seen on the Ministry of Finance website, but this concerns only the financial situation, and is barely communicated adequately. What is surprising is just how badly decision-makers in European capitals appear to be, judging by comments made in the past 24 hours.

As a result, the Greek crisis train continues to choo-choo along the tracks, entertaining hedge funds, bankers and journalists everywhere. So long as Greece is the apparent source of the crisis, it is hoped that Spain and Italy can refinance unscathed. Something tells me that this happy scenario will not last too much longer. 

© Philip Ammerman, 2012

Navigator Consulting Group

www.navigator-consulting.com

German proposals for conditionality on a second Greek bail-out

The Financial Times leaked a German policy proposal on Friday which includes two incendiary conditions attached to a second bail out package:

a. A constitutional amendment that enshrines “absolute priority to future debt service”. In other words, “State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure.”

b. Transfer of national budgetary sovereignty, in other words: “Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.”

Both conditions are unacceptable and unworkable, and have been rejected by Greek political leaders. They are unacceptable because they infringe on basic national sovereignty to the extent of making any future bailout impossible in political terms. They are unworkable for the same reason that governance of the current Greek budgeting system is unworkable:

a.     The Troika has already reviewed and in theory approved each Greek budget defined since 2010, including both general expenditure and revenue measures. A “veto [of] decisions not in line with the budgetary targets” is clearly impossible, given that any expenditure made would be recorded after the fact, and not beforehand.

b.     The actual Greek shortfall on the deficit side is small, and is due more to the fact that there is an unprecedented economic depression in the country as well as due to an extremely adverse international financial situation which makes certain decisions such as privatisation unworkable. Nonetheless, the Greek government and the political parties are certainly guilty of making promises which they have not implemented or reneged upon, and this is unaccepted. 

c.     The fact that much of the Troika’s plan is unworkable in conditions of an economic depression, with real unemployment of over 20%, and that the first and second bail-out plans continue to have grave errors in terms of economic policy.

To assume that a Eurocrat financial commissioner sitting in Brussels can govern the Greek budget by fiat is the worse sort of theoretical utopia. I honestly wonder which German theorists were responsible for drawing up this plan, and whether the cold light of reality has every intruded upon their gravid musings.

There are, in fact, several more workable solutions for ensuring that future Greek revenue is used for debt service rather than other means:

a. The first and most logical method is to disburse the second bail-out package in tranches rather than in a single package. This implies that rather than a single bond exchange in 2012, the bail-out can be phased in according to the expiration dates of the current debt maturities. There is practically no difference in the annual interest rate: the pre-2010 average interest rate of all Greek government bonds was about 3.8%; the current rate currently being negotiated is between 3.5-4.0%.

b. The second option is to place all future Greek income from European Union funding as a guarantee against a potential future Greek default. Given that Greece receives roughly EUR 2 billion in Common Agricultural Policy subsidies each year alone, it is clear that the potential withholding of these funds would provide a significant cash flow in the case of a future default. Moreover, their with-holding would create such asphyxiating political pressure among key political interest groups in Greece as to assure that any future government would think long and hard before contemplating a future default.

c. The third option would be to indicate in no uncertain terms that any future Greek bail-out would be the sole purview of the private financial sector, and not the European taxpayer. This would automatically raise the quality of due diligence and risk analysis made by private financial institutions, and force the Greek state to budget accordingly. It would also set a practical limit on this bail-out exercise, after which there should be no further public support to Greece.

It remains to be seen whether a rational resolution to this issue will be reached. With the Troika advocating ever more unworkable plans, and with a consistent record of Eurozone cacophony (remember the Finnish guarantee?), the most logical solution may in fact be a unilateral Greek default. This may be the only way to guaranteeing Greek sovereignty while at the same time requiring an immediate conversion to a current account surplus and primary public sector budget balance.

© Philip Ammerman, 2012 

Navigator Consulting Group

www.navigator-consulting.com

Theodoros Angelopoulos

A while ago this morning, en route to Athens Airport, I heard the news that Theodoros Angelopoulos had died yesterday evening in a traffic accident. He was hit by a motorcycle while crossing the road in Drapetsona and died in hospital several hours later. 

A renown film director, Angelopoulos’ work explores the cultural and historical identity of Greece in the years from World War II to the present day. His films touched on some of the most sensitive points of modern Greek history, ranging from returning home from the Greek civil war (Voyage to Cythera) to family loss and discovery (Landscape in the Mist) to the loss of cultural identity in the years of prosperity (The Beekeeper).

He was often not an easy man to work with. I remember clearly his public disappointment and sarcasm at not being awarded at the Cannes Film Festival; others will no doubt look at his selection of foreign leading roles and his treatment of younger Greek filmmakers with some criticism.

His films were also difficult to watch. You don’t go to an Angelopoulos film for thrills or laughs: emotional devastation was typically the result. His use of a limited number of long scenes and complex dialogues became something of a trademark.

And despite his fame, he suffered through all the indignities of a filmmaker in Greece, from limited budgets and resources (despite state funding) to high overhead costs to a very limited domestic market. His contempt for what he termed “commercial” films, television or advertising only complicated matters.

Yet his films have captured, in their own way, life in Greece for a certain period of time, from the traditional Greece of the 1960s-1970s to the transition to prosperity in the 1980s and the wrenching adjustments following the fall of the Soviet Union in 1991 and the large-scale immigration which followed. His focus on issues of family loss and reunion are stunning in their clarity: I had a relative who fought on the Communist side in the civil war. He was repatriated to Uzbekistan at the end of the war, returning to Greece in the 1970s. I can’t imagine what “Uncle John” went through, but Voyage to Cythera was probably close to it.

I feel shock and sadness at his loss. A lifetime of creative struggle killed by a motorcycle in a common traffic accident in Athens. The driver is rumoured to be an off-duty policeman.

A long time ago, I heard a song by Ioannis Markopoulos which I can never forget. I remember this now, thinking of Angelopoulos and what his loss means for Greece.

Rest in peace.

Στην κυρά μάνα μας μη δίνεται βοήθεια
ούτε μαγκούρα στο προσκέφαλο σιμά
γιατί θα δέρνει κάθε μέρα τα παιδιά της
κι όταν μιλάω θα με λέει αληταρά
κι αν δέρνει κάθε που γουστάρει τα παιδιά της
θα καταντήσουνε εμπόροι δουλικοί
τα νιάτα χάνονται στα βρόμικα σοκάκια
για να μετρήσουν με το μπόι τους τη γη

Λένγκω, Λένγκω, Λένγκω
πάψε να με κυβερνάς
Λένγκω, Λένγκω, Λένγκω
πάψε να με τυραννάς

Κι αν θέλω τώρα να ακούγεται η φωνή μου
με πιάνει τρόμος από ίσκιους μακρινούς
χρυσάφι μοιάζει η συντροφιά σου στη ζωή μου
κι η ομορφιά σου μου γιατρεύει τους καημούς
ρε μπάρμπα κάτσε να μας πεις μιά ιστορία
πως ήταν τότες η μανούλα μας παλιά
έπεφτε ξύλο σα γινόταν φασαρία
ή σας νανούριζε με χάδια και φιλιά

Λένγκω, Λένγκω, Λένγκω
μου σπαράζεις την καρδιά
Λένγκω, Λένγκω, Λένγκω
μου πληγώνεις τη χαρά

Κι ο μπάρμπας τότε σοβαρεύτηκε λιγάκι
τη κούτρα ξύνει και παράγγειλε καφέ
η μητέρα είπε ήταν ένα κοριτσάκι
που ορφανό μάζευε άνθη σε μπαξέ
τ΄άνθη στόλιζαν το αγέρωχο κεφάλι
μα όταν κοιμόταν πάλι πέφτανε στη γη
κι από τα λούλουδα που ο χάρος είχε βάλει
εμένα κράτησε να βλέπω τη ζωή

Λένγκω, Λένγκω, Λένγκω, Λένγκω
μου΄χεις φάει τη ψυχή
Λένγκω, Λένγκω, Λένγκω
φίλοι θα βρεθούμε όλοι μαζί

Αυτή παιδιά μου ήταν τότες η μανούλα
ο κήπος ύστερα εγέμισε ληστές
το κοριτσάκι μας το ντύσανε γριούλα
κι απ΄τα κουρέλια φαινότανε οι πληγές
κι αν μας χτυπάει με μανία και φωνάζει
τη βάζουν άλλοι με συμφέροντα πολλά
το όνειρο που φεύγει τη τρομάζει
να αναζητάει μιά χαμένη ελευτεριά

Λένγκω, Λένγκω, Λένγκω μάνα
στο καμίνι της φωτιάς
Λένγκω, Λένγκω, Λένγκω μάνα
πες μας πάλι τι ζητάς 

(Thanks to Gugalyrics)

Additional Links:

http://www.sensesofcinema.com/2003/great-directors/angelopoulos/

http://en.wikipedia.org/wiki/Theodoros_Angelopoulos

© Philip Ammerman, 2012

Navigator Consulting Group

www.navigator-consulting.com

Waiting for Godot

In Samuel Beckett’s adaptation of Waiting for Godot, Estragon and Vladimir explore the absurdities of life while waiting for a largely fictional character named Godot. “Nothing to be done”, exclaims Estragon, trying to remove his boot. “We’re saved!” they both exclaim, a little bit later in the first act. 

This week, if media reports are to be believed, the Greek PSI will finally be agreed. This adventure in net present value and coupon rate negotiations has reached the final stage of the absurd, to the point where it would almost make little difference to a bewildered public or to an exhausted financial sector whether it occurs or not. It reminds me of nothing more than Waiting for Godot—that illusory moment of salvation which will probably not arrive in this act or the next.

The “Private Sector Involvement” (PSI) is the preferred, more elegant term than the common “haircut”, and refers quite simply to the fact that Greece is no longer able to service her public debt. Rather than repaying 100% of it, will repay (if reports are to be believed), 50% of it or less.  It is interesting to note just how much time was spent in 2010 assuring the world that this was not the case.

This process originally started in May 2011 with an offer for a 21% voluntary PSI, offered by the financial sector. Unfortunately, the 21% apparently referred to net present value, i.e. the present value of the expected future cash flows from Greek bonds, less the present value of the bond itself.

Using NPV to determine a “haircut” in these circumstances is tricky, to say the least, for the simple reason that nominal rather than real bond value prices were used. In other words, the NPV treated a EUR 10 million Greek bond as being worth EUR 10 million, as opposed to its market rate which was probably discounted by at least 50%. This means that financial investors were receiving a 29% “bonus” over actual market rates (more, in fact).

While the “Troika” initially accepted this offer in July 2011, they then reneged in September-October 2011, led by Germany. Germany’s insistence on a greater NPV haircut of about 50% was certainly more in line with market valuation, but in turn led to greater “contagion.” This means that banks and other financial investors refused to purchase bonds of other Eurozone periphery countries (a politer term than PIIGS – Portgual, Italy, Ireland, Greece, Spain), causing their interest rates to skyrocket, and leading to a real scenario of a financial meltdown.

By December 2011, Germany had retracted, stating that the Greek PSI was a “one-time”, unique event, but insisting that the PSI move forward.

Complicating the issue of PSI are three additional factors:

·       The 50%+ PSI must be considered “voluntary” in order to avoid triggering credit default swaps (CDS). This is essentially a form of insurance against a sovereign bond default worked out between market actors. What’s the problem? If a “haircut” is “involuntary” (which is absurd, because the financial sector clearly does not want a write-down), then the CDS clause can be triggered, enabling investors to claim back 100% of their Greek bond values.

·       The fact that a number of hedge funds and other investors have invested in Greek bonds at a discounted rate. The fact that these investors are probably thinly capitalized and understandably aggressive in terms of their negotiating strategy means that they have less to gain from a PSI of over 50%. So they’ve been blocking a deal, if press reports are to believed, on terms offered by Greece (with instruction given by Germany & co).

·       The fact that a PSI of 50% will essentially wipe out the Greek pension and banking system, given that fact that Greek investor hold about EUR 70 billion of Greek government bonds. Oops.

There are in fact several additional complications, but the situation is clearly absurd enough as it is that we don’t need to go any further. I hope.

Godot has very nearly arrived—or perhaps not—in the PSI negotiations. We understand that Greek bonds will be exchanged for new ones with a 30-year maturity and a coupon (an annual interest rate) of 4% or slightly less, on average.

And yet, Greece is not yet saved. The PSI actually has to be financed by who else but … the Troika (enter stage left). Greece will receive further loans of between EUR 130-140 billion to finance not just the PSI but also the recapitalisation of its banking/pension system, part of its annual public sector operations, and a “sweetener” for the private financial sector to accept the PSI deal.

This further loan is in turn contingent on several additional factors, including:

a.     Further Greek austerity measures, including evidence that the Greek political parties back them, and evidence that the current set of austerity measures is working

b.     The agreement of Eurozone national parliaments on the second Greek bailout

c.     An IMF agreement that the Greek debt is sustainable even with a 50% PSI (the IMF has already indicated that a greater PSI is needed)

d.     The ability of the Eurozone countries to actually raise money to do this—which is far from assured given current market conditions.

This entire farcical process is complicated, or undermined, by two additional facts:

·       There is absolutely no success narrative. Press reports circulate an entirely unsubstantiated comment that the PSI will reduce Greek debt:GDP from 160% to 120% in 2020. This is absurd, as it confuses current debt-to-GDP (160%) with 2020 debt-to-GDP (120%), and ignores the many other structural reforms and privatisation issues required.

·       There is no clear public set of calculations where voters, financiers, and others can clearly understand the dynamics of the Greek debt and economic reform programme. This adds to confusion, particularly among a largely hysterical press.  

As with the entire process that started since May 2010 when the first bail-out package was announced, we have allowed the process to dominate the solution, rather than the solution itself. The process is fundamentally flawed, as it involves the total loss of national sovereignty and a contradictory and unworkable first bail-out plan. Beyond this, it is clear that although some useful work has been done, and more is planned, the underlying root causes of the Greek situation have been ignored.

As such, the Troika, the Greek government and the financial sector have allowed a relatively simple process of public debt restructuring to balloon into an existential crisis affecting the world financial system, at least according to the Financial Times, Wall Street Journal, Bloomberg and other worthies.

To say that this is absurd is an understatement. But wait...the doorbell rings. I think Godot has arrived.

© Philip Ammerman, 2012

Navigator Consulting Group

www.navigator-consulting.com