Explosion kills 12 people in Cyprus

The explosion of confiscated Iranian munitions reported today at the Evangelos Florakis base in Cyprus has led to 12 deaths and at least 60 casualties. The explosion has damaged the Vasiliko Power Plant, resulting in power cuts across much of Cyprus, and has caused significant damage to houses and property in the vicinity of the base.

I express my deepest sympathy to my friends, clients and all Cypriots for the loss of life. I hope there will be no further casualties and that services will be restored as soon as possible.

Greece, Renewable Energy Investments and the New York Times

The New York Times recently published another article on Greece which provides an extremely biased viewpoint and reveals an unsettling lack of knowledge of the underlying business economics and realities of the topic under investigation.

In “Struggling to Stoke Economic Growth in Greece”, published on June 19, 2011, Liz Alderman describes the alleged government’s reaction of Mr. George Peristeris, Chief Executive of GEK Terna, as follows:

So when George Peristeris, the chief executive of Gek Terna, a large energy company, wanted to plow funds into an offshore wind project, he thought he would be welcomed with open arms. But it turned out that the government decided it could run things better. “Private investors with money in hand were shut out,” Mr. Peristeris said.

In fact, it is hardly surprising that George Papandreou’s government may have given this reaction right after its election. This is due to the simple fact that even today, the government does not have a fully-integrated strategy for renewable energy. This is a highly complex subject, but it boils down to two essential factors:

a.  Energy generated from renewable sources is between 2x and 4x times more expensive than energy from conventional sources. In Greece, the average price per KW produced by the Public Power Corporation from existing conventional sources (and hydropower) is about 11 cents, while the average price/KW for wind power is approximately 20-25 cents, and for photovoltaic power above 40 cents. Given that renewable energy investments are being financed primarily by a high feed-in tariff, it is no surprise that the government needs to expand generation capacity carefully, in order to avoid excessive investment which would further bankrupt the country.

b.  The challenge of renewable energy investments is not to find available land or offshore areas to place them, but to ensure that they are as close to distribution networks and demand centres as possible. Why? Because (a) electric current transmitted over a distribution line loses power the further it is transmitted, and (b) the costs of connecting power generation units to the distribution grid is expensive, and is the responsibility of the investor. One of the major achievements of the former Minister of Environment and Energy, Ms. Tanya Birbili, was to begin the process of approving an energy map and zoning rules for renewable energy investments, including offshore wind farms. With such guidelines, it is unreasonable and illogical to expect that any investor showing up with his or her own plan would receive approval.

I presume, judging by what has occurred in Greece since the purported time of Mr. Peristeris’ contacts with the government, that things have improved significantly as will be explained below. I also presume that the journalist's task is to investigate this situation, not simply rely on passive reporting. To uncritically transmit the personal experience of a single executive, based on a single reported contact with the government, and then generalise from here to all investors and investments in Greece, is poor journalism to say the least.

This is confirmed by fact that renewable investments in Greece are surging and are among the most successful areas of investment:

·   On September 29, 2010, the Greek Public Power Company announced on a strategic investment of up to EUR 2 billion in renewable energy projects in cooperation with EDF Energies Nouvelles, the renewables energy division of Électricité de France (EDF), the world’s largest electricity generator. This joint venture is studying at least two investments: a 250 MW wind park in Florina as well as a hybrid unit in Crete which includes 90 MW generation with energy storage. EDF and PPC are already cooperating on a 38 MW wind park in Beotia.

·    RF Energy, a private firm, is in the process of installing 21 wind parks in Evoia with a total generating capacity of 579 MW, worth approximately EUR 984 billion. This investment has been underway since 2009.

·   DTS Hellas, a private firm, signed an agreement with China's Dongfang Electric International Corporation on June 6^th 2011, for the installation of two wind energy projects, 250 and 750 MW, for a total value of EUR 2.5 billion.

·   The government has greatly expanded the scheme for renewable energy projects, in both photovoltaics and wind energy, concerning both household and commercial power generation. Over EUR 1 billion in projects have been submitted and partially approved since mid-2010. These are “decentralised” projects: they can be submitted by any household or any investor. These calls have been open since mid-2010 and have been widely reporting in the Greek press.

Equally significantly, the Ministry of Development has set up a specific service, the Investor Support Service for Renewable Energy Projects. Together with the Invest in Greece agency, several billion Euros in large-scale projects are currently under review. The government has also passed Law 3851/2010 on renewable energy investments and the acceleration of the licensing process.

None of these investments or regulatory changes is mentioned in the NYT article. Yet taken together, these investments amount of over EUR 10 billion, in a country with a GDP of EUR 220 billion.

Adding insult to injury, the article closes with a quotation from Mr. Demetri Politopoulos, who set up a money-losing brewery in northern Greece, and has apparently become the ultimate authority on investments in Greece for the New York Times:

“What’s happened here in the last few days is Looney Tunes,” said Demetri Politopoulos, chief executive of the Macedonian Thrace Brewery, who himself ran into thickets of regulatory hurdles when he tried to make new investments in Greece. “We’re trying to attract investors? Good luck.”

My opinions on the reason for the failure of this investment and the credibility of its sponsor are seen in my blog entry: “What’s Broken in Greece: Ask an Entrepreneur”.

Again, I have to ask: shouldn’t a responsible journalist seek a fair and balanced opinion on investments in Greece? Shouldn’t a journalist seek out at least one entrepreneur who has actually succeeded in this country? Are failed investment cases the only authority for the New York Times?

I also have to ask why there is such a dearth of objective reporting on Greece. Is it because journalists simply don’t know what they are talking about in terms of business sense? Is it because “fair and balanced”, or “objective journalism” no longer apply? Is it because newspapers have editors who don’t edit? Is it intellectual laziness? Long distance reporting? Bad fixers?

By failing to ask the right questions, interview the right people, and understand the basic business logic of what is being reported, the New York Times is failing its readers and misrepresenting the reputation of a country which, whatever its present difficulties, deserves the benefit of the truth. The fact that this occurs so soon after the Judith Miller scandal on Iraqi Weapons of Mass Destruction indicates that regrettably, little has changed.

© Philip Ammerman, 2011

Proposal for a Solution to the Greek Debt Crisis

Proposals for a solution to the Greek debt crisis, presented at the Barcelona conference on "Small Countries in the Economic Crisis". View the complete slideshow in full screen on Picasa: https://picasaweb.google.com/philip.ammerman/ProposalForASolutionToTheGreekDebtCrisis 

Sixt Advertisement

I was disgusted and offended by the recent Sixt advertisement which shows a car in front of the Parthanon, with the caption: “Dear Greeks: Sixt accepts Drachma again!”


I wonder how Germans would feel if I advertised my consulting services with the line: “Dear Germans: Navigator accepts Reichsmarks again!”


Effective immediately, the companies and projects I am responsible for are terminating all supplier contracts with Sixt. I encourage others to do the same.

Voting for the Greek mid-term fiscal plan

The Parliamentary vote for the Greek mid-term fiscal plan occurs this evening. At stake are two key national policies: those of privatisation targets (and the use of funds) of up to EUR 50 bln by 2015, as well as a further EUR 28 bln (estimated) in austerity savings and tax increases over the same time frame.

Passing this vote is a key condition for the release of the EUR 12 bln fifth instalment of the original EUR 110 bail-out plan.

Unfortunately, the situation in Greece as well as internationally has now changed to the extent where it is impossible to speak of a rational debt restructuring process. It would appear that in its place, we have passed into the real of destructive politics, institutional rivalry, and unacceptable profit-making at the expense of Greece.

• The IMF and the Eurozone have now changed directions twice: in the week of 13 June, prior to the vote of confidence in the new Papandreou cabinet, it was indicating that the fifth instalment would be released. As soon as the Papandreou government won the vote of confidence, they reverted to the original strict conditionality, replete with dire warning of economic catastrophe.

• President Sarkozy of France is reported to have arranged a 30 year bond roll-over, in which 50% of the value will be lent at an annual rate of 5.5%, with a potential upside in the case of higher GDP growth. Of the remaining 50%, 20% will be cashed out (apparently by the bail-out package), while the other 30% will be invested in long-term, low interest bonds backed by an EFSF guarantee. While this is an good deal in principle (many details remain to be worked out), the fact is that the French government is negotiating directly with French creditors of Greece, apparently without any role for Greece in the negotiations. This goes against any principle of sovereign or private sector debt restructuring, and is a good indication of the lack of respect for basic principles with which the Greek debt issue is being handled.

• Passing the mid-term plan will undoubtedly increase the short term decline in GDP. In my original forecast, I was counting on a 4% decline in 2011 and a 2% decline in 2012: I believe the 2012 decline will increase to -4%. The austerity plan targets “easy” revenue increases and tax cuts, for instance by raising the price of heating oil to parity with that of gasoline. This measure alone will add between EUR 800 – 1,500 per year to the heating bill, which many lower- and middle-class families simply cannot afford. In contrast, there are insufficient measures to crack down on tax evasion within Greece and in terms of Greek accounts held abroad.

There is, however, one extremely positive aspect of the plan: it establishes that privatisation revenue can (and will) be used to purchase Greek debt. If this can be done on the open market, it will be a key element in any eventual debt work-out.

The key problems affecting the resolution of the Greek debt situation are unfortunately not resolved at the European level:

• Apart from the real interest rate loss implied in the French proposal, there is no systematic approach to managing the problem of the interest rate on Greek debt. Without such a measure, it is difficult to see how how the country can manage its total debt holdings. In most debt restructurings, the first thing to be addressed is the issue of interest rates. The fact that this has not been done by the IMF and Eurozone in the case of Greece is incomprehensible, if not criminal.
• Besides the interest rate issue, there has been no systematic attempt to deal with the second major problem, which is debt maturity. Greek sovereign debt had an average maturity of 7 years in 2010. This means that between 2011-2017, 100% of Greece’s EUR 340 bln debt expires and must be refinanced. It was impossible to conceive how this could be done in May 2010, when the original bail-out package was negotiated: it is equally impossible to see how this can be done today, in June 2011.

• Greece is still not negotiating as an equal partner. The fact that the new Minister of Finance, Evangelos Venizelos, was excluded from the discussion of the communiqué of the last Eurofin meeting is unacceptable. Greece, at the initiative of George Papandreou, has sacrificed any negotiating position vis-à-vis its creditors. As a result, European leaders have stepped in, transforming what should be a simple process into a political free-for-all. Their ability to manage the debt restructuring is a total shambles, to put it lightly.

• The IMF was invited into the Greek debt restructuring deal based on its vaunted ability to manage a sovereign debt restructuring. Yet its initial model was flawed. The IMF then forced the Eurozone to address the issue of Greek debt refinancing in 2012-2013, since it was obvious that Greece would not be returning to the markets any time soon. This has sparked the “negotiation” of a second bail-out, yet this second bail-out does not address the first two key issues mentioned: that of an interest rate freeze and an extension of Greek debt maturities.

No one can claim to have performed well in this crisis, and unfortunately it is far from being over. Absent an agreement to freeze interest rates, the revenues from the mid-term fiscal plan will be overwhelmed by the costs of interest to 2015. In this time, Greece will have to spend over EUR 75 bln on interest, which it should not have to do under a normal debt restructuring plan.

I believe the plan will be voted through tonight, at tremendous political cost. Yet even if the plan fails, it will be no more than both the Greek government, its Eurozone and IMF partners, and the banking sector deserve. It is difficult to think of a greater failure in terms of international policy than the handling to date of the Greek debt crisis.

© Philip Ammerman, 2011

Why the European Commission should not grant additional technical assistance funds to Greece

The European Commission President Manuel Barroso was recently quoted by press sources (Kathimerini: EU sweetens deal for Greece, pushes austerity, 25.06.2011) as outlining a new policy initiative in which Greece would receive an additional EUR 15 bln in aid to “boost growth and employment.” While this initiative is praiseworthy, it is exactly the wrong way to deal with the current crisis in Greece. EU aid has been among the major sources of corruption and patronage in Greece since its entry to the European Community in 1981. This corruption traditionally has two forms:

·       Development subsidies for companies or entrepreneurs are usually based on a kickback of 5-15% of the total fund value awarded. Ironically, this even includes the award of research and development funds: one senior official once informed me that a state research institute had been reduced to bribing the tender evaluation committee in the Ministry of Agriculture to receive EU funds. I don’t know many other countries where one state organisation has to bribe another to access EU funding.

·       Project support, such as infrastructure, IT development, or other works or goods procurement, is typically over-valued by 20-30%, with the balance being paid to the civil service and elected officials in charge of the project, and very often directly to the political parties in charge. This has been amply demonstrated in the Siemens bribery case by the Hellenic Parliament itself, but is also common knowledge among the contractors involved in EU-funded procurement of this kind. 

The fact that numerous EU audits have uncovered major irregularities and lead to demands for fund reimbursement should have been a warning to President Barroso why this approach might not work. It remains a mystery why additional audits are not undertaken: they are clearly needed.

Besides the obvious corruption, however, the use of EU funds for development carries with it a range of additional, insidious effects:

a.     The major projects are usually awarded to a small group of construction firms which are usually linked by cross-shareholdings to powerful media and ancillary interests (e.g. shipping, real estate development, retail operations). This small group of firms exercises unparalleled power in their specific sectors, and were famously referred to the former Prime Minister, Konstantinos Karamanlis, as a group of 4-5 davatzithes (pimps) during a ND party dinner in Monastiraki. Given that these firms now face major economic problems, and that they dominate the main broadcast and print media, it is impossible to see how any future aid could be efficiently and transparently disbursed.   

b.     These projects have a major distortionary impact. Besides the fact that they result in vastly over-priced projects (view my earlier post on the Hellenic Parliament’s million Euro website), they typically feature high capital expenditure which cannot easily be amortised in a normal market environment i.e. outside the distorted, high-cost world of Greek public procurement. In other words, the initial capex, distorted by the fact that it is “free”, leads to an investment which is often impossible to amortise at normal commercial operating terms. We see this most visibly in hospitals which have been expensively outfitted but where the Greek state cannot afford their operation. We also see this in the distorted terms of certain PPP-financed infrastructure projects, which encourage their operators to inflate their expenditure and engage in unnecessary further capital expenditure to justify their operating margins.

c.     Most funding of this sort will inevitably be channeled through state organisations. This will amplify the effects of patronage, lead to yet more losses due to waste and improper procurement, and will carry an unduly high administrative cost versus the actual benefits in “growth and development” delivered. In other words, it will be used to prop up a corrupt, nepotistic and inefficient public sector and its ancillary private sector contractors and consultants, delaying the inevitable work-out and restructuring which must follow.

d.     Finally, it is clear that the EUR 15 bln will not be disbursed immediately, but over 3-5 years, judging by previous technical assistance programmes. By that time, Greece will almost certainly be bankrupt once again, so the impact of this aid will be diminished.

In fact, there is a far easier solution for this EUR 15 bln which is apparently available: use the funds to purchase Greek debt on the open market. Greek 10-year bonds are trading at a 45% discount. This would immediately retire EUR 23.25 bln in debt, which is about 6.8% of the outstanding EUR 340 bln in debt. There would be no possibility of corruption in Greece, provided that the deal was handled through the European Financial Stability Facility, which is already in operation in Luxembourg. The transaction will have to be handled with the utmost secrecy if it is to be successful.

This would have a triple beneficial effect:

a.     EUR 15 bln could immediately retire EUR 23.25 bln in outstanding debt (45% discount)

b.     It would remove a further interest rate burden of at least EUR 1 bln per year

c.     It could, under some circumstances, partially reverse the negative sentiment affecting Greek debt.

Unfortunately, I see next to now chance that such a solution will be adopted. As with the European Investment Bank’s EUR 1 bln loan to the Greek Railways Organsiation, or the Eurozone’s insistence on a 5% initial interest rate on the EUR 110 bln bail-out, it is painfully clear that one of the greatest sources of policy error in terms of the Greek debt situation is the European Union itself.

The Greek debt problem can only be solved by a combination of policy initiatives which:

·       Replace short-term, commercial debt with longer-term debt (by longer term, I mean 20-25 years) at zero or concessionary interest rates (e.g. up to 2%)

·       Lead to greater rates of investment in Greece, either from foreign or domestic sources;

·       Radically streamline the Greek public sector while making it more productive in certain areas;

·       Implement a range of structural adjustments in justice, education in other sectors.

So far, the IMF and Eurozone have been replacing short-term debt with short-term debt, in many cases at higher interest rates, without taking any measures to deal with the cost of interest. This approach is doomed to failure.

© Philip Ammerman, 2011