Philip Atticus

Looting and Burning in Athens: Nothing to do with the Austerity Protests

2012-02-14T13:22:00.001+02:00

Based on press reports last night and today, some information on the looting and burning of property in Athens follows.

There were between 1,000 – 1,500 people, primarily young individuals operating in small groups, who participated in the looting. They were prepared; they had hoods and face masks, weapons and tools for breaking and entering. There are between 40-45 buildings or stores that have been destroyed by a combination of looting and burning. Others have been damaged less extensively: they were looted, or their facades were damaged, but they were not burned. The police report that over 500 molotov cocktails were thrown last night.

Owners of stores, including the Attiko theatre, report that they were first asked for bribes not to have their customers attacked. In the case of the Attiko, the owner apparently made one payment, and his customers left undisturbed. However, another group of looters started burning another entrance to the theatre. The entire building was finally burnt to the ground.

The police managed to make between 72 and 74 arrests (it is not clear if this arrest number pertains to the looting/burning or to subsequent street fights with the police). Most of the people arrested have a prior arrest record for similar incidents.

According to Kostas Pretenderis of Mega TV, “70 of the 74 people belong to a single political party”, without naming the party.

The staging point for the attacks was the Law School of the University of Athens. The premises were occupied on Thursday. On Friday, the administrative director of the Law School emailed the Rector of the University that the Law School was under occupation, and requested that all legal methods be taken to ensure their eviction.

The University Rector sent a request to the Police by mail to the Police headquarters. According to an article reported by Skai’s website today, the prosecution reports that two letters were received yesterday, 13.02.2012, sent by postαl delivery, signed by the Rector. The first states that the Law School will end its classes between 10-12 February and requests the guarding of the premises. The second, dated 10.02.12, reports the occupation of the Law School, by unknown students, and that authorities of the Law School have no access to the building. However, it also reports that there are no reports of damage. The letters are dated 13.02.2012, i.e. after the looting in Athens.

Adonis Georgiades, the ex-LAOS MP, reported yesterday that according to Article 3 of the ammendments to the law on university asylum, there is no longer any need for a specific request, or a request in a specific format, by university authorities to the police. In other words, the email sent on Friday was sufficient to prompt an investigation. Such an investigation never took place.

Skai reported today that in the wreckage of the occupied Law School, professors found a strong smell of gasoline in one room, and elements used to start fires.

A common complaint is that individuals arrested are frequently released by the legal authorities within any meaningful prosecution or fine. They are certainly not jailed. Several of those arrested for violence (including the attempt to burn the Municipality of Athens) are well-known figures; others are children of well-known figures.

As usual, not a single political figure has resigned to take responsibility for the events.

Conclusions

It is extremely important in the first instance to disassociate the looting which occurred with the protests against the austerity and government reform plan passed on Sunday evening. These two events have become conflated in many international media sources, which reported on Sunday and Monday headlines to the effect that “Athens burns while the Parliament votes on austerity”.

As with many similar events, it is clear that the violence was carried out by a relatively small group of individuals who were not directly related with the main political organisers of the protests. This was confirmed once again not only by political leaders on TV, but by first-hand accounts I have from unionists and participants in the marches.

However, it is also impossible to speak of a total separation between the mob’s organisation and political forces. There is abundant evidence from these and other events that several key organisers are linked directly and indirectly to certain political parties. They are linked directly, in that several key looters arrested are long-standing, senior members in the youth or university student branches of these parties. They are linked indirectly in that these members have been shown through arrest records, telephone intercepts, and university political activity to be large-scale organisers of a political nihilism which is linked to criminal activity. This activity involves drug distribution and sales of counterfeit software and DVDs, often within university premises.

A false political ideology provides cover for illegal activity; the illegal activity in turn is justified by this ideology, i.e. the “struggle against the state” and the usual rhetorical suspects.

The question as to why the police and legal authorities cannot or choose not to launch a full-scale legal prosecution of these individuals and networks is unknown. In theory, they have every legal right to do so. We can surmise, however, that there are multiple reasons:

a. Objectively, there are no resources to do so. This was the case even before the recent austerity cutbacks. The Greek court system faces a massive backlog of criminal cases, a penal code which does not include sufficiently deterrent punishment for civil crimes, and overcrowded prisons. Even if these individuals were arrested, they would soon be allowed to go free, either because they would not be prosecuted, or because they would be allowed to buy off their sentence.

b. Subjectively, there have been many instances where the police and the prosecution has been prevented from acting due to direct and indirect political interference. The direct interference occurs when politicians intervene in the arrest process to protect their constituents. The indirect interference is far more discouraging: the police knows that it is vastly outnumbered in certain areas of Athens. There is a tacit agreement on “go” and “no go” areas, where the police will simply not intervene. If they do crack down, the implicit threat is that police will then be targeted. This has already happened in the past on several occasions.

This same threat, incidentally, has been in force for years against university administrators and professors. Although universities technically now have full control over their campus security, in reality they cannot enforce this. They don’t have the financial resources to hire private security forces. Nor can they cannot rely on the police or the legal system. One well-known professor once told me that after every occupation, he knows which store he has to go to in Monastiraki to buy back his stolen computer hard drive.

As a result, it’s clear that the university staff must turn a blind eye to illegal behaviour, if they are to safeguard their own lives and property.

This post deals with the sad reality of a certain nexus of events, people and institutions in Greece today. On the one hand, we have a policing and legal system which has, since the late 1980s, been set up to protect and serve a political elite rather than enforce the laws of the land. On the other hand, we have a growing number of disaffected youth with no serious job prospects who turn instead to political utopianism and crime.

The result of this is seen in events which occur every week in Athens. Once in a while, the enormity of one event – burning and looting 45 buildings – becomes so large as to be impossible to ignore. But for every large even, there are thousands of small ones which illustrate how the system works.

If you want to see what the reality is, go to Exarchia Square on a Friday night, and walk down Stournari Street to Patission Avenue past the Metsoveio University building.

This reality is not going to go away, and has nothing to do with austerity votes or reform. It’s been there since the late 1980s, growing each year and becoming institutionalised. And I have yet to see any serious solutions for it.

Finding the Loch Ness Monster: The Continuing Search for Higher Education Reform inGreece

December 19, 2010

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The Mother of all Carry Trades (ii)

2012-02-13T10:44:00.003+02:00

In case you are still wondering how things work in terms of ECB liquidity, read today’s article on Bloomberg: Draghi $158B Free Lunch Boosts Bank Profits.

Banks are benefiting from a European Central Bank subsidy that could reach 120 billion euros ($158 billion), enough to pay every bonus at financial firms in London for the next 24 years at today’s levels.

Royal Bank of Scotland Group Plc, BNP Paribas SA (BNP) and Societe Generale SA are among more than 500 banks that took 489 billion euros of three-year loans from the Frankfurt-based ECB at a December auction. The loans carry a 1 percent annual interest rate, less than a quarter of the 4.3 percent average yield on euro-denominated senior unsecured bank debt of all maturities in the past year, according to Commerzbank AG.

With borrowing estimated to hit a record 1.2 trillion euros after a second auction later this month, banks may save 120 billion euros over three years. That could boost 2012 profit by about 10 percent for lenders in Italy and Spain, according to estimates by Morgan Stanley.

“This is very much a free lunch,” said Arnd Schaefer, an economist at WestLB AG in Dusseldorf, Germany. “Banks can get money for just 1 percent and then lend it on for much more. That’s pretty good.”

The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared. Any bank in the region can borrow an unlimited amount, provided it pledges eligible collateral. Lenders won’t face curbs on bonuses or dividends.

Don’t you love ECB’s version of quantitative easing? And this was only the first round - there's a second round planned for the end of February.

Angry yet?

Related Posts

The Mother of All Carry Trades

January 14, 2012

Explaining the Carry Trade

January 15, 2012

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A New Era of Political Fragmentation in Greece

2012-02-13T08:13:00.000+02:00

Monday morning dawns, and with it the absolute fragmentation of the present Greek political system has begun.

A total of 45 MPs of LAOS (2), PASOK (22) and New Democracy (21) voted against the new memorandum, and have therefore been expelled from their respective parties.

This leaves both New Democracy and PASOK fatally weakened before the elections, which based on previous agreement must be held by the end of April 2012.

Although there is no guarantee that the expulsions will not be reversed in time for the elections, it is certain that lasting damage to both major parties have been done. Together with popular discontent against the austerity measures, it is highly likely that any imminent election will result in a coalition of at least two, and probably four, parties.

What is uncertain is which side of the political spectrum these will be on. One scenario is for a government led by New Democracy, supported by LAOS, the Democratic Alliance led by Dora Bakoyianni, and any other centrist or right-wing independents. This scenario is highly uncertain due to bad blood between Samaras and Bakoyianni over the succession battle at New Democracy will have to be put aside in order for a cooperation to take place.

A governing coalition of the left is equally uncertain due to the same factors. Although the four centre- and extreme-left parties collectively dominate the polls, differences between some, namely the Communist Party, makes cooperation difficult or impossible.

Two outcomes of this Troika-forced memorandum are clear:

a. If Antonis Samaras leads a next government, it is highly likely that the civil service and the parties of the extreme left will engage in a campaign of active civil disobedience. This will be characterised by violent strikes and occupations, and will fatally slow any implementation of public sector reform and privatisation. State-owned companies or parastatals such as the Public Power Company (DEH) will be nearly impossible to privatise.

b. It will be almost impossible for any Greek government to pass any equivalent austerity legislation in the future. We should not forget that Greece had, before last night, already passed three broad austerity packages (in May 2010, July 2011 and October 2011) as conditions of the first and second bail-out packages. Last night was the fourth. The first three were only possible due to party discipline at PASOK: all other parties voted against the packages. Last night, the only way this law was passed was through the same process: party discipline, and an unprecedented 45 expulsions.

The fact that any future governing coalition will have less of a margin for error, and will therefore have further difficulties in maintaining the discipline needed for a vote, effectively means that passing further such laws will be impossible.

As a result, one could conclude that there is only one solution for an interim government to manage the crisis: extend the life of the Papademos government for another 2 years.

It remains to be seen in the coming days whether Antonis Samaras will take the plunge and push for elections as planned in April, or whether he will suppress his personal ambition and continue the coalition government.

It also remains to be seen whether such an option would be voted by the remaining PASOK and New Democracy members even if it were raised.

In any case, Greece has clearly arrived at a new and dangerous stage of absolute political fragmentation. This outcome is a clear result of Troika policy, which has rammed through austerity bills without regard for either the narrow or broad political capacity of the country. In terms of "reform" strategy, this is a deal killer.

Led by Germany, the Eurozone creditors and the IMF have managed to kill any political stability in this country, and with it any hope that real structural reforms will ever be implemented.

Through a combination of theoretical economic policies which show little regard for basic financial practise or the Greek reality, and through their own double-dealing rhetoric in which they temper domestic political considerations by trashing Greece to their domestic electorates, they've managed to turn both the Greek people and the political system against them, and against "reform".

What happens next is unknown.

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Greece passes the new Memorandum

2012-02-13T01:02:00.002+02:00

Voting has started on the latest bail-out memorandum in the Greek Parliament. Prime Minister Papademos just gave a reasoned yet stirring speech that was greeted with applause. MPs are voting “yes to all” or “no to all”.

So far, the main PASOK deputies – Papoutsis, Diamantopoulou – have voted yes to all.

Dora Dora Bakoyianni voted yes. Procopis Pavlopoulos voted yes. Kaklamanis voted yes.

Some big names from PASOK voted no: Vasso Papandreou, Louka Katselli, Milena Apostolaki and Marileza Xenogiannakopoulou voted no. Eliza Vozenberg voted no. All the far-left parties voted no.

Few defections. The yes votes are overwhelming.

George Karatzaferis, the LAOS leader, is absent – no vote. Only Georgiades and Vorides from LAOS voted yes: all other LAOS deputies were absent. There are about 20 defections from ND and 20 defections from PASOK. All "no" voters are to be disbarred from each party, according to speeches made by George Papandreou and Antonis Samaras earlier tonight.

Mega TV is running the vote on a right-hand screen, and on the left, footage of the rioters in Constitutions Square, right below the Plaza Hotel, on the corner where the Public store is located. It seem impossible that 30-40 young hooligans can’t be caught.

The new memorandum passes – most likely with about 200 votes.

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Athens Burning (Again)

2012-02-12T23:35:00.000+02:00

Athens is burning once again on the eve of the latest austerity vote. Organised gangs of anarchists and hooligans, many of them likely belonging to the extreme left, have attacked over 20 buildings in the centre of Athens, setting several of them on fire. The Municipality was attacked but was saved. Several other historical and neoclassical buildings are on fire. Several retail stores, including at least one Starbuck’s, have been trashed.

Needless to say, these events have been condemned by all political parties, with the possible exception of SYRIZA, who claimed this was actually a "provocation" by ultra right-wing elements. What is certain is that this violence has nothing to do with the vast majority of citizens and residents of Greece.

The Greek Parliament continues its debate on the new austerity package prior to voting later tonight. Most observers, including myself, believe that the bill will pass with at least 175-180 votes.

The Prime Minister, Loukas Papademos, is expected to restructure the cabinet tomorrow to replace the departed Ministers of LAOS as well as potentially several other ones.

Assuming the bill passes, the government will have a nearly impossible task of meeting its own deadlines for some elements in the new package.

Losing the Plot on Greek Austerity

2012-02-10T22:16:00.002+02:00

I have the impression European leaders have lost the plot when it comes to Greece.

Greek unemployment hit 20.8% in November 2011, or just over 1 million people in a labour force of five million. Real unemployment is much higher, as the government is funding approximately 450,000 labour positions with subsidies and training grants.

Eurostat revealed that 27% of Greeks are classified as living in poverty.

The leader of the Troika’s monitoring mission, Poul Thomsen, was quoted in The Guardian on February 1^st as stating that fiscal adjustment had reached its limits:

Poul Thomsen, a senior International Monetary Fund official who oversees the organisation's mission in Greece, also insists that, contrary to popular belief, Athens has achieved a lot since the eruption of the debt crisis in December 2009.

"We will have to slow down a little as far as fiscal adjustment is concerned and move faster – much faster – with the reforms needed to modernise the economy," he told the Greek daily Kathimerini, adding that the policy shift would be "reflected" in the conditions foreign lenders attached to a new rescue programme for Athens.

In an extraordinary departure from the script the IMF has followed to date, the Danish official, who is also in charge of the IMF programme in place in Portugal, acknowledged there was a "limit" to what society could endure.

"While Greece certainly will have to continue to reduce its fiscal deficits, we want to ensure – considering that social tolerance and political support have their limitations – that we strike the right balance between fiscal consolidation and reforms," he said. As such, the IMF had cautioned against "an excessive pace" of fiscal reduction.

It is all the more confusing, therefore, to see the latest demands of the Troika (of which Mr. Poulsen is the lead negotiator), which are almost exclusively all fiscal austerity: reductions in the minimum wage, reductions in supplemental pensions, further reductions in government spending.

Hannes Swoboda, leader of the Socialist and Democratic Group in the European Parliament, sent a letter to European Commission President Jose Manuel Baroso, in which he wrote:

"I am writing to express the grave concern of the S&D Group over the terms of conditionality imposed by EU negotiators on Greece as the price of approval of the latest tranche of loan funds.

"Representatives of the Commission seem to have conducted themselves on the basis of the unfounded assertion that Greece has not made sufficient efforts to restore fiscal stability and have imposed conditions which have less to do with economics than with ideology.

"It is the ruinous policies of extreme austerity imposed on Greece, which have driven it into ever deeper recession.

"The S&D Group believes that the punitive and ideological approach of the Troika to the Greek sovereignty problem is a gross betrayal of the European social model and of the solidarity which is a founding principle of the Union."

Yesterday evening, Eurozone financial ministers gave Greece the cold shoulder, despite the fact that the government has just agreed to unprecedented austerity measures which will exacerbate the depression—austerity measures which had been demanded by the Troika.

I watched a late news conference Thursday night following the Eurozone meeting with great disbelief. Jean-Claude Juncker insisted on “implementation”, by which he meant passing of a law agreeing to the austerity. But the whole problem in Greece is that laws are passed which aren’t fully implemented. Ollie Rehn didn’t do much better, making vague promises on how the European Commission wants to both increase monitoring, and help Greece with structural reforms. There’s been almost no sign of anything practical so far, and certainly nothing which can counterbalance the deleterious effects of Troika austerity.

The behaviour was so insulting, that it led today to the resignation of LAOS from the coalition government. George Karatzaferis aptly said:

"The creditors are asking for 40 years of submission,” Karatzaferis said. “Greece will not give itself up. Greece can survive outside the EU but cannot survive under a German boot.”

I am afraid that the more this situation continues, the more I agree with both George Karatzaferis and Alexa Papariga, head of the Communist Party of Greece. Although these two leaders represent the extremes, it's a sign of just how badly things must be when I, a financially-minded moderate, agree with them.

I have never seen a simple financial restructuring handled this badly. It’s yet another indication that the great European experiment is probably coming to an end. Anybody who believes in “European values” after this process must be living in the twilight zone.

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Greek Austerity Negotiations Continue

2012-02-07T09:14:00.002+02:00

The Greek government’s political leaders were unable to reach an agreement last night over the renewed austerity measures demanded by the Troika as a condition for the second bail-out package. Pressure mounted after Angela Merkel indicated in a press conference in Paris that time was running out:

"I honestly can't understand how additional days will help. Time is of the essence. A lot is at stake for the entire euro zone."

Yet a review of the negotiations indicate that while some of the problem lies with Greece’s leaders, a lot of the fault lies with the Troika and its own negotiating process. A bit of background should serve to illustrate this problem.

The European leaders and the IMF have known since June 2011 that a second Greek bail-out was required. This was formalised at the summit meeting of October 26^th, which resulted in a formal announcement that a second bail-out package of EUR 130 billion would be granted on the condition that an agreement on Private Sector Involvement (PSI) and a further austerity package would be reached.

After nearly a one-month delay due to the replacement of George Papandreou as Prime Minister, the new Greek government started work. While PSI negotiations were already underway, it should be noted that the final agreement will only be announced on February 15^th. A large part of the delay to date has been due to these negotiations, which were effectively taken over by Germany in January. In other words, Greece is not solely responsible for this delay.

A further problem is that of the Troika’s monitoring mission and how it works. This mission implements a quarterly review of the Greek “reform” programme (so far there has been very little real structural reform, but a lot of fiscal tinkering, which is why I use quotations marks).

The last quarterly review took place in mid- to-late January, and determined that Greece was far from meeting several key reform targets, including public sector cutbacks, liberalisation of certain professions, closing public sector organisations, and privatisation.

This resulted in the presentation of new demands for austerity, which were also mandated by certain Eurozone countries. Yet these demands were made approximately 2 weeks ago. Certain of these demands are set to lead Greece to an even deeper recession, and include:

· Elimination of the 13^th and 14^th wage in the private sector

· Reduction of the minimum wage by 20%

· Reduction of supplemental pensions by 15-20%

· Reduction of public sector headcount by 15,000 workers in 2012.

It is interesting to note that according to Minister of Interior Reppas, this last demand was made this past Friday, February 3^rd.

I don’t know of many countries where the political leaders, confronted by such demands in a 2-week timeframe, would have done a better job. It is both hypocritical and unhelpful for Angela Merkel and Nicholas Sarkozy to hold a press conference and demand immediate concessions, given the magnitude of the changes requested, as well as the way in which they have been requested.

None of this, however, should excuse the Greek government from an almost criminal lack of urgency and prioritisation in terms of its policy planning and choices. However, we should reflect why this is taking place:

· The original bail-out of EUR 110 billion occurred in May 2010, already delayed by four crucial months (due to German dithering), which worsened the credit climate permanently.

· The original bail-out was wrongly defined and made no provision for interest costs. It mandated a face-value repayment of privately-held Greek government bonds, at the time when the private sector was discounting these by 35-40%.

· The original bail-out package envisioned that Greece would continue to incur deficits to 2015, while returning to the markets in 2012. At the same time, it deliberately avoided the consolidation of Greek government debt, which occurred in November 2010. This caused a 3% rise in Greek debt, effectively destroying the credibility of the Greek programme. These problems were widely known, and have been extensively reported in this blog.

· Structural “reforms” in 2010 led to a reduction in the public sector workforce of 82,000-85,000 people, together with a restructuring of the regional public administration, a reduction in public sector salaries and all wages above EUR 1,400 by 15-20%, an increase in the retirement age, and the effective end of early retirement in the public and private sectors.

· These “reforms” led to a recession in 2010, with a decline in real GDP of 3.5% and a deficit of 10.6% of GDP. The recession grew in 2011, with a forecast real GDP decline of 5.5%. Inflation in 2010 was 4.7%; in 2011 it is forecast at 3.1%. This is largely due to the impact of indirect taxes on fuel and value-added tax. Greece is therefore in an inflationary depression.

· In mid-2011, it was clear that the Greek structural adjustment programme was losing traction. The Troika forced through a second round of austerity in July 2011, known as the Mid-Term Fiscal Adjustment Programme. This included the highly improbable target of achieving EUR 50 billion in privatisation income to 2015, together with a further EUR 28 billion in austerity savings by 2015. Yet it made no provision for interest income or the fact that Greek government bonds were being sold at a major discount. A quick analysis shows that accrued interest between 2011-2015 at a minimum rate of 4% would amount to EUR 76 billion, or just under the EUR 78 billion which was to be gained by privatisation and austerity.

· This second round of austerity illustrated in a nutshell the abysmal failure of Troika policy-making. In Greece and elsewhere, it was painfully apparent that EUR 50 billion in privatisation in 5 years in the middle of a global financial crisis was going to amount to one result: a massive give-away of public property, which at the end would barely pay interest income, and which could not be used to purchase Greek debt on the open market at a discounted rate. Despite this, European leaders pig-headedly demanded this reform, and then expressed indignation when it could not be met. To soften the blow, an initial private sector involvement of 21% of net present value of Greek government bonds held by the private banking and financial sector was proposed.

· Greece has actually tried to privatise a number of assets in 2011, including the government’s stake in the Athens International Airport. Most of these failed, primarily due to a lack of finance for such deals, and uncertainty regarding Greece.

· By October 2011, it was clear that further efforts were needed. European leaders forced through a PSI (private sector involvement) of 50%, in exchange for a further EUR 130 billion in bank recapitalisation and debt refinancing. A further condition for this was large-scale, further austerity. When the Greek prime minister tried to put this to referendum, he was called to Cannes, and forced to retire by his own party, as well as Nicholas Sarkozy and Angela Merkel.

· It is ironic to note that this same prime minister, in an apparent bid to gain approval for the first bail-out, agreed to buy 6 French FREMM frigates, 40 French Rafale fighters, several German submarines and 120 German Leopard tanks prior to the first bail-out. This was estimated to cost over EUR 10 billion, at a time when Greece could not afford to pay salaries or hospital costs. We should be under no illusions as to the “solidarity” of the Eurozone in this case.

· The October 2011 agreement was prefaced by the Finnish demand for a sovereign guarantee. This created at least a month of further useless negotiations which led nowhere.

· In November 2011, a new government was formed, led by Prime Minister Lukas Papademos, but comprising mainly political figures from PASOK, New Democracy and LAOS. The record so far has been much of the same, with the government continually responding to Troika demands, with very little time to deal with anything strategic or sustainable.

The year 2011 closed with unemployment just under 20%, a deficit of approximately 9-10% of GDP, and a real GDP decline of approximately 4%. Under these conditions, and taking into account the impact on wages and pensions from the latest austerity demanded, it is almost impossible that Greece will meet either the privatisation target in 2012, or the deficit target.

In all this debate about “reform”, I have not heard of or seen a single pro-growth proposal, except for the very dubious “Helios” proposal, which is based on an incomplete feasibility study and a high government involvement. Without growth, no amount of austerity will result in Greece meeting it’s “targets”, which are themselves rapidly-moving targets.

The entire record of the Eurozone and IMF intervention in Greece has been disastrous. European policy-makers have compounded error after error; the Greek political system has clearly not helped.

Once again, we are in a situation where external sovereign lenders are threatening Greece with default or Eurozone exit if further “reforms” are not enacted. These lenders don’t appear to have the slightest understanding of basic macro and microeconomics, let alone the situation as regards “competitiveness” in Greece.

Related Posts

European Cacophony on Greece Continues

8 September 2011

Continued Risks in the Greek Reform Programme

22 August 2011

Why the Next Greek Bail-out is Doomed to Fail

20 June 2011

Proposal for a Solution to the Greek Debt Crisis

May 2011

The Unrealistic Prospects for Greece’s EUR 50 billion Privatisation Programme

18 February 2011

Pending Confirmation of Higher Greek Debt

25 October 2010

The Next Greek Debt Discovery

15 February 2010

Forecast of Greek Debt to 2015

8 December 2009

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Yes, but…

2012-02-06T08:51:00.001+02:00

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.

Navigator Consulting Group

www.navigator-consulting.com

Has Angela Merkel gone stark raving mad?

2012-01-30T21:38:00.000+02:00

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.

Navigator Consulting Group

www.navigator-consulting.com

German proposals for conditionality on a second Greek bail-out

2012-01-29T21:56:00.002+02:00

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.

Navigator Consulting Group

www.navigator-consulting.com

Theodoros Angelopoulos

2012-01-25T07:33:00.001+02:00

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

Navigator Consulting Group

www.navigator-consulting.com

Waiting for Godot

2012-01-23T09:23:00.000+02:00

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.

Navigator Consulting Group

www.navigator-consulting.com

Reading Plutarch in Geraka

2012-01-18T23:23:00.000+02:00

One of the most appropriate passages I’ve ever read about Greece, ancient, Byzantine or modern, is the Introduction to the Penguin Classic edition of Plutarch: Makers of Rome, translated by Ian Scott-Kilvert (1965). I came across this at Princeton in 1989, and it has stayed with me ever since. I take the liberty of transcribing part of the Introduction of the 1965 edition here.

************

Two themes dominate the cycle of Plutarch’s Roman Lives, the valour and tenacity of the Roman people in war, and their genius for political compromise. The creators of the pax Romana were first of all children of Mars, and so Plutarch depicts them, often defeated by never subdued, and in the end triumphant over one dreaded enemy after another, the Volscians, the Gauls, Pyrrhus and his elephants, the Carthaginians and their matchless cavalry. Lastly the army moves into politics, the enemies of the Republic become her own legions led by their contending generals, and the clash of arms is only finally stilled when, after the victory of Actium, Octavius Caesar symbolically closes the ever-open doors of the temple of Janus.

This brings us to Plutarch’s second motif, the problems of statecraft and the struggle for power between patricians and plebeian, the Senate and the popular leaders. It is here, for all the ruthlessness of Roman political life, that Plutarch pays tribute to the political instinct, the ability to close ranks in a moment of crisis, which eventually raised this tribal confederation of Italian farmers to the mastery of the world – and the absence of which proved the ruin of the Greek city-state.

The tragedy of Greece and the triumph of Rome form the political poles of the Lives viewed as a whole, and Plutarch passes judgment on his fellow countrymen in a memorably passage from The Life of Flaminius:

For if we except the victory of Marathon, the sea-fight at Salamis, the battles of Plataea and Thermopylae, and Cimon’s exploits at Eurymedon…Greece fought all her battles against and to enslave herself. Every one of her trophies stands as a memorial to her own shame and misfortune, and she owed her ruin above all to the misdeeds and the rivalries of her leaders.

The peculiarly Roman virtues as Plutarch sees them – best exemplified perhaps in the careers of Fabius, Marcellus and Sertorius – include not only courage and the power of leadership, but also generosity and forbearance, the qualities which create harmony between rulers and ruled. But the real source of Roman supremacy and object of Plutarch’s admiration is “the idea of Rome”, a spiritual heritage undreamed of in Greece, which at moments of supreme crisis seems to descend upon the city’s fallible representatives, to work through them and to shape their ends.

******

Today, in the midst of a wrenching economic crisis which illuminates the self-destructive tendencies of Greece’s political elite and of many segments of her population, these words seem more relevant than ever.

Ironically enough, Plutarch hailed from Chaeronea in Boeotia, today an otherwise unremarkable village near Levadia we drive by while en route to Delphi. I have often wondered why Chaeronea’s most famous son is not honoured with a museum, or even a simple sign along the road, and why Chaeronea is not on any tourist routes.

Another brief transcription from the summary:

*******

Plutarch was one of the last of the classical Greek historians. He was born in about AD 45 at Chaeronea in Boeotia, where he later had a schook, and in middle age took up a priesthood at near-bye Delphi.

When Nero visited Greece in AD 66, Plutarch was a student at Athens. He became a philosopher, a man capable of lecturing and discussing on many learned topics, and wrote a large number of essays and dialogues on philosophical, scientific and literary subjects (the Moralia). He adopted the philosophic standpoint of a Platonist, and frequently attacked both Stoics and Epicureans. He wrote his historical works somewhat late in life, and his Parallel Lives of eminent Greeks and Romans is probably his best-known and most influential work (their translation by North was used by Shakespeare as a source for his Roman plays).

*******

Some additional resources:

MIT Classics Archive (complete Dryden translation of Plutarch’s Lives): http://classics.mit.edu/Browse/browse-Plutarch.html

Stanford Encyclopedia of Philosophy: http://plato.stanford.edu/entries/plutarch/

Livius: http://www.livius.org/pi-pm/plutarch/plutarch.htm

Wikipedia: http://en.wikipedia.org/wiki/Plutarch

America, Greece and a World on Fire

2012-01-16T23:05:00.001+02:00

Gideon Rachman wrote a truly excellent article in the Financial Times today entitled America, Greece and a World on Fire. The article reviews the role of the United States in declaring the Truman Doctrine in 1947 as a result of the Greek Civil War, which led to the Marshall Plan for Europe. It contrasts the fact that at present, European leadership of the Greek debt crisis has proved extremely disappointing.

An extract is below: please check the link for the full article.

“It took an economic crisis in Greece in 1947 to force the United States to assume world leadership. Now, more than 60 years later, another Greek crisis is showing what the world feels like without US leadership.

In February 1947 the British government – bankrupted by the war and beset by a harsh winter – told America that it could no longer afford to aid Greece, which was on the brink of economic collapse and civil war. A British diplomatic cable at the time recorded a belief in Washington that “no time must be lost in plucking the torch of world leadership from our hands”.

President Truman went before Congress and requested $400m in aid for Greece, pledging that America would now “support free peoples who are resisting attempted subjugation”. A few weeks later, the US announced the Marshall Plan – a huge programme of financial aid, aimed at stabilising the whole of western Europe.

The contrast between then and now is stark. Once again, an economic crisis that began in Greece is threatening Europe. But this time there is no question of America assuming the central role in the management of the crisis.”

America, Greece and a World on Fire

Financial Times – 16 January 2012

The Troika, the Reform Programme and the Missing Labour Reserve

2012-01-15T23:06:00.002+02:00

The other news from Greece this past week was the fact that the phantom labour reserve programme was officially shelved.

Minister of Administrative Reform Dimitris Reppas announced on Tuesday, 10 January that the labour reserve policy “bordered on the absurd and the ridiculous.” This policy, designed to place 30,000 public sector workers in a 12-month “labour reserve” at 60% of their pay, was designed under former Prime Minister George Papandreou as a means of avoiding, or at least minimizing the impact, of public sector cutbacks.

Minister Reppas further stated that firings of public sector personnel were not on his agenda. As quoted by Kathimerini’s English edition:

“We did not expect anything significant from a fiscal aspect and on the other hand there was the danger of public administration being unable to operate because of the loss of key personnel,” he said.

At the same time, Greece has clearly committed to downsizing the public sector by 150,000 workers by 2015.

So far, it is estimated by various sources that up to 10,000 public sector workers were placed in the “labour reserve” in 2011. Other sources claim that in fact many of these people claimed early retirement. Yet other sources say that the number of people placed in the reserve were in fact far less – on the order of 1,500 – 2,000 people.

While I share certain misgivings as to the efficiency of the labour reserve scheme, it is hard to underestimate just how much of an operational and public relations disaster this is for the Greek government.

On the one hand, Greece has committed to the labour reserve scheme since early 2011. This is the first step of a far larger public sector cutback.

Yet on the other hand, Minister Reppas is on public record disparaging the entire scheme, and abandoning it.

This clearly indicates that PASOK is still not behind the “reform” effort it has put it signature to, and indeed, has for the most part crafted. And apparently, Prime Minister Papademos is unable to enforce any sort of collective discipline on the matter.

Yet the commitments were made. If they were not the right commitments, they should have been refused at the time of their agreement. Not agreed to, and then rejected over one year later. This is otherwise known as hypocrisy.

With the Troika visiting Athens, I expect one or more of the following scenarios to unfold in the next few weeks:

a. There is a strong chance that the Troika will break off the monitoring visit over lack of progress, repeating the scenario seen in August/September 2011. This will create yet another delay, exacerbated by the delay in agreeing to the PSI conditions.

b. Prime Minister Papademos will force the restructuring the cabinet, removing certain “deep PASOK” ministers and installing “technocrats” in their place.

c. Prime Minister Papademos threatens to resign, or resigns, on the lack of support for his premiership, and for the agreements that Greece itself has signed and agreed to implement. An election is then held, creating yet another self-destructive round of politicking and delay.

The self-destructive tendencies of the Greek political class should be manifest to everyone. Unfortunately, they threaten to drag everyone else in Greece down with them.

Related Post:

Public Sector Cutbacks and Political Paralysis in Greece

December 19, 2011

Navigator Consulting Group

www.navigator-consulting.com

Explaining the Carry Trade

2012-01-15T15:43:00.000+02:00

I received several comments on yesterday’s post that the concept of the carry trade was either unknown, or too complicated to understand. Apologies for this: I’ll try to explain this in simpler terms here.

In the currency carry trade, an investor takes out a loan in a stable currency at a low interest rate. For years, the Japanese Yen was the main source of such borrowing.

The investor then converts these funds into an investment in another, higher-interest currency or deposit account. His/her benefit is the margin between the two interest rates, less any transaction fees or exchange rate losses

Let’s take an example: I borrow EUR 1 million in Japanese Yen at an annual interest rate of 1%.

I take this amount and invest it with the Bank of Cyprus, which is offering 1-year deposit rates of 5%.

At the end of the year, I’ve gained EUR 1,050,000 (or EUR 50,000 of interest), less capital gains tax in Cyprus. I have to re-pay the loan in Yen, which had a rate of 1%, so I have to repay EUR 1,010,000, less any currency exchange losses.

My profit for 1 year is a little less than EUR 40,000.

We have a similar carry trade going on right now with low-cost European Central Bank loans. In Cyprus, for instance, a bank can loan money from the ECB at 1%, and lend the money onward to a company at 7-8%. It can do the same by lending to the Italian government at 7%, if it wants a higher risk. It can lend to consumers via visa card interest rates of 12-14%.

My point is not to minimize the risk of sovereign lending, which is mounting*. My point is that banks benefit from 1% repo lending rates for 3-year loans from the ECB, while the large majority of citizens in the Eurozone typically pay far higher rates.

If the objective were to have banks by government bonds using a share of this ECB funding, it would be far better for the ECB to lend directly to governments, cutting out the banking middleman. This “standard” quantitative easing would send a stronger signal to financial markets and would eventually lead to lower interest rates (although it would also lead to political risk and potentially higher inflation and/or a weakening Euro).

Given that the ECB is ultimately guaranteed by the central banks of the Eurozone central banking system, it seems incredible that private citizens in the Eurozone are essentially guaranteeing the expansion of the ECB’s balance sheet, so that the ECB lends to banks, which in turn either sit on the money (credit expansion has slowed everywhere), or are supposed to “recycle” this money into government bonds.

This will result in outsize profits for the private banking sector. There are also simpler work-arounds to getting the ECB or the national central banks to buy government bonds or provide working capital to companies, which is what this whole process is supposed to result it.

* It is interesting to note that while banks borrowed EUR 498 billion in late December, in early January they had nearly the same amount on deposit with the European Central Bank, in an apparent “flight to safety”.

Related Posts

The Mother of All Carry Trades

January 14, 2012

Navigator Consulting Group

www.navigator-consulting.com

The Mother of all Carry Trades

2012-01-14T12:23:00.000+02:00

The ECB’s decision to lend EUR 498 billion at an average rate of 1% for 3 years to European banks is turning into the mother of all carry trades.

The unspoken premise behind these loans was that banks would use part of these loans to re-invest in sovereign debt. As Bloomberg stated

Italian two-year notes rose for a third day and Spanish securities rallied on speculation the European Central Bank’s provision of three-year loans is boosting demand for the two nations’ debt.

Given that recent Italian and Spanish bond auction rates exceeded 6%, this amounts to a margin of just under 5% for banks which took out ECB loans and re-lent to these two governments.

The Standard & Poor’s downgrade of 9 Eurozone countries yesterday evening, among them France and Italy, raises sovereign interest costs still further. This comes on the heels of a successful Italian bond auction last week

Italy issued 12 billion euros of Treasury bills, meeting its target as its borrowing costs plunged. The Rome-based Treasury auctioned 8.5 billion euros one-year bills at a rate of 2.735 percent, down from 5.952 percent at the last auction.

With Italy now downgraded to BBB+, we can expect another spike in interest costs next week.

All this has been financed by the European Central Bank and the Eurozone central banks. According to Reuters

Due to the generous liquidity provision and a bond-buying programme, the balance sheet of the ECB and euro zone national central banks has ballooned by more than 600 billion euros to 2.688 trillion in the last four months.

It is extremely doubtful whether the European Union’s citizens are aware of what this means. The ECB, in an effort to solve the banking and sovereign liquidity and solvency crises, has expanded quantitative easing (QE) of a very different sort. In “standard” QE, the [national] central bank “expands its balance sheet” and buys the bonds of its national government directly.

The ECB, however, is prevented by its charter from doing so. As such, it can only intervene on the secondary market, in this case by loaning money to banks, hoping that the banks will in turn loan money to governments.

But what does this mean in terms of costs? A standard, national central bank would lend to Italy at a rate of 2-3%, driving sovereign lending costs downward. Under current legislation, the ECB is forced to “recycle” the loan at 1% through a bank, which lends onward to Italy at a substantially higher rate. Add a rating agency downgrade and a liquidity crisis into the mix, and the bank soon gains a 4-5% margin.

This exposes (once again) the flaw in the design of the European currency, as well as the risks in pooling sovereignty in a global world.

This also means that the democratic deficit and moral hazard are increasing to unprecedented levels. There has been no public referendum on whether or not the European Central Bank should deliberately enrich the banking sector through what amounts to a massive expansion of cheap credit, which is ultimately borne by the European taxpayer.

Ironically, while public sector rates will increase, we can also expect a declining Euro currency value, which may result in higher inflation in some countries and segments. (The decline in consumer income due to public sector austerity will probably offset this inflationary trend).

It remains to be seen when the Tea Party will emerge in Europe, but I cannot imagine that the mainstream political parties in most countries can continue to remain unscathed in light of what we are seeing. While few European voters appear to realize what’s happening, it is only a question of time before they do.

Navigator Consulting Group

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Athens - A Little Great City

2012-01-10T15:37:00.001+02:00

Athens I The Little Great City from emmanouil papadopoulos on Vimeo.

Congratulations to Emmanouil Papadopoulos on this fantastic clip.

The European Debt Crisis in 2012

2012-01-08T13:49:00.002+02:00

The year 2012 will be critical to the resolution of a number of economic issues, primarily in Europe. Unfortunately, it is highly likely that whatever solutions will be found will be very temporary in nature, and will address symptoms rather than root causes. At least in Europe, there is critical awareness that these issues will have to—at some point—be resolved. In the United States or Japan, where much the same problems exist, the recognition of even the symptoms of the problem does not appear to have reached a societal critical mass.

The headlines in Europe will continue to be dominated by the need to address two critical issues: the refinancing of sovereign debt, and the inability of the banking system to do so in parallel with private sector obligations and their own recapitalisation needs.

Unfortunately, the relatively simple process of refinancing is exacerbated by the normal political fragmentation and duplicity, but also by electoral interests. The example of Greece, where a caretaker Prime Minister had to once again implore his cabinet for cooperation and real progress, is indicative. Yet the same paralysis is in effect in Spain, Italy, France, Belgium and even Germany.

As a result, we can a “crise du mois”, a monthly crisis, or perhaps even a crise du jour, in the Eurozone each month in 2012. In Greece, the crisis has already been planned, given the need to refinance EUR 15 bln of bonds in March, and with the Troika already indicating that the first bail-out installment plan will be delayed by 3 months. Either Greece will have to raise short-term funds via high-interest treasury bills (as it did in December to stave off default), or it will have to raid its bank stabilisation fund, to reach this amount.

The problems in Italy are far higher: Italy needs to refinance EUR 300 billion in 2012, with about half of this occurring in the first six months. Total Eurozone refinancing needs are estimated by Citigroup at EUR 1.1 billion in 2012.

So far, both France and the EFSF have been able to complete bond issues in the past week, but for very low amounts and with lower debt covers. Italy and Spain return to the markets in the week of January 9^th and thereafter. The real test will occur in January and February.

In December, a long-expected scenario materialised as the European Central Bank lent nearly EUR 500 billion in 3-year, low-interest loans to European banks. Together with its limited interventions in sovereign finance, this was enough to close December without a meltdown, which is something most desperate bankers were looking for. Yet it is unlikely to persist into 2012. If it does, it will require a massive expansion of the ECB’s balance sheet, which at some point will exceed the limits of credibility.

The Eurozone system will be tested, possibly to the breaking point, in the next 3-4 months. Only non-sovereign lending by the ECB, the IMF and possibly the EFSF remain to save the situation. The breaking point will be illustrated by events:

· At least two failed Eurozone national bond auction, meaning debt cover ratios below 50%

· Sustained yields above 7% for Spain and Italy

· A downgrade of two or more Eurozone countries, placing the EFSF’s rating in jeopardy.

These events will have inevitable consequences, chief of which will be a financial panic. To avoid this, it is likely that the seven “grand bargain” conditions I mentioned in my post of December 2^nd will be put into effect, namely:

1. Extending ECB lending as well as maturity terms to banks. This would require quantitative easing for the private sector by the ECB, and also extending maturities from 1 year to possibly 5 years.

2. As part of such an agreement, banks agree to repurchase a certain share of Eurozone sovereign debt, most likely in the range of 60-65% of total outstanding debt.

3. The IMF steps in with a formal austerity programme for Italy and Spain, enabling them to refinance part of their needs using ECB-IMF resources. It is likely that IMF-ECB resources of at least EUR 200-250 billion will be needed.

4. The ECB is given limited authority to continue secondary market sovereign bond repurchases, perhaps by another EUR 100-150 billion.

5. The banks agree to participate in the European Financial Stability Facility (EFSF) capital increase, perhaps to EUR 800 billion. This adds about EUR 400 billion to the fund, which is then used to repurchase sovereign bonds as well as possibly bank refinancing.

6. The Eurozone adopts much stricter rules on the public finances of its member states. It is not impossible that a "new Eurozone" emerges.

7. The European Banking Association (EBA) delays its core capital increase, or alternatively allows an exemption for central bank guarantees or ECB credit lines. It is difficult to see exactly how this would work, but some solution will no doubt be found.

Conditions 1 and 4 have already been implemented in whole or in part, and will almost certainly be extended.

Again, it is worthwhile to emphasize that these “solutions” address the symptoms of the problem, not the root causes. These root causes are familiar, and include:

· A paradigm shift in the economic model of the “West”, from a producer of goods and services, to a consumer of goods and services using loan finance. This has in turn been further exacerbated by the implementation of unrealistic free trade agreements which have destroyed any vestige of competitiveness in many manufacturing segments.

· Excessive reliance on a few consumption-based economic sectors such as retail, catering, tourism, finance and the still over-valued real estate/property sector.

· Demographic decline, exacerbated (or “leveraged”) by the implied or legal acceptance of millions of low-paid immigrants who can no longer be accommodated under prevailing economic conditions.

· A burgeoning public sector, which is based on the direct provision of services and future benefits (such as pensions) and which can no longer be maintained.

It remains to be seen whether the policy recommendations we see made at the European or national levels will be sufficient to address these root causes. I do not believe they will. In general, European elected officials are using first generation policy tools to fight what amounts to third generation policy problems. It’s a bit like giving the captain of the Titanic a teaspoon to bail out his 46,326-tonne vessel after it hit the iceberg.

There are very few countries in Europe today that have unlocked a “golden mean” for managing their economic competitiveness, and unfortunately this number is declining, because of Eurozone and EU obligations, because of declining national and international economic conditions, or because their own societies are ageing.

As a result, I am extremely bearish on 2012, although it is possible a short-term compromise is reached which enables the Eurozone to keep ticking over long enough. It will be necessary for everyone, whether a company or an individual investor or wage-earner, to prepare for far worse trading conditions than 2011.

Related Posts

Toward a Grand Deal on Bank Refinancing and Sovereign Loans

December 2, 2011

The End of Leverage

November 25, 2011

Navigator Consulting Group

www.navigator-consulting.com

A Greek Tragedy in Five Acts

2012-01-02T13:27:00.000+02:00

The Financial Times has come up with an absolutely hilarious opener to 2012. Happy New Year to all!
______________________________________________________________________

ATHENS. The spotlight opens on George Papandreou, who is at home in bed, tossing in his sleep.

Papandreou (waking up): Great gods! Will these nights never end? Will daylight never come? I heard the cock crow hours ago, but my indolent and totally corrupt people are still snoring away! Curses on this debt crisis! Curses on Pasok! I can’t even sack my own public servants.

The spotlight switches to the top floor of Papandreou’s home and reveals the Troika of Creditors, who are armed with iPads and studying a pile of dusty Greek ledgers.

First Creditor: It really is quite remarkable. Until last month more than 1,000 dead pensioners were receiving payments from Greece’s biggest pension fund.

Second Creditor: And what about this? The Greek state considers 637 types of job to be so arduous that the people doing them get early retirement.

Read the complete article here.

Cypriot Bank Exposure to the Greek Debt Crisis

2011-12-30T15:28:00.000+02:00

Cyprus and its three main banks were downgraded in November 2011 by the three major credit ratings agencies, in no small part due to their exposure to the Greek debt crisis as well as the declining situation in Cyprus. This downgrade was followed by the publication of the banking sector’s January - September 2011 financial results, which revealed a write-down of nearly EUR 1.5 billion of Greek government bonds (GGB) by the Bank of Cyprus, Marfin Laiki and Hellenic Bank, as well as rising impairments due to non-performing loans (NPL) in the private sector.

The downgrade can be summarised as stemming from a declining macroeconomic and fiscal situation in Cyprus itself, as well as Cypriot exposure to Greece:

a. Cypriot banks are exposed to Greek government bonds (GGB), which must be written down by approximately 50% of their value in line with the private sector involvement (PSI) agreement of October 26th, 2011.

b. Cypriot banks are exposed to non-performing Greek private sector loans (Greek NPL). According to Moody’s, up to 20% of all Greek private sector loans may be classified as non-performing in the next 18 months.

c. Cypriot banks are also increasingly exposed to non-performing Cypriot private sector loans (Cypriot NPL), which have been hard-hit by the declining situation in the real Cypriot economy.

A further potential exposure is seen in the uncertainty surrounding the second Greek bail-out package, which is seen as essential to avoiding a hard default by Greece. A little-known fact of the first bail-out is that any country encountering economic difficulties, expressed in a higher bond yield, may opt out of further refinancing for Greece. With Italian and Spanish bond prices having breached 7% in December 2011, it is increasingly possible that neither these countries nor France will be in a position to raise money for Greece on the open market. This could yet lead to a potentially catastrophic situation.

This article explores the actual exposure of the Cypriot banking system to Greece, and reviews the next steps in the Greek and wider European debt crises.

View the complete article on the Navigator Consulting Group site (no registration required).

The Greek Green Energy Bubble – II

2011-12-30T14:55:00.003+02:00

The first confirmation of the coming pricing problems in Greek energy sector became visible yesterday with the publication of the first official proposal on energy price increases by the Hellenic Ministry of Environment and Energy (YPEKA) and the Public Power Corporation(PPC).

These amount to an annual increase of 9.2% for the PPC’s own domestic generation cost plus 3% for the renewable energy cost.

While this is far below the initial suggestion of the Energy Regulatory Authority’s (RAE) 16% increase, as well as PPC’s 20% increase, the proposed increases have caused renewed public outrage.

The President of the Greek Chamber of Commerce and Industry, Mr. Dimitris Asimakopoulos, stated on SKAI TV that energy costs today are higher than social insurance costs in most enterprises.

It must also be remembered that the total cost PPC bill is magnified several times by additional taxes on either the base electricity price, or by the number of square meters of the property being supplied with energy. These include:

· A municipal tax

· A special tax on property

· A tax for the state television and radio broadcaster, ERT

· Value-Added Tax (VAT)

These indirect taxes routinely increase the electricity bill by at least 2x the price of electricity.

As such, the PPC bill is an example of failed government policy, in that it has transformed what should be a relatively simple billing exercise from an “independent power producer” into a focal point for public outrage and resistance. It is also an example of a massive public policy failure to properly plan for flexible feed-in tariffs for renewable energy, together with the lack of any real limitations on licensing of renewable energy installations.

This also points to the fact that Greece is now in the throes of an inflationary depression. GDP will fall by approximately 5-6% in 2011; inflation is currently running at 2.5% monthly, and higher on an annualised basis, primarily due to new indirect taxes. Together with official unemployment of about 18%, it is painfully clear that the choices in public policy mandated by the Troika and the government have failed, at least in the short term, and will lead to further severe economic damage in 2012.

The Coming Crash of the Renewable Energy Bubble in Greece

December 10, 2011

Navigator Consulting Group