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Friday, January 20, 2017

Primary Surplus 2016: Ministry of Finance vs. Bank of Greece

If the numbers below are too small to read, one has to follow this link.

The above is the preliminary budget execution bulletin for 2016, as published by the Ministry of Finance. Whenever there is a table with many numbers, the first questions are: Where is the bottom line? Where are the numbers that matter?

The bottom line is the second line from the bottom where it says "State Budget Primary Balance". One has to hasten to add that this is NOT the (in)famous "primary balance" which is always cause for contestation between Greece and its creditors. It is "only" the primary balance of the "state", not of the "general government". The figures for the general government have not yet been published (they include, in addition to the state, local governments, social security funds and other non-consolidated items). For 2016, it can be expected that the "general government" will look even better than the "state" alone.

The bottom line says that the "state" recorded a primary surplus of 4,4 BEUR in 2016. In the previous year, in 2015, the equivalent number was 2,2 BEUR. The target for 2016 had been a primary surplus of 2,0 BEUR.

In short: the Greek state doubled its primary surplus from 2015 to 2016! And it exceeded the target by 1,2 BEUR!

Assuming a GDP of about 180 BEUR, the state's primary surplus represented 2,4% in 2016. The percentage for the general government can be expected to be even higher.

All of this would be fine and dandy if the Bank of Greece had not come out with the following press release on January 19, 2017 (i. e. yesterday):

"In January-December 2016, the central government cash balance recorded a deficit of €3,569 million, compared to a deficit of €3,359 million in the same period in 2015. During this period, ordinary budget revenue amounted to €48,941 million, compared to €45,607 million in the corresponding period of last year. Revenue of €43 million regarding Securities Markets Programme (SMP) income transfers from the Bank of Greece is excluded. Ordinary budget expenditure, including expenditure of about €3,850 million for the repayment of arrears, amounted to €51,143 million, from €48,043 million in January-December 2015."

Here is the table published by the Bank of Greece which shows a primary surplus in the state budget for 2016 of 1.948 MEUR, compared with a comparative figure for 2015 of 3.490 MEUR.

I am sure that there are convincing explanations why there is, in actual fact, no discrepancy between the figures, only between reporting formats but it would certainly be helpful to be informed about what these discrepancies/explanations are.

Friday, January 13, 2017

Foreign Investment - A Long Shot?

This rather pessimistic commentary by Alexis Papachelas of the Ekathimerini concludes with the following paragraph:

"Greece has become cheap, it has potential and a capable manpower; but in order to lure investors it will have to implement reforms and inspire confidence, and it will need a government that speaks the same language as investors."

There, in only one sentence, everything is said! I would only add: Greece also needs a society which sees the positive aspects of foreign investments.

The economic ingredients all speak in favor of Greece: yes, Greece has become rather cheap and, of course, Greece has a capable manpower and potential. So why are foreign investors not lining up to put their money into the Greek economy, into real investments instead of only financial speculations?

To blame it all on "those old-school leftists, revolting against every privatization and investment plan, by whom the Prime Minister is surrounded" is simplifying things. Yes, the PM's aides are "constantly trying to douse the flames that continue to erupt here and there. Perhaps it is even against the PM's political DNA, which makes him feel more at home in Havana or when promising handouts to the electorate." But even if there were a center-right government tomorrow, I am not sure that things would change radically overnight. Yes, there would be more visits and photo-op's with visiting potential foreign investors and a few of them might even put their money into projects which promise good short-term returns.

But will those potential investors really see Greece as a great place to do business in the longer term? Some of them, like Cosco, most certainly will because Greece offers them a long-term perspective (entry to Europe via the South-East) which is promising enough to outweigh any short-term hurdles and/or disappointments. But how about the regular non-European foreign investor who is screening European countries with a view of determining the best place to build his new plant? How about the European foreign investor who wants to take advantage of Greece's cheap labor, its capable manpower and its potential?

I have no doubt that the country's elites, political and otherwise, when visited by potential foreign investors, will express great interest, if not even enthusiasm about a potential investment. The question I have, however, is whether those elites really represent the general feelings among Greek society. Is Greek society really convinced that foreign investments can be a very good thing for the country? Or is there a general view that foreign investors, after all, are here for profit and the profit which they will take abroad is profit which, without them, would stay in Greece?

I think only real results would change any prejudices among Greek society, if at all. Only if there is a significant number of foreign investments which truly show what long term benefits they are for the Greek economy and for the prosperity of Greeks, only then is Greek society likely to give up any prejudices which there may be.

It's really a matter of education. As long as society feels that a most valuable train company is given away to Italians for a song; that the most profitable regional airports are given away to the Germans for nothing; in short: that this is a sell-out of valuable Greek assets to greedy foreigners; well, as long as that is the general feeling in society, foreign investment will never flourish.

Thursday, January 5, 2017

State Investment In Banks: Money Gone Up In Smoke?

My neighbor Yiannis, the theoretical Marxist, is furious. He has found out that most, if not all, of the 25 BEUR which the Greek state borrowed offshore in order to invest in Greek banks as part of the bank recapitalizations may turn out to be worthless. Let me clarify: only the investment may turn out to be worthless; the loans will continue to remain 100% obligations on the part of the Greek state.

Yiannis asks me two very simple questions: Where did that money go? And, as he suspects, if the money simply went up in smoke, why should Greek tax payers pay for it?

No money ever goes up in smoke; it only changes owners. But who are the new owners of that 25 BEUR which the Greek state is no longer owner of? That's where it gets a bit tricky.

The Greek state invested in banks, the value of which went towards zero and, in consequence, the value of the Greek state's investment also went towards zero. But who got that money?

Nobody got that money! The answer is that some parties who still have money today would no longer have that money if the Greek state had not invested the 25 BEUR. That's where the money is! Had the Greek state not invested the 25 BEUR, the 4 large Greek banks (and others) would have gone bankrupt and the creditors of those banks (bondholders, savers) would have lost a lot of money (in sum certainly more than the 25 BEUR which the state lost). Not to mention the collateral damage involved when the largest banks go bankrupt.

So I told Yiannis that he himself was one of the beneficiaries. Yes, as a tax payer he is now responsible for paying off that 25 BEUR in debt but, in exchange, the value of all his bank deposits remains in place.

Yiannis said he had no bank deposits. I told him he was out of luck.

Friday, December 30, 2016

Brussels And Greek Slot Machines!

Here is a good one to finish off the eventful year 2016. As the Ekathimerini reports:

"The European Commission has sent a letter to the government asking it not to implement a new regulation on the operation of video lottery terminals (VLTs), which OPAP has undertaken.

Dated December 21, the letter asks the government to forward its draft measures for the operation of the gaming market to Brussels and to freeze the application of the new VLT operation regulations, as the Internal Market Directorate-General argues the rules approved in October by the Greek Gaming Commission (EEEP) do not protect punters or society sufficiently."

Well, aren't we glad that Greek society is being protected by the EU Commission?!? With that kind of an efficient EU government, it can only be a question of time until Greece becomes sufficiently protected against illegal migration, etc.

Will Donald Trump Brand Germany As A Currency Manipulator?

A tweet by Yiannis Mouzakis drew my attention to an Analysis of Donald Trump's Economic Plan and a brief comment which was made on page 15 of that White Paper:

"A similar problem (of currency manipulation) exists because of the European Monetary Union. While the euro freely floats in international currency markets, this system deflates the German currency from where it would be if the German Deutschmark were still in existence.  In effect, the weakness of the southern European economies in the European Monetary Union holds the euro at a lower exchange rate than the Deutschmark would have as a freestanding currency. This is a major reason why the US has a large trade in goods deficit with Germany – $75 billion in 2015 – even though German wages are relatively high."

This issue is well know to many Europeans. The Southeners blame the North for having an exorbitant privilege and the Northeners tell the South that they knew what they were getting into when they joined the Eurozone. Both are right, in a sense, but neither side has a solution for the problem.

Now that Donald Trump will soon be President, this may all change in the near future. Trump has talked a lot about currency manipulators during his campaign, always with great passion and with promises for retaliative action, but his targets have been mostly China and Japan. Not once has he mentioned Germany but that was probably more by default (i. e. not knowing how the Eurozone works) rather than by intention.

An outsider to the Eurozone is probably certain that the Euro cannot be manipulated to the advantage of any one country because the truth is - it can't. However, it rests in the structure of the Eurozone that the Euro becomes too strong a currency for some countries (i. e. Greece) and too weak a currency for others (i. e. Germany).

Trump will probably tweet immediately that Germany should urgently revalue and France, Italy & Co. should devalue. This will be followed by another tweet where he says that his advisors have now explained to him that neither can Germany revalue nor can France, Italy & Co. devalue. At that point, Trump has probably realized that the Euro is a huge problem.

"Donald Trump has promised to use his Treasury Department to brand any country that manipulates its currency a 'currency manipulator'. This will allow the US to impose defensive and countervailing tariffs if the currency manipulation does not cease" - states the White Paper. Well, this is going to be an interesting situation!

Will Trump's Treasury Department brand Germany as a currency manipulator? It really can't because Germany isn't. But one can certainly brand Germany as the beneficiary of currency distortion which comes as a result of the structure of the Eurozone.

It would be an irony of history if the elitist defenders of the Euro were to be told by an American con man to stop pretending and to start fixing the structure of the Eurozone! That'd be something interesting to watch!

Tuesday, December 20, 2016

From Beer To Mountain Tea

The Financial Times calls this article about two Greek companies "Hangover cure and clutching at straws drive Greece's export sales". One of the companies produces a low-calorie soft drink derived from Mountain Tea ("Tuvunu"). The other one ("Matrix Pack") makes polypropylene drinking straws. Both are small but allegedly very successful companies.

Tuvunu caught my attention because it was mentioned that they belong to the Macedonian-Thrace Brewery from Komotini, makers of the Vergina Beer. A brewery in Komotini? That triggered a bell. Something in the deep corners of my memory told me that I had read something about this before. And then I remembered.

In January 2011, the NYT had published an article titled "What's broken in Greece? Ask an entrepreneur!" It told the story of Demetri Politopoulos, a Greek American from Manhattan who had this idea of returning to his home country in order to start a brewery in Northern Greece. That was the plan. The result was that he lost over 5 MUSD in the first years of operation.

I remember that, when reading the article, I felt very sorry for the man because I felt sure that it was only a question of time until he would be forced to cut his losses and return to the US as a poorer man. So much greater my joy to read that apparently he has succeeded, Greek intricacies notwithstanding! Congratulations!

Friday, December 16, 2016

Uproar About A 616 MEUR Christmas Present

According to the Ministry of Finance's State Budget Execution Report, Greece's primary surplus for the period January-November 2016 was budgeted at 3.553 MEUR and it came out at 7.449 MEUR. That's a surplus in the surplus of 2.896 MEUR, or 110%. Greece has now decided to take 616 MEUR out of that unplanned surplus in the surplus of 2.896 MEUR, or 21% thereof, for a one-time payment to recipients of low pensions.

In the world of business, this would be called a bonus. Management exceeded expectations by 110% and the board decides that management is deserving of a bonus in the amount of 21% of the excess. In the world of investment banking, management would not be satisfied with only 21%.

If the EU had been smart, it would have anticipated events and acted pro-actively instead of reacting later. That the State Budget would have a significant surplus over the planned surplus has been in the coming for months. And one does not have to be a prophet to predict that, when there are unexpected surpluses, voices will come out claiming a piece of the action. Particularly when there are battered pensioners. Particularly at Christmas time.

If the EU had been smart, it would have proposed to Greece something like the following: "Your State Budget has seen a terrific development this year (that would be the praise part). We think that a portion of this unexpected surplus should go to the most needy in your society instead of your creditors (that would have been the bonus part). We propose 25% thereof."

The way things happened, the EU has fallen into a trap laid out by PM Tsipras. He did the right thing (reward the most needy in society at Christmas time) but he did it in such a way that the EU would have to violently object to it (by not consulting them beforehand and, thereby, violating the agreements). The net result of this: it is now Tsipras who is the human politician to whom the most needy in society are more important than greedy creditors. And it is the EU who are the bad guys. Well done, EU!

Below is an article which I had written about the distribution of the primary surplus 4 years ago.