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Monday, April 25, 2016

The Return Of The Past

The Greek bail-out debates are returning.

Frances Coppola writes in Forbes that "neither the European creditors nor the IMF are fundamentally interested in restoring Greece. What they disagree over is how much sustenance Greece needs to stay alive enough to pay them back. They are all vampires".

Mohamed A. El-Erian writes in Social Europe that "Greece can overcome its economic troubles only if it modifies its approach. Specifically, Greece and its creditors must agree to a credible debt-reduction program that would support the domestic reforms needed to re-invigorate Greece's growth engines and places its internal obligations in line with its capabilities".

The tenor of such commentaries is (and always has been) that it is the responsibility of others, primarily Greece's European partners, to put together a program and provide the money so that Greece returns to prosperity. El-Erian states that "Greece's European partners have nothing substantive to show for the billions of euros they have lent the country".

I am somewhat prejudiced by my banking career. I have never witnessed a situation where a borrower who hit a crisis and was kept afloat by lenders, and who didn't make it - where that borrower would accuse the lenders that they have nothing to show for all the money they lent. Normally, it is the party in trouble which feels primarily responsible for getting itself out of trouble and which is proud to show something for the money which it was lent.

Would Greece's problems be over as soon as its sovereign debt is reduced to the Maastricht level of 60% and tenors and interest rates are adjusted to market? 60% of GDP would represent a debt load of about 110 BEUR. Assuming market rates of 2-3%, that would represent an annual interest expense of 2,2 - 3,3 BEUR. If that were all that is needed to get Greece going again, I would strongly recommend to do that tomorrow.

I suppose the argument is that as soon as Greece's debt situation is regularized and as soon as the debt is viewed as sustainable, confidence will return and foreign investors will start making investments in Greece. Maybe yes, maybe no. I doubt it. Of course, foreign investors - or investors in general - are unlikely to invest when financial collapse appears imminent but the absence of fears of a financial collapse alone is unlikely to make foreign investors - or investors in general - invest money.

It simply cannot be the lack of money which explains the lack of investment. There is plenty of Greek financial wealth stashed away offshore which could - at least partially - return to Greece for investment. There are plenty of foreign companies which ought to be interested in taking part of a Greek economic rebound.

If I had to pick one catch-all cause for the lack of investment in Greece, I would call it the 'insufficient attractiveness of Greece as a place to do business'. By that I not only mean excessive rules, regulations, administration, tax laws, etc. etc. Above all, I mean an overall positive climate for private enterprise.

Churchill once said that "some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon". There may be many Greeks who see private enterprise the way Churchill did but they certainly don't seem to be in the government.

Thursday, April 7, 2016

Official And Unofficial Greek Economic Activity

Greece's official statistics do not accurately reflect the real state of economic activity in Greece. I have made this point on several occasions. Why do I think so? Because by all rational calculations, the Greek economy should have nearly collapsed in 2015 as a result of all the catastrophic moves of the Greek government. And yet - 2015 didn't turn out so bad, after all.

Back in the fall of last year, I wrote this article about the miracles of the Greek economy as I perceived them then. At a time when I thought sellers of balcony shades would probably go out of business, one of them explained to me that 2015 had been their best year in history so far. I could only conclude from that that a growing part of economic activity was moving on to a cash basis where it cannot be captured by analysts.

I have now come across an article published by a blog at the LSE titled: "Greece, the country with the half Drachma". This article describes very well what I had sensed by way of intuition. One key paragraph:

The result of the above actions was a de-facto disengagement of economic life with the domestic banking system. The economy adapted in an environment that strongly resembles that of the drachma of the 80s. Almost no one is going to a bank for a loan or to deposit cash, but only to pay everyday bills. The capital controls increased the electronic and card transactions, but only for the Euros that were locked in the banking system. The cash according to the Bank of Greece Eurosystem data (so called autonomous factors), outside the banking system only fell from a high of 50 billion in June 2015 to 48.5 billion in November. And this number is after 13 billion of tourist money (much of it in cash) entered Greece during that period. So there is significant part of the economy that now operates with these 50+ billion only in cash.

Wednesday, April 6, 2016

Panama Papers And Greece

400 journalists belonging to the International Consortium of Investigative Journalists (ICIJ) are reviewing 2,6 terabytes of data to track billions held in shell companies over almost 40 years. Every first and last name showing up among the data is automatically criminalized. Sensational news have already come out such as: the clique around President Putin is not perfectly flawless; Russian oligarchs have not necessarily built up all their wealth in an honest way; a FIFA executive may have been involved in corrupt deals; etc.

I have written extensively about anonymous offshore companies with regard to Greece. One such article is here. Mossfon, the Panamanian company whose records were hacked, is only one of very many players in the market for shell companies in tax havens. This article from The Economist of April 7, 2012 gives a rather good overview.

As one might surmise, there are shell companies and there are shell companies. There is hardly an Annual Report of an international corporation which doesn't list several shell companies under the section "ownership in subsidiaries". At the same time, there is probably not one single shady politician or businessman in the entire world who does not own a shell company somewhere.

I asked a friend of mine, an oil & gas lawyer in Texas, for his views on shell companies because he has extensive experience with them: virtually every project he manages is housed in one (or more) shell companies. And yet - they are all legitimate business ventures (saving taxes in a legal way is legitimate!). Here is his reply:

* Using offshore entities is the only intelligent way to invest abroad.
* First, you want to ring fence. If I have two concessions in Colombia, I set up two different Cayman Island entities. Each will hold a concession, either directly, or through a Colombian wholly owned entity. If I get in trouble with the Colombian government on one concession, I don’t want that trouble to bleed over to the other one.
* Many countries, like the U.S., have a tax imposed on the gain on the sale of stock.  If I sell the stock of my Colombian company to Exxon, I pay Colombian tax on any gain. If I sell the shares of my Cayman Island company, I pay no such tax.
* I may want to give my key employees incentives and bonus. If I do that through the Colombian entities, they have to pay tax on the income.
* Another reason is that no one likes the U.S. or U.K. law. I had a client who had a Delaware entity own its portion of two supergiant offshore Indonesian fields. After 30 years he decided to sell it, and the purchaser was English. The purchaser was scared to death of owning a U.S. company with all the chance of litigation and taxation in the U.S. even though the asset had nothing to do with the U.S. So a nanosecond after the purchase was done, the U.S. entity was redomiciled to the British Virgin Islands.
* To open up an entity is extremely expensive and time consuming. Our law firm went through all the traps. I had to give my passport, driver’s license, bar card, and utility statements. And then they checked the databanks to be sure that I was whom I thought. They had a local law firm come out to meet me in person to compare my picture to what I was giving them. Of course, once you go through that, you wouldn’t change law firms for the cost of going through that again.
* My client was a U.S. hedge fund. They checked out the principals up side and center. And anyone that was a director or had signing authority had to go through the same process I did.
* The law firm we used was U.K. based. My contact was an Eton and Oxford lawyer. He was out of Dubai (where I met him once) and he handled Cayman Islands accounts. 
* And when we opened a bank account, it was in the U.S. or London. We had to go through all the Patriot Act protocol to establish the source of funds.
* There was no tax advantage to this. When a U.S. company owns more than 50 percent of an offshore entity, the U.S. regards the entity as a controlled foreign corporation.
* Other countries don’t tax income earned outside the country. So a Bulgarian can own a Colombian entity and not pay Bulgarian tax on any income – or on income on interest on fund legally held abroad. So for them, having it a Cayman Islands entity rather than a Bulgarian entity makes sense.

As a lawyer, I’m furious that a hacker can take 2.3 terabytes of data, give it to one newspaper, which in turn spreads it around 100 newspapers, each of whom has lots of folks looking at it – all with impunity. My social security number, my passport, my driver’s license, my picture – everything that an identity thief needs – would be in front of those people. And I have no recourse. Is that supposed to be legal as well? I never opened an account with Mossack Fonseca. But if I had and I came across one of the Suddeutsche Zeitung reporters who had my data, I’d take out my gun and ...

So much for shell companies which are used in the context of legitimate businesses. For example, I would be surprised if any Greek shipowner owned a ship which is not housed in a shell company somewhere. Does that make it illegitimate? Absolutely not! Only when the beneficial owners of shell companies take pains to hide their identity can one assume that there is a likelihood of something illegitimate in the shell company.

It is perfectly legitimate for a Greek to transfer his assets abroad, particularly if he is worried about political stability in Greece and/or currency devaluation. The two questions are: is the source of this wealth legitimate and is the revenue on it taxed properly? My understanding is that Greek tax laws are rather clear about this: Greeks have to declare all their world-wide assets on the tax return as well as the income earned on them. If the purpose of the shell company is to hide one of the two (or rather: both), then one is safe to assume that there is something illegitimate.

As a matter of rule: no one takes major steps to hide something if it is legitimate.

Monday, April 4, 2016

Greece: On The Way Towards 800% Indebtedness?

Below is a baseline long-term fiscal scenario for Greece. It was put together in 2009 on the assumption that nothing would ever change. In that scenario, Greece's indebtedness would reach almost 800% of GDP by the 2050s.

Since the figures are very difficult to read, I link below the report from which they came. A very interesting report, by the way, and one wonders why its recommendations were never heeded.

IMF Country Report - Greece; August 2009

"Dear Christine!" --- "Dear Mr. Prime Minister!"

Here is the sequence of events leading up to the storm:

Transcript of recorded internal meeting (phone call) on March 19.
Letter from Alexis Tsipras to Christine Lagarde of April 2.
Letter from Christine Lagarde to Alexis Tsipras of April 3.

The Greek government may have justifiably found some of the content of the leaked internal IMF conversation offensive but the real slap in the face occurred at the top level: When you address a Head of Government as "Mr. Prime Minister" after he as addressed you as "Christine", you have really put the man in his place.

The whole issue is actually a tempest in a teapot. After every important meeting, after every important negotiation, each side has internal conversations as to where they stand. Such conversations are obviously not for the record and the language used in such conversations is obviously not always fit to print. Only utopists like Yanis Varoufakis argue that the world would be a better place if all such internal conversations which are not necessarily fit to print were to be made public.

I, too, was a bit ticked off when I read the protocol and saw how employees of an international institution would 'rule' over a sovereign country as though it was their own. But only after the violent reaction from the Greek side did it dawn on me that of all parties involved, the Greek side had the least to complain about. After all, the IMF employees evaluated strategies for loosening Greece's fiscal constraints by forcing a debt forgiveness on the EU, particularly on Germany. Whichever way I slice it, the employees wanted to make the IMF an ally of Greece and not its opponent.

The ultimate transparency which is being demanded by many good people of Europe these days could have major implications on mutual trust. The members of the Eurogroup will no longer have open and frank discussions when they have to fear that their comments are being recorded. They same applies to representatives of the Quadriga when they have to fear that every word they utter in private will show up in the newspapers the next day.

Regrettably, not having open and frank discussions will affect the quality of the outcome.