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Saturday, May 20, 2017

A Plea For Greek Elites!

I had never heard of Mr. Aristides Alafouzos before. Like many foreigners, I have practically zero knowledge of the Greek elite (political, economic, social or otherwise) except for those who are in the media all the time. Whether one likes the term 'elite' or not, every society, even a communist one, produces its own elites. Some are artificial elites (i. e. hereditary or appointed), others are natural ones (meritocracy, charisma, etc.).

I learned about Mr. Alafouzos through two obituaries in the Ekathimerini (here and here). It seems clear that Mr. Alafouzos was one of the natural elites.

There is a German saying which cannot well be translated into English: "Wie der Herr, so das Gescherr". One translation might be: "Like master, like man."

Henry Ford II was known to be a CEO who would slap his top executives in their faces (almost literally). During his reign at the Ford Motor Company, managers all the way down to the supervisory level were known to slap their subordinates in their faces (literally speaking).

Other CEOs are of the gentleman kind and the culture in their companies will undoubtedly be gentleman-like. In fact, culture is very much influenced by the elites.

Based on the two obituaries, I have no doubt that Mr. Alafouzos formed and shaped a culture in his companies which corresponded to his own values. While he is now dead, cultures tend to survive for quite some time.

I have always wondered what kind of a society Greek society would be if the elites of Greek society (of the Alafouzos kind) came more to the forefront, played a more significant role in society. Some of the things we see these days on TV, like physical fights in the Greek parliament, are clearly the worst of Greek society.

Why can't we see more of the best of Greek society?

Tuesday, May 9, 2017

The Gut Says: "Greece Is On The Rebound!"

My wife and I always spend springs (typically 2 months) and autumns (up to 4 months) in Greece. I admit that the microcosm in which we move may not be typical of all of Greece but it is always the same microcosm: a mixture of big-city life in Thessaloniki, visits to villages, trips to tourist areas in Chalkidiki, travels throughout Northern Greece, etc. This microcosm may not reflect Greece overall but it serves well as a basis to measure trends. And here is my surprise for you:

Greece is on the rebound, no doubt about it!!! I first had that feeling last spring and it intensified last fall. After having been here for 3 weeks this spring, I am now convinced. I sense a level of positivism if not optimism which I haven't sensed since 2010. In the villages, I see 1-person shopmen who suffered terribly in the past and who now say that they have quite a bit of work. Some of them even in the construction industry. For my car service, I used to get an appointment at Hyundai with a week. Last spring it was already 10 days and this time around it was a little over 2 weeks. I see traffic jams in down-town Thessaloniki which I haven't seen since 2010, and this at gasoline prices 30-40% higher than in Central Europe! When I look out at the Thessaloniki harbor, I now see up to 10 freighters loading and/or unloading freight. I could go on and on. If the official stats do not show that, it's because the official stats miss a lot of reality.

Barring unforeseen surprises, Greece will sign a deal with creditors soon and it is likely to start benefiting from the ECB's QE. Today, I even read that they are thinking about placing a bond in the markets next June. If some of that (or even all of that) really happens, there will be a lot of positive news about Greece. And positive news will feed upon itself, particularly when a record tourist season reinforces such positive news every day. The steady decline in Greek bond yields will also be a continuous reinforcer of the good news. Financial investors will start wondering whether perhaps they might be missing the bottom of the crisis to make good deals. That, too, could feed upon itself.

I have no facts to offer but my gut says that Greece is on the rebound. The key variable for increased economic activity in Greece is the net inflow of foreign capital. Foreign capital does not always flow on the basis of hard facts. Oftentimes, if not even very often, it is the 'leading steers' that make the herds move. It would only take a few 'leading steers' to set a trend in motion. Who knows? We may soon see the financial herds turning around and 'discovering Greece' anew!?!

Mind you, I don't believe that Greece today is a much better place to do business than 7 years ago. But once the herds start moving, they never pay attention to such details. Neither do I think that the bottom of Greek society will benefit all that much from the herds. As Adam Smith said: "The problem with fiat money is that it rewards the minority that can handle money." I recently read that about 1,5 million people in Greece are without income and assets. I don't think miracles will happen for them.

But there will be a fairly large section of society which will benefit from the renewed bandwagon. As I said, I don't think it will be a new start in a fully reformed country. Not at all!

But I think that there is a good chance that we will soon see a renewed herd movement. Essentially a repeat of the past. When money comes into Greece, Greece does well. The better Greece seems to do, the more money comes into Greece. And I am fairly certain that the herd will start moving again soon.

Until the next 'sudden stop' happens...

Trade Balance: Bank Of Greece vs. ELSTAT

Much publicity has been given to the fact that ELSTAT reported an increase of 36,2% in Greece's trade deficit in March of this year (versus March 2016). The numbers are distorted by oil and ship transactions but even without those, the trade deficit increased 6,6%.

While this is interesting information, it always reminds me of a question which I have been trying to get an answer to for years, albeit without success, namely: why do ELSTAT and the Bank of Greece report trade figures which differ quite substantially, sometimes even enormously. For example, for 2016, ELSTAT reported a trade deficit of 18.705,0 MEUR whereas the corresponding figure from the Bank of Greece was 16.581,0 MEUR. A difference of that magnitude can certainly be considered as enormous.

Will I ever get an answer to this question?

Monday, April 24, 2017

Thessaloniki's Private Equity Port

It was announced that 67% of the Thessaloniki Port Authority has been sold by the Hellenic Republic Asset Development Fund to a socalled 'German-led consortium'. The lead member of this consortium is "Deutsche Invest Equity Partners GmbH", joined by the French "Terminal Link SAS" and "Belterra Investments Ltd." of Cyprus.

The financials of the transaction sound rather attractive: the total value of the deal is said to be 1,1 BEUR, of which 232 MEUR are for the acquisition of the shares. The remainder consists of mandatory investments, license fees, dividends, etc.

Deutsche Invest is a Munich-based private equity fund. Its website doesn't reveal very much information. The internet information about Terminal Link is even less. And no information can be found about Belterra (other than the fact that it is domiciled in Cyprus).

The above consortium won the deal over two other bidders: the International Container Terminal Services, a Philippines-based powerhouse in the field of container ports and terminals worldwide, and P&O Steam Navigation Company, the 168-year old bastion of the British shipping industry which now belongs to Dubai Ports World, a giant in the industry.

Since I have no background information on this transaction, I can only comment on it based on the brief announcement about the transaction in the media.

Here is, on one hand, a Munich-based private equity firm whose website lists a total staff of 5, and two powerhouses in the industry on the other. That is in and by itself highly unusual. The Deutsche Invest consortium won the deal because it had submitted the highest bid. If that was the only criterion of the seller, the HRADF, it was a rather short-sighted criterion.

A private equity firm has only one strategic interest when making investments: to sell the investment to someone else within a foreseeable time frame, seldom more than 5 years. Obviously at a good profit. That's neither good or bad; it's the business model of a private equity firm. Everything that is done during the limited period of ownership, every decision which is taken has one single priority - to increase the value of the investment for resale. More often than not, the methods applied in making the bride presentable for the next wedding are somewhat questionable.

Not in my wildest imagination can I come up with any explanation as to why the HRADF would have chosen a private equity firm over seemingly interesting strategic investors. Sorry, I can come up with one: maximize short-term profit. The only problem with that is: when privatizing state assets, the maximization of short-term profits should be the least priority of all. Far greater priorities would be the strategic importance of the buyer, the potential for know-how transfer, etc.

I have written on many occasions that I consider Cosco, the investor in the Piraeus port, as the prototype of an ideal foreign investor for Greece. Based on what I know so far, The Deutsche Invest consortium seems to be the prototype of the foreign investor that Greece should stay away from.

ADDENDUM per April 25, 2017
According to an article in DER SPIEGEL, the person behind Belterra of Cyprus is Ivan Savvidis, the Greek-Russian dealmaker of questionable renown. That rounds out the picture quite nicely: a small private equity firm which wants to cash-out reasonably soon; a questionable Greek-Russian miniature oligarch who obviously aims at collateral benefits and two global players in the industry who wonder about the ways and means of the Greek government.

ADDENDUM #2
I have just learned that behind the French "Terminal Link SAS" is the French Group CMA CGM Group. That also seems to be a powerhouse in the industry so that I have to take some of my above criticism back. The question would still be: why does such an industry powerhouse need the services of a small Munich-based private equity firm and a questionable Greek-Russian dealmaker?

Friday, April 21, 2017

On One Hand... And On The Other...

My return to Greece after a 4-month absence coincided with 2 articles which nicely sum up what the 'Greek problem' is all about. The first one was the following comment in the Ekathimerini:

"Foreign investors and international markets are awaiting tangible results from Athens in order to be convinced that the country is, finally, turning a corner, and that something is moving after years of frustration. Their wait has been a long one and the economic pressure on the country has been unbearable. But the deals regarding the old airport, and the new one as well, could do the trick. However, if foreign investors are to be convinced of Athens’s commitment to change, it will need to make some bold decisions that will allow the country to circumvent, and essentially neutralize, the naysayers within the administration and within the state that are doing everything in their power to stand in the way of the growth Greece so desperately needs. The problem is that those opposed to progress are determined as ever to keep standing in the way."

And the second article was written by Bill Rhodes, the doyen of sovereign financial crises. I had written about Rhodes on several occasions in the early years of this blog when I lamented that no one was listening to his advice (had they listened, the crisis would have been resolved within 2-3 years, in my opinion). The gist of Rhodes' message is summarized in the following sentence:

"Debt relief really means softening the terms on interest rate payments on the outstanding debt as the Greeks have no requirement for many years to come to start repaying principle."

We have now observed a song-and-dance around the above two positions between Greece and its creditors for months and it is likely that it will continue for even more months. Bill Rhodes once said exasperatingly: "We are in a sense of gamemanship here and everything is being played out in the public rather than getting in a room, something that I was accustomed to for 25 years with so many debt restructurings around the world, and to say 'Let's get it done!'"

In case of doubt, one is well advised to take the advice of those who have the most experience and the best track record. Between the Eurogroup, the IMF and Bill Rhodes, there is only one party which has a good track record; an excellent one, for that matter! And that party is not the Eurogroup nor the IMF!

As a starting point, it would be helpful to do some public educating that there are various kinds of debt relief. The key available elements are: forgiveness of principal, extension of maturities and reduction of interest. Greece so far has had a bit of all but never in a truly consequential manner. And the big mistake is that many understand debt relief to be a forgiveness of principal. A forgiveness of principal of official debt is totally out of the question in a year with several important European elections.

And - a forgiveness of principal is really not necessary because principal debt only matters to the extent that it carries interest and has maturities for repayment. If, for example, interest is brought down to close to zero and if maturities are extended into the next century, debt assumes the character of equity.

So far, the IMF has taken a huge profit on its 'help for Greece' because its lending margins are in the area of 2-3% and, as a super senior lender, it faces no credit loss. With the Eurogroup, the situation is a bit different because they now have a large portion of their loans on zero interest and they certainly face the risk of credit loss sooner or later. Neither is the IMF's 'help for Greece' recognizable with their maturity structure because all their loans mature in the foreseeable future. The Eurogroup, on the other hand, has already extended some maturities substantially.

Perhaps it is wise to have the IMF in there with maturities in the foreseeable future because, that way, one always has some leverage over the borrower. However, there would have to be some explanation why the IMF is not lowering its interest rate to the lowest they have ever charged a country because, as they have stated, they have never had a country in as bad a shape as Greece.

The Eurogroup should restructure its maturities in such as manner that there are no maturities for at least 10 years. And on the interest side, they should reduce the rate to their funding cost and lock in as much of the rate for as much of time as possible. That would be some 'help for Greece' without really costing anything. As a final 'gift', one could offer the deferral of interest for, say, 5-10 years.

If Greece were a company with the benefit of bankruptcy laws, its creditors would already have given debt relief involving massive forgiveness of principal, significant extension of maturities and zero interest rates on large portions of the debt. All that because it would still have been a less costly affair than a bankruptcy.

The only reason why Greece has not gotten such debt relief is that there are no bankruptcy laws for countries. But that should not be a free ticket to get away with bloody murder.

Wednesday, March 29, 2017

The 120 BEUR Chuzpe

Handelsblatt writes about an internal paper at the German Finance Ministry with calculations that an interest deferral for Greece until 2040 would 'cost' Germany 120 BEUR. Well, they really don't say that it will 'cost' Germany 120 BEUR. Instead, they say that if Greece did not pay any interest until 2040, the total of such unpaid interest would amount to 120 BEUR by 2040. That 120 BEUR would simply be added to Greece's debt.

Or so they allegedly say because I haven't seen any original document.

When does Germany (or any other country) make or lose money on loans to Greece? In the absence of a haircut of principal, this can only be a function of interest rates.

A company keeps its books on an accrual basis. If the annual interest revenue is 365.000 to be paid on December 31, every single day, starting with January 1, will accrue interest revenue of 1.000. After 100 days, interest revenue of 100.000 will have been accrued. Since no cash payment has been received yet after only 100 days, the 100.000 accrued interest will be shown as a receivable. Should interest not be paid on December 31, the entire accrued interest of 365.000 (account receivable) will have to be written off, resulting in a full revenue loss of 365.000.

The state operates on a cash basis and not on an accrual basis. Whenever cash comes in, it is recorded as revenue. If no interest cash ever comes in, no revenue loss is recorded because the expected revenue was never shown as a receivable.

The German state has cash interest revenue from loans to Greece and cash interest expense on the funding of those loans. For all practical purposes, the German state currently has a funding cost of 0%. Put differently, if the German state lends to Greece at 3%, it is making a 3% true profit (revenues minus expenses). If, out of generosity and solidarity, the German state lowers its interest rate for Greece from 3% to 1%, it is not taking a loss of 2%. Instead, it reduces its profit from 3% to 1% but it still makes a profit!

If, instead of deferring interest, the German state would simply waive all interest on loans to Greece until 2040, and if the German state could indeed refinance itself at 0% for that period, that great gift to Greece would cost the German state exactly --- nothing!

A smart business deal is one where you offer something to your business partner which costs you nothing but which means a great deal for your business partner!

Thursday, March 23, 2017

Dijsselbloem's Dutch Flippancy

I joined a large American bank as a trainee back in 1972. After having gone for over a year through various training programs with fellow MBAs, I was sent into the field where business development was the job description. My first boss was a Dutchman. An unforgettable man. Simply Dutch. The ideal boss to take one down from the academic heights of MBA training programs to the rough field of selling.

His Dutch humor was great for those who could take it and terrible for those who were overly sensitive. The former laughed about the latter for being overly sensitive. The latter asked whether being sensitive wasn't part of responsible conduct.

MEP Ernest Urtasun (Spain): But you apologize for saying, or for implicitly saying, that the South has spent the money on women and alcohol in the last years? Would you apologize for that?

Jeroen Dijsselbloem (Dutch President of Eurogroup): No, certainly not!

My Dutch boss would have fired a guy who gave such a stupid response. And, frankly, I, too, thought - after listening to that exchange - that Dijsselbloem ought to tender his resignation the very next day. Absolutely irresponsible his insinuation! Some, like Nick Malkoutzis, took it with sarcasm by tweeting: "Dijsselbloem under fire for claiming Southern Eurozone spent money on ‘alcohol & women.’ The rest we just wasted."

At the same time, my Dutch boss might have said: "Wait a minute! Something is wrong, here. A Dutchman would never give such a stupid response. Let's look at the source!"

So I looked up the source. It was an interview with the FAZ where Dijsselbloem talked about solidarity and emphasized his well-known position that solidarity must be a two-way street if it's going to work. And then came the crucial sentence: „Ich kann nicht mein ganzes Geld für Schnaps und Frauen ausgeben und anschließend Sie um Ihre Unterstützung bitten" ("I cannot spent my whole money on liquor and women and subsequently ask you for help!"). He then added that this principle was valid in all situations, on a personal level, on a local or national level or on a European level, for that matter.

My Dutch boss might have made the same comment. Most of us would have understood what he meant and some of us might even have smiled at his directness. Those who felt completely insulted by the comment would sooner or later have discovered that they worked for the wrong bank.

The only difference between my Durch boss and the Dutch Dijsselbloem is that whatever happened between my Dutch boss and the rest of us was a private affair whereas Dijsselbloem spoke for the public record.

When speaking for the public record, a senior politician must know that being sensitive is a pre-condition for responsible action.

And there is another thing my Dutch boss might have said to Dijsselbloem: "I am embarrassed that you as a Dutch would fall for a trap which some Spanish politician laid out for you!"