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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 aas 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.

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!"

Saturday, March 18, 2017

The Perennial Greek Question: ποιος φταίει?

Every language has expressions which are difficult, if not impossible, to translate into other languages. The German "Gemütlichkeit" would be one of them. The Greek "φιλότιμο" would be another one.

When I first came to the US as a young student and when I was still brushing up my English, I couldn't find a translation for a phrase which most young people in German-speaking countries grew up with at the time: "Du bist schuld!" Literally translated, that would have meant "You are guilty!" but short of sending people to the electric chair, Americans didn't use that phrase. Instead, they would say "It's your fault!". The English translation of Dostoyevsky's famous novel is "Crime and Punishment". The German translation is "Schuld und Sühne" (Guilt and Repentance).

To accuse someone of his or her fault is a perfectly proper assignment of responsibility because it can be rationally discussed. To accuse someone of guilt is something which can destroy a personality over time because there can never be a rational discussion about that.

This was a long way of introducing a comment by an anonymous reader which I reproduce below. Its focus is on ποιος φταίει except that the author is rather clear as to whose guilt it really is.

"A closer look at the Eurozone shows imbalances building up from the very beginning—with money rushing into the periphery countries in the misguided belief that eliminating exchange rate risk had somehow eliminated all risk.

This illustrates one of the key flaws in the construction of the Eurozone: It was based on the belief that if only government didn’t mess things up—if it kept deficits below 3% of GDP, debt below 60% of GDP, and inflation below 2% per annum—the market would ensure growth and stability. Those numbers, and the underlying ideas, had no basis in either theory or evidence. Ireland and Spain, two of the worst afflicted countries, actually had surpluses before the crisis. The crisis caused their deficits and debt, not the other way around.

The hope was that fiscal and monetary discipline would result in convergence, enabling the single-currency system to work even better. Instead, there has been divergence, with the rich countries getting richer and the poor getting poorer, and within countries, the rich getting richer and the poor getting poorer. But it was the very structure of the Eurozone that predictably led to this. The single market, for instance, made it easy for money to leave the banks of the weaker countries, forcing these banks to contract lending, weakening the weak further.

Economists assessing the prospects of a single currency arrangement some quarter century ago emphasized the importance of sufficient labor mobility and an adequately large common budget to buffer against shocks as well as sufficient economic similarity among the countries. But the euro took away two of the critical instruments for adjustment—the exchange and interest rates—and didn’t put anything in their place. There was no common deposit insurance, no common way of resolving problems in the banking sector, and no common unemployment insurance scheme.

Equally important, these early discussions ignored the importance of intellectual convergence: There is a huge gap in perceptions of what makes for good policies, especially between Germany and much of the rest of Europe. These differences are longstanding. Thus, the austerity policy—which Germany thought should have brought a quick return to growth—has failed miserably in virtually every country in which it has been tried. The consequences were predictable, and predicted by most serious economists around the world. So too, many of the particular structural reforms have actually weakened the countries on which they have been imposed, lowering growth and increasing their trade deficits.

So please get off this bandwagon that Greece and Greeks are responsible for their own failure because all evidence points to the exact opposite. The eurozone is failing miserably not Greece or the Greek people. What you are asking us to do in response to the crisis makes absolutely no sense to me. It only makes you(the austerity crowd) look better because you are responsible for the mess. And by you I mean the conservative part of Europe with its roots to monarchies and absolutism. You can't talk to the Greeks like you do because we are inherently free people; free of despotism and free of blind obedience for the benefit of the rulers. We don't like rulers in Greece; we are against ruling classes. O.k.?"

Well, Ok. But still: some form of a response ought to be permitted.

I observe that I have different answers to the above questions depending on the environment I am in. When I am in a 'Germanic' environment where everyone blames the Greeks for their terrible failure ("wasting our good tax payers' money"), I tend to argue like the anonymous commentator above. When I am in a Greek environment and when I get the victim's plea as above, or rather the assignment of guilt, I react differently.

There really isn't any specific point in the above comment which I could counterargue with substance. Yes, the Euro was an 'unfinished product' which was put into operation for political considerations far too soon. The EU itself, via the Delors Report of 1989, pointed that out. All the problems which the Euro later on ran into were spelled out in that report ("sudden stop", etc). One of the members of the Delors Commission (Karl Otto Pöhl, then president of the Bundesbank) later said: "When the report was formulated, I did not think that a monetary union would become reality in the foreseeable future. I thought perhaps sometime in the next hundred years. I thought it was improbable that other European countries would simply accept the model of the Bundesbank".

Ok, so we've settled that: the Euro was an unfinished product, some countries benefited from that and other countries suffered. And Greece suffered tremendously. And, in consequence, Greeks should rally in the call against the EU with the two most harmful words of the Greek language: εσύ φταις!

Such a call again the EU would appear even more justified when considering how much Greece had achieved without the EU in the half century prior to joining it:

"Greece’s average rate of growth for half a century (1929–1980) was 5.2 percent; during the same period Japan grew at only 4.9 percent. These numbers are more impressive if you take into consideration that the political situation in Greece during these years was anything but normal. From 1929 to 1936 the political situation was anomalous with coups, heated political strife, short-lived dictatorships, and a struggle to assimilate more than 1.5 million refugees from Asia Minor (about one-third of Greece’s population at the time). From 1936 to 1940 Greece had a rightist dictatorship with many similarities to the other European dictatorships of the time and during World War II (1940–1944). Greece was among the most devastated nations in terms of percentage of human casualties. Right after the end of the war a ferocious and devastating Civil War took place (in two stages: 1944 and 1946–1949) after an insurgency organized by the Communist Party. From 1949 to 1967 Greece offered a typical example of a paternalistic illiberal democracy, deficient in rule of law, and on April 21, 1967, a military junta took power and ruled Greece until July 1974, when Greece became a constitutional liberal democracy. The economy of Greece managed to grow despite wars, insurgencies, dictatorships, and a turbulent political life."

So that is quite a remarkable success story! Whoever interrupted or even halted it would deserve the blame of εσύ φταις! So let's read further on.

"Seven years after embracing constitutional democracy the nine (then) members of the European Community (EC) accepted Greece as its tenth member (even before Spain and Portugal). Why? It was mostly a political decision but it was also based on decades of economic growth, despite all the setbacks and obstacles. 

When Greece entered the EC, the country’s public debt stood at 28 percent of GDP; the budget deficit was less than 3 percent of GDP; and the unemployment rate was 2–3 percent.

But that was not the end of the story. Greece became a member of the European Community on January 1, 1981. Ten months later (October 18, 1981) the socialist party of Andreas Papandreou (PASOK) came to power with a radical statist and populist agenda, which included exiting the European Community. Of course nobody was so stupid as to fulfill such a promise. Greece, with PASOK in power, stayed in the EC but managed to change Greece’s political and economic climate in only a few years. 

Today’s crisis in Greece is mainly the result of PASOK's shortsighted policies, in two important respects: 

(a) PASOK's economic policies were catastrophic; they created a deadly mix of a bloated and inefficient welfare state with stifling intervention and overregulation of the private sector; and 

(b) The political legacy of PASOK was even more devastating in the long-term, since its political success transformed Greece’s conservative party (“New Democracy”) into a poor photocopy of PASOK. 

From 1981 to 2009 both parties mainly offered welfare populism, cronyism, statism, nepotism, protectionism, and paternalism. And so they remain. Today’s result is the outcome of a disastrous competition between the parties to offer patronage, welfare populism, and predatory statism to their constituencies."

So what is the answer to the question ποιος φταίει? I suppose like everything else in life: it depends on a combination of factors. Sometimes, it is more prudent to abdicate the search for the ultimate truth and focus on pragmatic solutions for a problem.

PS: the above quotes are taken from the paper "Greece as a precautionary tale of the welfare state" by Prof. Aristides Hatzis.

"Debt Trap Report" - Debt Restructuring Without Reforms Would Not Help!

"A debt restructuring by itself, without some deep reforms, would not help. In a few years’ time Greece would again be on the razor’s edge. Therefore Greece will have to continue with reforms in crucial sectors such as justice and combating corruption and tax evasion, and by improving state mechanism operation and governance. Only in this way will it ensure that it does not revert to a bankruptcy situation.”

Thus spoke Wolfgang Schäuble! Or so one might think. Instead, it was Panagiotis Liargovas, head of the Greek Parliamentary Budget Office who presented the "Debt Trap Report".

One really doesn't have to be an economist (or a genius, or both) to understand the correctness of this position. A simple look at Greece's external accounts over the last 3-4 decades will do.

The Greek economy has historically been rather dependent on capital inflows from abroad. Until the early 1980s, those capital inflows did not represent a great danger because (a) their overall size was limited by credit risk considerations on the part of investors; (b) there were sizeable capital inflows in the form of investment instead of debt (Marshall Plan, etc.) and (c) remittances by Greeks working abroad formed a major portion of such capital inflows. Also, a reasonable share of those capital inflows went into investment instead of only consumption.

The last 3 decades changed all of that: (a) credit risk considerations on the part of investors (or rather: lenders) declined once Greece joined the EU and virtually disappeared after Greece became a member of the Eurozone, thus leading to a tsunami of capital inflows from abroad; (b) investments ceased to be a major pillar of such capital inflows; and (c) remittances by Greeks working abroad virtually disappeared. Finally, the capital inflows from abroad became almost exclusively debt and they went primarily into consumption instead of investment.

The Greek economy had become a turntable for money: money would flow into the country in the form of debt, it would be recycled within the country to generate unsustainable growth and it would leave the country for imports and capital flight (but the debt stayed on the books). It was like a hot air balloon which would collapse once the hot air supply ceased.

If all of Greece's debt were forgiven but the economy's structure would not change, all that would happen is that the turntable for money would be set in motion again (and the debt would increase again without any sustainable benefit). In order for the turntable for money to become a machinery for domestic wealth generation, more of the necessary capital inflows would have to come in the form of investment and much more of it would have to go into the productive sector of the economy. Young Greeks should not look for jobs in cafés but in producers of tradable goods, instead. And there would have to be job opportunities in that sector.

One doesn't have to make a much greater case than that in order to show that the structure of the Greek economy needs to be reformed before any more foreign debt makes sense.

Monday, March 13, 2017

803 Million USD Unaccounted For?

The website Refugees Deeply published an article titled: "Refugee Talks: Lessons From the Refugee Response in Greece". The bottom line is that Greece received 803 MUSD in 2015-16 as humanitarian support for handling the refugee crisis, an amount which the authors call "the most expensive humanitarian response in history". That's the good news.

The bad news is that a senior EU official, whose name is wisely not revealed, estimates that about 70% of that amount has been wasted.

People who are accustomed to dealing with numbers can only be flabbergasted at this revelation. When 803 MUSD flow to Greece, there are those who send the money and those who receive it. One would expect that the senders would keep some sort of records about who they sent the money to. One would further suspect that the senders would periodically ask the recipients what they did with the money. In fact, it would only be reasonable for the senders to require the recipients to maintain some form of bookkeeping.

For 654 MUSD out of the total 803 MUSD, the sender was the EU itself. Everything the EU can send is ultimately tax payers' money. If the EU could not provide a reckoning as to what happened to that tax payers' money, it would reflect a high degree of irresponsibility.

The remaining 149 MUSD came from other sources. To the extent that those other sources were not ultimately tax payers' money (some were undoubtedly donations), an accounting of those funds is not necessarily mandatory as long as those other sources comply with the rules and regulations which they are subject to.

Regarding the recipients, only 184 MUSD went directly to the Greek government. One could reasonably expect that the Greek government can report EXACTLY what that money was spent on. According to the authors, that has not been done as yet.

The much larger portion of the 803 MEUR, namely 619 MUSD went through multiple other channels. The authors do not reveal under what conditions those other channels received those funds or whether they complied with any conditions. The only thing which seems certain is that no one really knows exactly where the money went.

The refugees now stranded in Greece will find it interesting to read that 14.888 USD were spent per capita on their behalf. A family of four might come to the conclusion that 59.552 USD (14.888 x 4) would have provided them an excellent base for maintaining a decent living standard during their refugee status. In fact, they might conclude that it was a tremendous humanitarian effort.

Which had been the original idea of the 803 MUSD.