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Tuesday, September 30, 2014

How To Spend 3 Hours at a Greek Tax Office

An elderly man died in Thessaloniki on Tuesday after collapsing at a bank while waiting in line to pay the ENFIA property tax, reports the Ekathimerini. Which reminds me of the story which my neighbor Yiannis told me yesterday.

Yiannis had to go to the tax office to get a certificate that all his taxes were paid up. There were a total of 5 stops, he said. First, he had to go to employee 1 who handled the hard facts. She checked that all the information Yiannis provided was correct and then she wrote her ok in handwriting. With that provisional piece of paper, Yiannis had to go to the Director on the first floor. The Director checked the handwriting of employee 1 and the information and gave his stamp of approval. That, however, was not the end of it because there was not yet a final document. Instead, it only authorized Yiannis to go back downstairs to employee 2 who would check the signature and stamp of the Director in order to issue the final document. However, the final document now required the signature of the Director, so Yiannis went back to the first floor. And after he got the signature of the Director, he had to take the final document back to employee 2 who would then add a second stamp. And that was it.

All told, it took him 3 hours, Yiannis said.

Sunday, September 28, 2014

Germany's Economic Mirage

"Germany has stagnant wages, busted banks, inadequate investment, weak productivity gains, dismal demographics, and anemic output growth. Its “beggar-thy-neighbor” economic model – suppressing wages to subsidize exports – should not serve as an example for the rest of the eurozone to follow".

Greece's Media Landscape - A Chronicle

The author of these articles calls them 'a series of articles which chronicle the long history of corruption, lawlessness and censorship in Greece's media and journalism landscapes". To an uninformed outsider like myself, they are interesting reading which is why I publish them without comment from my part. This is part II. 

19 Sep 14: Corruption, Clientelism and Censorship in Greece's Media Landscape

Friday, September 26, 2014

Two Austrians and Tsipras - and Pope Francis

Sarcastic stories are floating through the interenet about Alexis Tsipras' recent 'audience' with Pope Francis. Was it an audience in the first place? Or was Tsipras in a group of people who saw the Pope? Why were there no pictures taken? Did the Pope say what Tsipras said he had said. The most sarcastic, albeit quite humorous, item was a picture showing the Pope waiving to thousands of people on St. Peter's Square suggesting that Tsipras was among the crowd and called that 'meeting the Pope'.

The fact of the matter is that there were 3 people who were received by Pope Francis and not Tsipras alone. Since the other two were Austrians, I quote what the Austrian public broadcaster reported on its website.

ORF reported that the meeting was arranged by the Austrian Franz Kornreif who is head of the Austrian branch of Fokolar Movement. That movement, according to its website, operates under the auspices of the Roman Catholic Church and its mission is to foster unity. Unity in the family, in the social-cultural, political and economic spheres; unity between the rich and the poor and between nations. Kronreif on his part is very good friends with Walter Baier, an Austrian who headed the Austrian Communist Party in the past and who is now a leading figure in transform!europe, a network of 27 European organizations from 19 countries, active in the field of political education and critical scientific analysis, and is the recognized corresponding political foundation of the European Left Party.

ORF quotes Tsipras as saying after the meeting that "even though we start from different ideological points, we believe that we have common positions in the principles of solidarity, in the principles of justice, peace and cohesion" and a Vatican spokesman as saying "the meeting with the leader of the Greek SYRIZA party Alexis Tsipras and Austrian Walter Baier was private rather than political".

Walter Baier held a press conference after the meeting in which he said that "the Pope said it is scandalous that saving banks is regarded as more important than saving people".
"The meeting with leader of the Greek SYRIZA party Alexis Tsipras and Austrian Walter Bayer was private rather than political. - See more at:
He is one of the leaders of the Focolare Movement which is an organization that operates under the auspices of the Vatican and aims to establish contact between the Catholic Church and people with non-Christian views and mostly atheists.   - See more at:
He is one of the leaders of the Focolare Movement which is an organization that operates under the auspices of the Vatican and aims to establish contact between the Catholic Church and people with non-Christian views and mostly atheists.   - See more at:

Thursday, September 25, 2014

More Stars of the Greek Economy

In my previous article, I had definied Pharmathen as a corporate 'star' of Greece and asked whether there were other 'stars' like that. A reader provided my with the links to 6 other companies and I will make quick summaries on each of then.

Their website is not as smooth sailing as Pharmathen's. Certainly, there is much less financial information about the company. They have a link to the 2013 financial statements but there is no content to be found. Thus, I opened the 2012 financial statements. And then, all there was were a condensed P+L statement and balance sheet. Everything quite a few steps behind Pharmathen in terms of impact.

In the headline, Elpen describes itself as "The Leading Greek Pharmaceutical Company". Well, maybe the leading one but certainly not the largest one. Pharmathen, for one, is larger with its sales of 178 MEUR when Elpen (in 2012) had sales of 115 MEUR. Elpen posted a profit before tax of 4 MEUR, a 4% return on sales, or much lower than the 12% of Pharmathen. Most importantly, Elpen includes in revenues an extraordinary item of 7 MEUR as 'income from prior years' provisions'. Impossible to say what this might be but without it, for sure, Elpen would have posted a loss. The year before, they had paid out virtually all their profits as dividends. In 2012, it looks like they retained all earnings. Perhaps someone told them that they shouldn't drain the company. Of total assets of 138 MEUR, 12 MEUR are 'other formation expenses' and 5 MEUR are 'interests in affiliated undertakings'. There is no way of telling how much those assets are really worth. What stands out, though, is that they are sitting on 40 MEUR of cash plus, get this, 11 MEUR of Greek sovereign bonds. That was not a good investment for them because they already had to write-off 5 MEUR of that. Elpen's net worth of 40 MEUR is very satisfactory but one has to remember that they have 17 MEUR of assets whose value cannot be determined. They are stretching suppliers' credit to the limit with 61 MEUR of trade accounts payable. That would smack of payment terms of 180 days. Why does a company which has so much cash pay its suppliers so slowly? Holding money back from suppliers to invest it in the money market is not really elegant.

So what is the bottom line on Elpen? Not a bright star, perhaps not even a star but an okay company. I would have to get a feel for management (interestingly, there is nothing in the website about management) and the overall management culture. There are quite a few questions to ask about their financial statements, particularly the question whether there is a hang for creative accounting and/or financial maneuvers.

To begin with, their website is available in 6 languages which makes for an impressive start. The company's founder and CEO sees the company 'at the top' which is not as bragging as Elpin. Moreover, they understand that 'to reach the top you need to try' and that 'you need vision, dedication an faith'. After all of this, I am already in good spirits about the company. They have been around for 90 years which is Pharmathen and Elpin combined. And it seems family through and through. That's a plus, too! So much family through and through that they don't even reveal any financial information about themselves. If the company's financials are as impressive as the information which it provides about its activities, then the financials must be extraordinary. My guess is that the financials are probably extraordinary.

One cannot blame the company for going overboard with telling beautiful stories about themselves. Their website is rather ordinary, if not to say boring. However, this doesn't strike me as a weakness but rather as intended understatement. Again, family-owned and so private that there is no information whatsoever about management or about financial statements. If I had to guess, I would guess that this is a very conservative company with very conservative financial statements.

This is a comparatively young company (1986) and with sales of 30 MEUR and 70 employees, a relatively small company. There is nothing eye-catching in their website and certainly no financial information. Normally, I tend to quickly develop a 'feel' for a company. Here I have no 'feel' at all. Normally, I become a little confused when I cannot develop a 'feel' for a company.

They are just over 20 years old so they cannot be too large. My 'feel' is that, here, a group of like-minded, dynamic people got together and said 'let's start someting'. One gets a sense of dynamism. More I cannot say about this company.

I cannot tell why my reader sent me only health/pharma companies. Perhaps he works in the health/pharma industry himself or perhaps the health/pharma industry is the best of all industries in Greece. Either way, one gets the impression that there is something happening in the Greek pharma industry. Which makes me wonder whether pharma could not become a core industry of the country.

Pharmathen is the clear star hovering about the others. Elpen should worry a bit less about pretending to be as good as Pharmathen and focus more on providing solid information about themselves. Perhaps there is an issue with management culture. The others seems to be smaller companies but they cannot be zombies because if they were zombies in the pharma industry, they wouldn't have survived 5 years of recession as a pharma company (they would have been taken over by others or disappeared).

Wednesday, September 24, 2014

Looking for Non-Zombies in Greece? Here Is One!

A friend of mine told me that her sister, a young chemical PhD, started a job with a company by the name of Pharmathen recently. So I looked up Pharmathen's website. What a surprise!

Founded in 1969, Pharmathen 'is focused on the development and marketing of pharmaceuticals, with a strong position in generics. With 3 state of the art research laboratories and 2 manufacturing units, Pharmathen is a completely vertically integrated company and its activities extend from the development of pharmaceutical products up to their distribution. The company’s human resources include more than 800 people who work in the sectors of Research & Development (R&D), production and distribution of drugs to more than 85 countries worldwide'.

The website has a separate section on Corporate Social Responsibility (CSR): 'It is important that our employees know about our commitment to social corporate responsibility, understand their responsibilities and keep up to date with our progress. Therefore we instantly inform our personnel regarding CSR practices at Pharmathen via emails, intranet services and our monthly newsletter. Through all these means they participate in CSR practices as they recognize that CSR is not only an enterprising issue but a personal issue'.

It soon got even better! Pharmathen also has a Vision and a Mission! The vision is 'to elevate the quality of people’s lives globally by providing novel and affordable pharmaceutical products. We aspire to be one of the best healthcare companies in the world, sustaining our impressive growth rates, securing customer preference and providing leading pharmaceutical innovations and solutions'. And the mission is 'to aim to be one of Europe’s leading Research & Development companies. Already one of the fastest growing generic companies in Europe, we aim to provide innovative, distinctive products and services that improve the lives of patients worldwide and satisfy customer needs. We will achieve this by employing the most advanced technologies available, by constantly enhancing our product portfolio and expanding our international presence'.

At this point, I became a bit suspicious. Websites, vision and mission statements fall into the category of softs facts; of 'stories', as investment bankers call it. It's easy to put together beautiful stories. It was about time that I looked at the hard facts, Pharmathen's financial statements for 2013.

Group sales were 178 MEUR, 10% higher than in 2012. Wait! Wasn't the Greek economy in recession during 2013? Well, 131 MEUR of total sales came from international operations (Pharmathen has a presence in over 80 countries!) but sales in Greece also increased by 6% (in a declining market!). A total of 22 MEUR was spent on R&D, which is about 12% of sales! Now, pharmaceutical companies have no choice but to spend a lot on R&D and 12% may be normal in the industry but one could compare the 12% to the 3% which the EU sets itself as a goal for R&D spending, which goal it always misses.

After paying for all of its expenses, Pharmathen posted a profit before taxes of 21 MEUR, or 12% of sales. That is a very high profitability! And since Pharmathen intends to be a good corporate citizen, they paid income taxes of 4 MEUR.

Pharmathen posted a net worth of 100 MEUR. With total assets of 204 MEUR, Pharmathen was financing almost half of its assets with net worth, an extremely high ratio. This, however, should be qualified a bit since Pharmathen posted goodwill of 41 MEUR among its assets. Such goodwill represents the excess which was paid over book value when acquiring companies. Where such companies are very profitable, such goodwill is justified. Still, even without goodwill, Pharmathen was still financing 36% of its assets with net worth! Pharmathen follows a policy of retaining a large portion of its profits in the company instead of paying it out as dividends. Thus, retained earnings of 42 MEUR account for almost half of net worth.

Finally, the most important 'Greek subject' --- debt. Pharmathen owed 68 MEUR to banks. Is that high? Well, that depends on how much debt a company can service. Pharmathen posted a free cash flow of 27 MEUR and interest expense was 7 MEUR. Put differently, free cash flow covered the interest expense by close to 4:1. Short-term debt was 38 MEUR of the total debt. When considering that Pharmathen had 54 MEUR of short-term trade receivables, one knows what short-term debt was financing. Not to mention the fact that the company also had a cash position of 18 MEUR. Current assets of 122 MEUR covered current liabilities of 74 MEUR 1,7 times. There is no worry to be had about Pharmathen's short-term debt service capacity. And the long-term debt of 29 MEUR contributed to the financing of property, plant and equipment of 38 MEUR. In short, there is no worry to be had about Pharmathen's indebtedness.

Pharmathen employed 867 people (up from 800 two years earlier), 577 of which have university degrees, and research scientists exceed 150. 49% of the employees are women and women account for 26% of management positions.

Below are some of the rankings which Pharmathen claims:

* among the top 50 most profitable companies in Greece
* among the top 100 largest Greek companies
* among the top 50 largest pharma R&D companies in the EU
* among the largest exporting companies in Greece
* among the "True Leaders" in Greece based on credibility

It took me a while to digest the above information. When I saw such a company during my active years in banking, I would hurry to the phone to make an appointment for a business development call. Before seeing the rankings, I would have expected Pharmathen to rank as No. 1 in Greece in all categories. But Pharmathen says it is 'among the top 50' or 'among the top 100'. Well, this can only mean that there are a lot of other non-zombies in the Greek economy. In fact, I would call them stars.

Who are the other stars? Why does one hear so little about them?

Tuesday, September 23, 2014

Getting Bored With Politics? Let's Have a Bank Run!

Back in 2002, the then CEO of Deutsche Bank, Rolf Breuer, was asked in an interview about the fledgling German media giant Kirch. His subtle answer was: "Everything one can hear and read about this is that the financial sector is no longer prepared to make debt or equity capital available". Kirch collapsed soon thereafter. This has been described as the most expensive sentence in financial history: 12 years later, Deutsche agreed to pay the Kirch heirs about 1 BEUR for damages. Deutsche has announced that they will attempt to recover part of that from Mr. Breuer personally.

PM Samaras is obviously not a banker. Verbal subtleties are not his strength. Instead, he tells the public straightforwardly that if SYRIZA came to power, all Greek banks would be left without money. And to make sure that the message got across, his parliamentary spokesman, Adonis Georgiadis, repeated it the next day.

Wow! Greeks are always good for surprises but the fact that the head of government of a country would publicly announce a bank run must be unique in the world. One wonders who will pay for damages incurred and whether Mr. Samaras will be held personally liable! Sorry, the answer to that question is obvious: the Greek people will pay and Mr. Samaras will claim that he would have saved Greece if only SYRIZA had not come to power. The only thing which is certain is that Mr. Samaras' sentence will replace Mr. Beuer's sentence as the most expensive one in financial history if a bank run does occur. It will cost more than just one billion.

So where do we go from here? Do we expect Mr. Samaras to correct himself and say something like "Sorry, I didn't mean it that way. Of course there won't be a bank run if SYRIZA comes to power. Feel free to vote for SYRIZA!"? Doesn't sound like a good strategy for political survival. Or would it be better if Mr. Tsipras came out to say "Have no fears! There won't be a bank run if we come to power!" That would be like the CEO of Lehman's announcing a few days before bankruptcy that Lehman was solid as a rock. People would wonder why he needs to say that.

Until recently, Greece and its politics had appeared so stable that it got a bit boring. I remember making a statement not too long ago that I thought Mr. Tsipras' heyday was behind him. Since the EU elections, the tables have turned. We are back to the old situation where everybody knows for sure that "the next 3 or 6 months will determine the future of Greece".

Mr. Tsipras goes a step further. Not only the future of Greece will be determined when SYRIZA comes to power but the future of the EU altogether. SYRIZA will show the EU the new path towards prosperity. Well, he doesn't face the risk of being sued for damages for saying that.

Was all of that really necessary? This is the question which Mr. Samaras should ask himself all the time and hopefully he will learn from the answer he gives himself.

Monday, September 22, 2014

Growth and Social Cohesion: Challenges for Greece and Beyond

Here is the video of a 1:28 h panel discussion on the above subject which took place at the LSE. Below is a summary of the key points made by Horst Reichenbach, head of the EU Task Force for Greece.

Access to credit: this is currently the major impediment for growth in the private sector.
Foreign investment: more focus is required on making Greece more attractive for foreign investors (structural reforms). 
Competitiveness: has improved significantly in terms of unit production costs (wages/salaries). What is missing is an increase in productivity (particularly in sectors where Greece has competitive advantages).
Social cohesion: critical! Unemployment will not come down quickly, thus, an overhaul of social cohesion systems is required.
Politics: sustained political stability is essential for Greece's turn-around; the condition 'sine qua non'.
Troika: Greece needs to assume ownership (rather: take it back from the Troika) of reform effort ("Greeks need to take their own fate into their own hands").
Financing: before year-end, clarity needs to be established whether Greece needs new financing from the EU. If yes, there will be the issue of a further adjustment program ("which clearly is not popular among Greeks").
Debt relief: the EU has promised debt relief and has reaffirmed its promise earlier in the year. A decision is likely to be reached befor the end of the year.
Technical support from the EU: will continue to be necessary.

"I think Europe has shown quite a lot of understanding that the situation from now on has to change and that if there isn't growth, not only the future of Greece will suffer but also the repayment of the debt will become impossible or at least very much more difficult. Therefore, very practical hands-on support of a different type is required. First of all, the need for more social cohesion in Greece is enormous. There is no social welfare system in Greece. It's the only European country where there is no social welfare system. Unemployed who are long-term unemployed for more than one year don't get any support from social insurance or the state directly and more than 2 million, perhaps moving towards 3 million, do not have any access to health service other than emergencies in the hospitals. So this is really a dramatic situation in which the activities of extreme parties can prosper by offering part of the solutions to these problems and if Greece is not, as a state, and in solidarity with Europe, is not able to address these problems head-on, there will be a very difficult situation".

Sunday, September 21, 2014

Did Scotland Avoid Becoming Another Greece?

In a recent article, Prof. Paul Krugman compared the Scottish drive for independence while maintaining the pound to the EU's drive for the Euro as a common currency. Here is an extract: 

"The obvious parallel is the push for the Euro; in pursuit of the political vision of European unity, leaders waved away the obvious economic problems. I don’t know how many times I encountered arguments along the lines of “You Americans are only raising these objections because you don’t want a competitor to the dollar”, which wasn’t the point at all. And sure enough, the Euro has turned into one of the great economic disasters of history, dealing a devastating blow to the very cause of European unity it was supposed to serve. It so happens that some of the economic issues involving Scottish independence are the same: Euro enthusiasts insisted that there would be no problem in creating a unified currency without a unified government, the SNP is insisting that there is no problem with maintaining a unified currency while breaking up the United Kingdom. But there is even less excuse this time around, since we have the Euro experience to enlighten us".

Well, the Euro experience has definitely enlightened us!

Saturday, September 20, 2014

Greek Media - Corruption, Clientelism and Censorship

I have come across this "first in a series of articles which chronicle the long history of corruption, lawlessness and censorship in Greece's media and journalism landscapes" (quote from the author of the article). To an uninformed outsider like myself, this is interesting reading which is why I publish it without comment from my part. 

Corruption,Clientelism and Censorship in Greece's Media Landscape

Greek Tax Revenues

According to ELSTAT, total tax revenues for 2013 were 83 BEUR (page 18 of this Economic Bulletin). Since the state records revenues on a cash basis (instead of an accrual basis), these are not all taxes due but only that portion which was actually collected. Interesting questions pop up when comparing this figure to the data compiled in this Macropolis article.

At December 31, 2013, after the state had collected the above 83 BEUR, there were still another 61 BEUR in taxes due to the state but not paid by the respective tax payers. This is referred to as 'legacy'. Put differently, had the state been able to collect all of the 'legacy' in 2013, tax revenues would almost have been twice as high as they actually were.

The word 'legacy' suggests that there was a one-time problem in the past which may or may not be cured going forward but since it is a one-time problem, it will not become greater. This is not the case here. Instead, from January-August of 2014, taxes due but not collected were 9 BEUR. Thus, the 'legacy' of 61 BEUR at December 31, 2013 became a 'legacy' of 70 BEUR by the end of August. Over 1 BEUR per month on average was the amount of taxes due but not paid so far this year.

Of the 2013 'legacy' of 61 BEUR, roughly 1 BEUR could be collected during the first half of 2014. That looks like a lot of money but it represents a collection rate of only 1,6%. The government hopes to collect another 1 BEUR of the 2013 'legacy' in the second half of 2014 which will bring the annual collection rate to 3,2%. At the same time, at least 12 BEUR will be added as 'new legacy' during 2014.

This has the characteristics of moving one step forward while retreating two steps at the same time: 2 BEUR of old debt is collected while 12 BEUR becomes new 'old debt' as the year goes on. On a net basis, 'legacy' will increase by 10 BEUR during 2014.

When debtors don't pay their obligations, there are always two questions to be asked: is it their unwillingness to pay or is it their inability to pay?

When tax payers could pay their taxes but are unwilling to do so, the full force of the judicial and executive should come down upon them. When tax payers don't pay their taxes because they are unable to pay, no judicial or executive is strong enough to make them pay. That would be like attempting to draw water from a dried-out well.

Who are those culprits who don't pay the taxes due? It can't be the receivers of wages/salaries or pensions because there the income taxes are withheld at the source. My understanding is that this group accounts for roughly one-half of the Greek tax subjects.

I can only guess that the culprits are those who have tax obligations as a result of deemed/assessed income or tax obligations stemming from non-income items (real estate, etc.). Here, again, the question is whether they are true culprits due to unwillingness to pay or whether they are victims due to inability to pay.

I read all the time how inefficient the Greek tax collection system is but, then, I often hear stories from friends where I have to marvel about the efficiency of the Greek tax collection system. One of my friends who is 59 and has been without official income for over 2 years inherited a small house in Litochoro. The authorities have now required him to produce evidence that the house was built before 1955, otherwise it would be deemed as an illegal construction and all sorts of penalties would become due. There is a court document on record where his grandfather swore under oath during the 1950s that he had owned the house since 1940. That, however, is not good enough. The authorities want an official record and my friend doesn't know how he can produce one. He fears the penalties might exceed what the house is worth today. Add to that the taxes he has to pay on income which he doesn't have but which he is deemed to have because he owns a car and the apartment where he and his family of 3 live and you can understand that the man fears to soon be financially wiped out.

Or my sister-in-law, a grammar school teacher with low income, who was presented an aerial photograph showing that her balcony in central Thessaloniki exceeded the approved limits. She had not made any changes to the balcony since she bought the apartment but that is irrelevant; she has to pay. Now, that is quite an efficient tax collection system as far as I am concerned!

And those very same tax authorities have trouble discovering swimming pools in Athens, to use that famous example? To identify the owners of anonymous corporations which own luxury real estate, yachts, etc.?

I am all for chasing past-due taxes from subjects who have the ability but not the willingness to pay. When it comes to tax subjects who have no ability to pay, one has to wonder how those tax obligations came into existence in the first place. It serves the state no purpose to build up 'legacy' when there is no hope of ever collecting that 'legacy'. More importantly, it is simply immoral to tell financially insolvent tax subjects that their tax liabilities keep going up.  If I were one of the latter, I wouldn't give a damn about a possible bank run. I would vote for SYRIZA if they promise to help me get out of my bind.

Wednesday, September 17, 2014

How To Eventually Cause a Bank Run? Warn Of It!

I have read in a couple of places that PM Samaras has warned of an unprecedented bank run which would occur if SYRIZA came to power. Well, one very good way to eventually cause a bank run is to warn of it! A government which so concerned about stability (as ND rightfully is) should not engage in tactics which are sure to lead to instability.

To scare people out of voting for a political competitor by threatening a bank run may eventually produce both --- the success of the political competitor AND the bank run!

SYRIZA's Balanced Budget Policy

Already in their First Economic Manifesto of June 2012, SYRIZA had stated that they would reign in government expenditures at a maximums of 45% of GDP and to increase revenues to about 45% of GDP. I considered that a mishap at the time; a mishap in the sense that in the enthusiasm to produce a First Economic Manifesto, the preparers of it had overlooked that they were in fact proposing a balanced budget.

Now, over 2 years later, SYRIZA has again published an Economic Manifesto; I called it Manifesto 2.0 in a previous article. All proposals smack of deficit spending and the Finance Ministry is already taking it apart. And what does SYRIZA say? Yiannis Dragasakis, chief economic spokesman of the party, insists that "we are not going to return to deficits".

Is SYRIZA perhaps a fiscally conservative party (possibly the most fiscally conservative party of Greece), after all? One would expect that if party leaders proclaim a balanced budget policy and if party members do not immediately engage in uproar, the stated policy enjoys broad support within the party. Given that SYRIZA vehemently supports a balanced budget policy in public statements, I would hope that they are challenged on that by the media. Anyone who proclaims a balanced budget policy should have to explain why he does that and, more importantly, how he proposes to accomplish that.

Incidentally, I first came across Mr. Dragasakis back in June of 2012 when I read an interview of his, which prompted me to write this article about him.

Monday, September 15, 2014

SYRIZA's Economic Manifesto 2.0

Back in June 2012, SYRIZA had put out its First Economic Manifesto on which I commented at the time. In a recent speech at the International Fair of Thessaloniki, Alexis Tsipras gave a speech which strikes me like an Economic Manifesto 2.0 of SYRIZA. I couldn't find a transcript of the speech so I limit myself to the summary of it published by the Macropolis blog and this summary from the KeepTalkingGreece blog.

The June 2012 Manifesto I had described as an 'arousing document' because it included all the right soundbites which a domestic audience suffering pain and humiliation likes to hear. To me, that was a major strength because without something arousing, a battered society is unliky to develop optimism about a better future. On the other hand, Manifesto 1.0 was short on plausible hard facts; on specific policies which would bring about that better future.

Manifesto 2.0 is short on 'arousing soundbites' and long on hard facts; on specific policies which will bring about a better future. Specifically:

1) Debt forgiveness - at issue is not a relief or a restructuring of sovereign debt; no, Tsipras calls for straightfoward debt forgiveness. He doesn't reveal specific numbers but one can calculate as follows: if debt forgiveness had to reduce sovereign debt to 120% of GDP ('sustainable' as per IMF), one would be talking about roughly 120 BEUR. If it had to reduce sovereign debt to 60% of GDP (Maastricht), one would be talking about roughly 240 BEUR.
2) 6,5 BEUR to restart the economy
3) 5 BEUR for two-year job creation program
4) 2 BEUR for humanitarian crisis

For detailed measures I refer to the above-linked articles. The bottom line is that Manifesto 2.0 plans to reduce sovereign debt by 120-240 BEUR and increase spending by 13,5 BEUR. Clearly, if Greece succeeded in reducing sovereign debt by the mentioned amounts, there would be an annual saving in interest expense of 3-6 BEUR. When asking how the increased spending would be financed, that saving in interest expense is about the only sure source but it depends on a totally unpredictable event (debt forgiveness). All the other sources which Tsipras outlines rest on shaky grounds (cutting down tax evasion and fuel smuggling, EU structural and cohesion funds, etc.). These potential revenue sources have been mentioned by others forever.

Macropolis concludes that "Tsipras' next challenge is to start fleshing out the policies. His aim will be to build his party's credibility with those Greeks who doubt that such a program could be implemented". I would tend to disagree with this assessment. Tsipras' first and foremost task should be to convince those who will have to fund the program that it will work. The ultimate test for Tsipras and SYRIZA is to convince lenders/investors. If he succeeds with that, Greek voters will quickly fall in line.

ADDENDUM on September 16, 2014
Upon reflection, I overlooked one major constituency whom Tsipras should attempt to convince that his program will work. Perhaps it is even the most important constituency. It is not foreign lenders; it is not foreign investors; it is --- Alexis Tsipras' own compatriots, the wealthy Greeks who have enormous sums of money stashed away offshore. To be sure, no wealthy Greek will ever repatriate all of his money, if for no other reason than for fear of having to pay up taxes. However, if they only bring back part of their money, many of Greece's growth financing challenges would be solved in a hurry. Wealthy people have a way of avoiding tax risks: they don't have to bring their money back in their own name. They can bring it back as back-to-back loans or in the name of foreign corporations or whatever. And they will undoubtedly bring money back as soon as they are convinced that the risk-adjusted return is greater in Greece than where they presently have the money. Clearly, should wealthy Greeks ever trust their own country, they probably would find no better investment opportunities than in a country which is on the economic rebound and which has a lot of economic catching-up to do!

Saturday, September 13, 2014

Why Greece's Non-Oil Exports Don't Grow!

I have raised this question several times in this blog: given the significant internal devaluation since the beginning of the crisis and given that the Euro itself has also declined against third currencies, it is hard to understand why Greece's non-oil exports do not show any significant growth.

The below article from Brookings gives the best explanations I have heard so far. Its bottom line is that "the failure of the internal devaluation to improve Greece’s export performance resulted from increasing costs and placing new risks and burdens on the productive economy that cancelled out any competitiveness gained from the fall in labor costs".

Why Internal Devaluation is Not Leading to Export-Led Growth in Greece

Monday, September 8, 2014

Marfin Investment Group (MIG) - Tale of a Zombie!

Every once in a while it happens that I start digging myself into a subject and the more I dig, the greater the appetite to dig even more. Typically, this happens when the digging does not lead to plausible answers but, instead, raises even more questions. This is what happened to me a few months ago when I stumbled into the dealings between Piraeus Bank and the Marfin Investment Group (MIG). I published 5 articles about it at the time and rested my case afterwards. I couldn't rest it for very long because an article about the former Governor of the Bank of Greece, George Provopoulos, brought the issue right back to my mind. Hardly had that issue died down in my mind, Piraeus Bank brought it back to the surface by proudly announcing that they had taken a 144 MEUR profit on a transaction with the MIG Group.

I had made a review of MIGs 2013 Financial Report back in May of this year and in the back of my mind I had stored the information that the group was in a very weak financial condition. Now I read that this group was so strong that a bank could take a 144 MEUR profit on it? That deserved some further research and I reviewed the Financial Report of the MIG group for the first 6 months of 2014, as per June 30, 2014. I will begin with only a few points and then draw some conclusions:

1) the MIG Group has annual sales of about 1,2 BEUR and employs close to 12.000 people. If that were one single company, one would have to say that it is a reasonably large company, though not a giant, and presumably a major factor in its industry. The MIG Group, on the other hand, is spread over a seemingly endless number of companies in several different industries. Its corporate structure and complexity resemble that of an S+P 500 multinational. The obvious question is how such a complex corporate structure can pay off when the aggregate of the businesses is comparatively small.
2) consolidated tangible assets amount to 2,3 BEUR and are exceeded by consolidated liabilities of 2,5 BEUR. A classic case of overindebtedness and insolvency. The group can avoid the latter by putting some value to intangible assets but there is no way of telling what that value really is.
3) all major group companies are still losing money in the first 6 months of 2014, and some of them losing a lot of it! In fact, all companies together lost about 80 MEUR in the first 6 months of the year before taxes!
4) the group has total interest-bearing debt of over 1,8 BEUR! Put differently, total debt is about 50% greater than annual sales which is a staggering relationship by all standards!
5) of that total debt of 1,8 BEUR, 831 MEUR is officially in default, i. e. financial conditions and contractual obligations regulating this debt (covenants) were not met. This gives lenders the right to terminate the contracts and make the borrowings repayable immediately. Put differently: but for the grace of the lenders, the MIG Group survives financially on a day-to-day basis.
6) as is customary, MIGs auditors (Grant Thornton) make only a 'review' and not an 'audit' of interim financial statements. What is not customary is that auditors make specific reference in their review to the fact that the MIG Groups's current liabilities exceeded current assets by 982 MEUR (!), "a fact that may indicate the existence of uncertainty regarding the group's ability to continue as an ongoing concern". Translated into plain English, the auditors are saying that the group is illiquid and cannot meet its short-term obligations. No auditor can suggest such a situation without simultaneously justifying the continued corporate existence: "Group's management has planned appropriate actions in order to enhance the group's financial position and going concern assumption, a condition which has been taken into account in the preparation of the financial statements according to the going concern principle". The plain English translation of that would read something like: "While the group no longer is an ongoing concern, management promised us that they are planning to correct this and that promise, and only that promise, allows us to still consider the group as an ongoing concern".
7) when browsing through the Financial Report, one wonders how the group can still exist when it is overdebted and in default all over the place? Presumably, no lender alone wants to trigger a financial collapse (at least not for the time being) and they all hope that they will lose less money if they can avoid financial collapse.
8) as an icing on a bad cake, MIG changed, once again, its accounting principles in the first half of 2014 and re-stated figures of comparable periods. They are now accounting for their investments in subsidiaries at cost. That way, they prevent any future write-downs of investments for impairment reasons. Changing accounting principles is always a sensitive issue. MIG has now changed theirs for the second time in only a couple of years.

These few points alone (one could write pages about more problems) suffice to describe that the MIG group is a financial zombie. It is hard to say whether it is an operational zombie as well. On one hand, there seem to be decent operating companies active in interesting branches of the real economy. On the other hand, why are decent operating companies active in interesting branches of the real economy losing so much money? Why do they have so much debt? The problem is: even if they had no debt at all, they would still be losing money!

One puzzle is how the enormous level of consolidated group debt has built up. One ought to research that question. Normally in a group, the debt builds up at the holding company level because the holding company buys companies all the time and finances these purchases with debt. In the case of the MIG Group, most of the debt is in the operating subsidiaries. How did it get there? What was it used for?

Since the operating companies are decent companies active in interesting branches of the real economy, they definitely seem to be worth saving. Is the membership in the MIG Group a benefit or a hinderance in that effort? I would say a hinderance. When looking through MIGs Financial Report, one wonders whether group management has time for anything other than dealing with banks and lawyers, negotiating and documenting agreements, etc. It’s hard to spend the morning negotiating convertible bond issues with banks and lawyers and return in the afternoon to deal with day-to-day issues of the dairy industry… And what the synergies are between the dairy industry and aviation would need to be explained to me!

The thing which bothers me the most is that both, MIG and Piraeus Bank as its major shareholder and lender, have a habit of making bad news look as good news, presumably hoping to fool readers. Piraeus brags about having made a profit of 144 MEUR on one transaction with MIG when in actual fact all they did was to upwrite the value of assets without any apparent reason/justification for doing so. And MIG, on page 10 of its Financial Report, makes it appear that almost all of its divisions are making very solid profits when one has to look into the details on page 53 to see that they are making enormous losses.

MIG tells a great story about itself on its website, describing itself to be "uniquely positioned to take advantage of an expanding array of investment opportuntities in the South-East European region; opportunities which traditional investment vehicles lacking MIGs regional focus, scale, expertise, and/or investment flexibility and financial resources may find difficult to identify and exploit". Piraeus Bank tells a great story about its relationship with MIG and how that fits its overall strategy of "enhancing the viability of troubled assets against extensive collaterals"

Successful enterprise typically requires a combination of hard and soft facts. Both, MIG and Piraues, seem very strong in the area of soft facts; in the area of story-telling.

When it comes to hard facts, it seems clear that the MIG Group is a financial zombie and Piraeus Bank a rather adventurous lender, to say the least! 

PS: I understand that Piraeus has now received permission to trade the convertible MIG bonds which it acquired a couple of months ago. Presumably, they will look for innocent depositors to take some risk off their books. Message to those innocent depositors: STAY AWAY FROM THOSE MIG CONVERTIBLES!!!

Friday, September 5, 2014

Privatizing Greek Beaches

It's only a few years ago that I first got to know Paliouri Beach in Chalkidiki. Arguably the nicest beach I have gotton to know in Chalkidiki.

At first, this looked like a rather underdeveloped beach/bay. A touch of 'raw nature'. True to form, there was an abandoned hotel ('Xenia') covered by trees and bushes. Everything looked really down-trodden. Except for the beach, of course, because that was of the finest.

I remember telling my wife that this was just a phenomenal example of Greek waste of resources. What a beautiful touristic development one could build up in the bay if one only put money and know-how behind it.

We visited Paliouri Beach again last week. It seems that my dream has come true. The Hellenic Asset Development Fund had put Paliouri up for sale and the Russian investor Iwan Sassidis, of distant Greek origin, acquired the object for 14 MEUR. He got 320 acres of land for it which he is now going to develop. Presumably a kind of resort like Sani Beach on the other side of the Kassandra peninsula.

While I should have been happy that my dream had come true, I felt the opposite. I pictured a Sani-type of resort in the bay and that, of course, would be the end of a 'raw-nature'-type of a bay. Not to mention the fact that 14 MEUR strikes me like a very low price for that kind of prime real estate. Immediately, thoughts about back-room deals between power brokers came to mind.

It is always easier to criticize than to propose solutions. I criticized Paliouri as an abandoned area and now I feel critical about some Russian investor crowding the beautiful bay with a huge resort. Something tells me, though, that there have got to be solutions between abandonement and luxury resorts; something which is better suited for the Greek coastline than abandonement or luxury resorts.

Wednesday, September 3, 2014

ECB Stress Tests --- Piraeus Bank et. al.

Wonderful times are approaching for all those who have been worried about the stability of the financial system: by late October 2014, so I understand, the ECB will announce the results of their multi-month examination of the roughly 120 “too-big-to-fail-banks” in the Eurozone. When all is said and done, we will know – so we are lead to believe – which banks are zombies and need to be resolved in an orderly manner and which banks have capital insufficiencies which need to be replenished within a short period of time. All other banks, in all likelihood the great majority of them, will pass the stress test successfully. They can be considered as ‘safe’ going forward. No more worries to be had about the stability of the financial system of the Eurozone!

I predict that the most interesting section of the ECBs report will be the one outlining the ‘qualifications’, the ‘provisos’, the ‘subject-to’s’, etc. Obviously, the ECB will not make any outright statement as to which banks are definitely ‘safe’ for the simple reason that one can never make such an across-the-board judgment about any bank.

Particularly the 4 large Greek banks will be interesting cases to watch. They have all published their financials for the first 6 months of 2014 recently. The common denominator is that roughly one-third of their loans are non-performing. I would argue that any bank (or any group of banks) which has about one-third of its loans in the non-performing category cannot be objectively judged as to its financial stability. Period!

In its examination, the ECB has to start with official financial statements and question those wherever appropriate and/or necessary. An uninitiated outsider might wonder why official financial statements need to be questioned when they are audited by reputable auditing firms. The disappointing answer is that one can do a lot of things with numbers even within the strict rules of International Financial Reporting Standards. Here is a case in point involving Piraeus Bank.

Piraeus Bank reported total net revenue (before operating expenses) of 1,374 MEUR for the first 6 months of 2014. Included in that net revenue is a 144 MEUR ‘gain resulting from the replacement of one the two acquired loans of Marfin Investment Group (MIG) companies with a convertible bond inssued by MIG’. Now that really sounds impressive because it suggests that MIG was able to raise fresh money via a convertible bond to pay back bank loans which had already been written-down by the lending bank. Quite a feat!

Unless, of course, the lending bank receiving repayment of its previously written-down loans and the bank buying the new convertible bond are one and the same bank --- Piraeus Bank. Then, the above-mentioned 144 MEUR gain is nothing other than a gain manufactured by fancy business practices and fancy (though not incorrect) accounting.

I have described in previous articles why, in my opinion, MIG – the holding company of the Marfin Investment Group – is a classic case of a financial zombie (here and here). If the P+L statement of a bank is heavily influenced by gains from a fancy deal with a financial zombie, one wonders how many other fancy deals are recorded in the official financial statements of the 4 large Greek banks.

And one really wonders how the ECB will deal with such issues!

PS: these issues obviously apply to all banks and not only to the Greek ones.