Friday, October 29, 2010

How Much Does Greece Matter?

The Bank for International Settlements (BIS) just published its international banking statistics for Q2 2010, showing, among other things, the exposure that one country’s banks have on other countries. In June 2010, the 24 countries that report data had an ultimate exposure of $156 bn on the Greek economy – the majority of that exposure was to the non-bank private sector (50%), followed by the public sector (41%) and then banks.

Over the past nine months, foreign banks have gradually unwound their positions on Greece. From a high of $297 bn in Q3 2009, foreign banks have reduced their exposure to Greece by some 50% or $141 bn. More than half of that decline came from Switzerland, which lowered its claims $78 bn to $3 bn between Q3 and Q4 2009. This reduction was part of a broader strategy by Swiss banks to shore up their balance sheets: between Q1 2008 and Q2 2010, Swiss banks lowered their foreign claims by 40% or $1 trillion.

Besides Switzerland, the two countries most exposed to Greece are Germany and France, which together hold around 60% of the global claims on the Greek economy. Both countries, however, have reduced their exposure to Greece since Q3 2009: the French by $21.2 bn and the Germans by $6.4 bn. Still, these two countries stand to lose the most in the event of a Greek default.

But how much do they stand to lose? The nominal amount they held in June 2010 – $94 bn – is significant. Yet that number is marginal in the overall portfolio of these countries’ banks. For France, claims on Greece represent some 1.8% of total global claims; for Germany, the number is 1.2%. Only for Portugal, which is the fourth largest holder of Greek liabilities, does a Greek default pose a serious problem since 7.2% of the total claims of Portuguese banks were on Greece.

None of this is to suggest that default would not hurt these banks or these countries’ banking sectors. Given that capital adequacy requirements can easily swing if a few billion dollars worth of assets are impaired, an exposure of $156 bn is quite serious. Yet, it is quite clear that French and German banks are both reducing their exposure to Greece (the French a lot more so) and that as a result, the impact of a possible Greek default on their balance sheets becomes progressively smaller.

Wednesday, October 27, 2010

Why Greece Needs a Repayment Extension from the Troika

There is much debate lately about whether the EU and the IMF should give Greece more time to repay the €110 bn it has borrowed. While any extension should depend on Greece continuing to fulfill its obligations under the memorandum, the extension makes sense. In fact, without an extension from the EU and IMF, Greece would most likely default.

To understand the case for the extension it is important to understand two points about Greece’s rescue package. First, this is not a rescue package: all the EU and IMF did is to lend money to Greece at a lower rate than what markets were asking. By Q2 2013, the program will come to an end, and Greece will need to continue to pay down its existing debt (including its debt to the EU and IMF) as well as to raise funds from the market to cover any future financing needs.

Now, the financing needs at that time are very high. According to the original IMF report (May 2010), by 2014 Greece would need to spend 23% of its GDP just to pay back debt. That is equivalent to 61.7% of central government revenue. Of course, no government can afford to spend that much on debt without reneging on its other spending obligations. The IMF noted as much in May 2010: “These figures … underscore the scale of market access that needs to be secured soon after the end of the program, in the context of average amortizations of public medium- and long-term external debt of over 65 percent of general government revenue.”

The second point that one needs to know is that the re-payment program to the EU and the IMF is heavily front-loaded. Disbursements end by Q2 2013, and Greece will start repaying right after that. In fact, about two-thirds of the debt should be repaid by 2015 and about 90% of it by 2016 (the debt goes away by 2018). The graph below presents the numbers around this dynamic and shows clearly the speed with which the positive turns negative.

With these two facts – Greece faces a re-financing need by 2014 and the repayment schedule towards the EU and IMF is heavily skewed to 2014-2015 – we can ask the following question: how much of the repayment challenge that Greece faces by 2014 is due to the EU and IMF debt and how much comes from other debt?

The graph below is my estimate of that figure – it is somewhat imprecise given the opacity of the data, but the error margin is not very high. What this tells us is that Greece’s repayment challenge in 2014 is fundamentally a challenge in paying back the EU and the IMF. More than half the debt service in 2014 is EU/IMF debt and more than 60% is in 2015.

In other words, if the EU and IMF do not extend the time for Greece to pay back its debt, Greece’s position in 2014 becomes exponentially harder. In fact, if no extension comes, Greece is almost sure to default and might as well give up on the program now.

Tuesday, October 26, 2010

Banking Sector Review: October 2010

The latest data from the Bank of Greece on the banking sector showed some positive news, mainly in the form of a reduction in the capital flight that the country has witnessed in 2010. Between January and July 2010, the deposits of households and corporations were falling by €3.6 bn a month. In total, more than €25.7 bn was either withdrawn or moved out of the country.

In August, for the first time in 2010, there was a positive change in the deposit number with an addition of €739 million. Looking at what drove that increase shows that it was mainly due to two forces (a) there was a significant increase of €574 million in the non-financial corporate sector; and (b) there was a net increase in the deposits of households of €74 million.

These two sectors, as can be seen in the graph below, have accounted for almost all of the drop in deposits – in fact, they have produced a decline in net deposits despite an offsetting increase in the deposits by insurance companies and the general government. So the fact that both corporations and households are boosting deposits is a welcoming sign.

Of course, there is much more than needs to happen before the massive outflow of 2010 is repaired. And perhaps August 2010 proves to be nothing more than a blip. But a positive blip it certainly is.

Friday, October 22, 2010

Foreign Investors in Greece, the New Barbarians?

The euphoria that followed a Memorandum of Understanding signed with Qatar in New York and the visit to Greece by Chinese Premier Wen Jiabao is sobering up: the first deal proposed in Greece after the rescue package has collapsed. In March 2010, Qatar suggested a set of energy-related investments in the Astakos port in Western Greece. A few days ago, it pulled out.

The Astakos investment was a long shot to begin with and the chances that it would materialize were slim. Anyone studying the basic elements of the deal could easily come to this conclusion and many did. The case for building a one-of-a-kind liquefied petroleum gas (LPG) power plant to sell power to Greece and Italy had neither commercial nor environmental merits. But these objections were overruled by politicians and pundits who wanted good news. The investment was welcome not because it made sense, but because any investment at that time would have boosted Greek and foreign morale.

The lesson from Astakos is that Greece needs to grow up when it comes to foreign investment. What the country lacks is the ability to perform a basic reality check on proposed foreign investment without οoverwhelming with joy or panicking with fear. At the heart of that inability is ambivalence to foreign investment, an attitude that is both inviting and hostile: the "ξένες επενδύσεις" (foreign investment) are the right's solution to all economic ills; by contrast, the "ξένα κεφάλαια" (foreign capital) are the left's excuse for what plagues the country.

Many countries struggle with that duality. But what distinguishes Greece is that it lacks is that moderating, sensible center - the cool technocrats and entrepreneurs that execute deals and carry on while the fringes are paralyzed with joy or fear. It is an attitude that runs deep in the Greek psyche. Since the Greek Revolution at least, Greeks have wandered between wanting foreign patronage and fearing it, between courting foreign "protectors" and repelling them at the same time. What is often missing is a focus on what Greece wants and how foreign interests could advance or retard those objectives.

Listening to Greek discussions over foreign investment, I merely think back to Constantine Cavafy's poem Waiting for the Barbarians:

Why this sudden restlessness, this confusion?
(How serious people’s faces have become.)
Why are the streets and squares emptying so rapidly,
everyone going home so lost in thought?

Because night has fallen and the barbarians have not come.
And some who have just returned from the border say
there are no barbarians any longer.

And now, what’s going to happen to us without barbarians?
They were, those people, a kind of solution.

Wednesday, October 20, 2010

Greek Budget Review: September 2010

The Ministry of Finance has released its September Budget Execution Bulletin (in Greek, here). The story is familiar: expenditures continue to perform much better than revenues and the budget deficit is showing considerable improvement, albeit still below targets.

Revenues have risen by 3.6% relative to 2009. This number must be set against a progressively less ambitious target: back in January, the government forecast a 10.8% increase in revenues and this target changed three times to 11.7% in February, then 13.7% in June and now to 8.7% in September. I have written before about the details of that revenue shortfall, but it is worth repeating here that much of the gap can be explained by (a) the inability to absorb EU funds and (b) lower spending which leads to lower than expected consumption taxes.

Spending, by contrast, continues to shrink at impressive rates, having fallen 7% relative to 2009. However, for only the second time this year, the achievement is below target since the government now expects a 7.8% reduction in expenditures versus the 5.5% reduction it was forecasting in August. In other words, spending restraint is still strong, just shy of the increasingly aggressive targets set by the government.

Looking at a little more detail on spending, it is clear that two areas are providing the bulk of the reduction: social security and wages. Together, these have shrunk by 3 bn, against an overall drop of 3.6 bn. Interest payments, by contrast, continue to be a drag, and the interest burden increased by 8% ( 859 million).

Overall, then, the budget deficit is expected has shrunk by 30.90%, which is still below the target of 36.9%, which in turn is a revised target from the 39.5% forecast in August 2010. This is also the first time that the government has revised downward its deficit target - all previous revisions showed an expectation that the deficit reduction would be higher than anticipated. No more.

Violence at the Acropolis

Protesters at the Acropolis have "tarnished the image of the country globally," said Prime Minister George Papandreou. Yet the images were both depressing and heartening. Depressing because there is nothing Periclean about the riot police clashing with protesters in Athens' "Holy Hill." But heartening too because here is a government willing to govern. In a country where mobs spend more time protesting than working, the government's resolve could mean that legislation passed will be legislation implemented.

The Greeks have a healthy aversion to state-sponsored violence. For the left, in particular, the riot police are the offspring of paramilitary groups that chased "dissenters" in the 1960s and 1970s. For those who grew up in the "Metapolitefsi"(after 1974) and never experienced that period, they are reminded annually on November 17 of the brutality of a state that turned its tanks against students who merely wanted a voice in their future. This anti-government bias in terms of violence means that mobs who despoil the city are as likely to be criticized as the police officers charged to stop them. Damned if you do, damned if you don't.

In fact, the largest protest since 1974 came in December 2008 after a police officer murdered in cold blood a 15-year-old boy. People protested around the country and around the clock against police brutality, although as time went on, the grievances invoked to justify protesting grew. There is nothing wrong with such protests - the police can be and often is brutal. But where are those same crowds to protest against the routine November 17 riots that turn downtown Athens into a wasteland?

Aversion to violence can easily degenerate into lawlessness. A people that too easily welcome violence are as doomed as one that disavow it categorically. Soccer matches where hooligans consider clashing with the police to be as central to the match-going experience as rooting for their team; successive governments tolerating violent protests; and a permissive attitude towards the most serious terrorist organization that operated in Greece until it "lost touch with popular feelings" – Greece’s problem is equally too little state violence as too much.

A state that cannot use violence to enforce its will is not a state. Unable to control crowds, the state confronts its own narrow legitimacy. A state built on patronage alone cannot take an anti-populist stance because it has no higher principle on which to stand. If there is no broader agenda, no higher consensus on what is acceptable and what not, the state wavers aimlessly between the inability to either lead the mob or to control it. Most recently, three people paid for that inability with their lives at the Downtown branch of the Marfin Egnatia Bank on May 5, 2010, in an act that the political elites denounced with a whisper rather than a shout.

People have a right to protest, just as the state has the right to maintain the peace. The use of violence is not, in itself, the question, and certainly not the basis upon which to condemn an act as "tarnishing the image of the country." Greece’s image should be to convince Greeks and foreigners alike that change will not be held hostage at the hands of this or that group of hooligans willing to fight in order to maintain the prerogatives that brought Greece to the brink of bankruptcy in the first place. There is a time for debate and a time for decisions. And if the state - and society overall - is not willing to stand up and fight for that, then we might as well give up now.

Saturday, October 16, 2010

The Suckers in Greece

A blog dealing with the Greek economy is a blog that deals with the insane, the delusional, and the corrupt. But there are still revelations that surprise and shock. Such is the graph below, showing salaries in the private and public sector sand in the eleven least profitable state-owned enterprises (SOEs). It is part of a presentation that the Finance Ministry published on the results of the least profitable SOE (here). 

In 2008, the last year for which we have full data, employees in the general government earned on average €26,556 a year. This is 39% higher than the average salary of €19,147 in the private sector. Now look at the SOEs: their employees earned an average €38,287, effectively double what private sector employees earned and 44% higher than even public sector employees.
(This is the same gap one observes in other places as well, I should note – for example, the US Bureau of Labor Statistics shows that government jobs paid 44% more than private sector jobs in June 2010. But that is another story and I believe does not negate the points below).

These numbers portray an unsustainable supply and demand dynamic, and the SOEs are just the tip of the public sector iceberg (they employ around 22,000 people). High wages mean high demand for public sector jobs, while the growing size of the public sector means no politician can say no to a voter seeking a government job. Incentives are distorted: given a choice between a private sector job and a public sector job that paid more and had guaranteed employment, who would pick the private sector?

A large public sector is linked to corruption and stifling innovation in the marketplace; it also enervates the constituency for reform. What emerges is a self-perpetuating dynamic where the political system caters to public sector employees and where the productive sector - the private sector - is squeezed as its tax contributions are increasingly used to fund public sector largess.

The implications go beyond taxes: society is divided between the private and public sectors. The eager and ambitious are told they have to start at the bottom and work their way up. Years later, they may match the salaries earned by entry-level staff in the public sector, but not their job security.

Even more, when they interact with the state bureaucracy, they encounter people that (mostly) work less and make more. More oddly, they encounter people whose dream is to find a job in government for themselves and their children. Where did the meritocracy go and does anyone seem to care? What values and dreams get rewarded? Are we "suckers" working hard in the private sector? The distortion in those incentives does more than skew the job market – society itself is turned upside down.

Saturday, October 09, 2010

Lies, damn lies and (Greek) statistics

As Greece readies to revise its statistics, it is worth trying to understand this sore subject. After all, doubts about the numbers lie at the core of the distrust and hostility that markets and governments have toward Greece.

This is a complicated subject and it is also intensely political. For research, I have relied on two Eurostat reports on Greek statistics done in 2004 and 2010. I have also consulted a documentary from the Greek show "Fakeloi," which is available online (in Greek only).

First some background. Greece government statistics have always been suspect, and Eurostat has been raising questions about Greek government statistics since the early 1990s. But since 2004, there have been three instances where revisions have been excessive:

- In April 2004, when a new government came into power, it ordered a "fiscal audit" that resulted in significant revisions of Greek deficit and statistics going back to 1997. Under this revision, Greece was shown to have been above the 3% deficit ceiling in 1999 - which means it would not have qualified to enter the Eurozone.

- In September 2006, Greece reported a large revision in GDP, which rose 25.6% for the base year of 2000. The press seized upon the fact that the revision included the incorporation of some illegal activities such as prostitution, but these made up less than 1% of GDP.

- In October 2009, Greece made significant revisions to its 2008 budget deficit from 5% of GDP, which is what it had reported in April 2009, to 7.7%. Not only that, but the change was preceded by another revision also in October 2009 which put the deficit at 5.6% of GDP. So within 19 days, the 2008 estimate rose by €3 billion. Greece also revised its estimate for 2009 from 3.7% of GDP to 12.5% (although the minister of finance says the latest available estimate was 6%).

Beyond these headline events have come other revisions. The table below by Eurostat shows the revisions in government deficit statistics since 2005. On average, there is a 1.4 percentage point, difference (33%) between the highest and the lowest number that the government has reported for any given year. Eurostat writes that such revisions are "extremely rare in other EU Member States, but have taken place for Greece on several occasions."

The 2004 Revision: Politics or statistics?

The 2004 revision remains controversial - so this is also a good case study into the subject of Greek statistics. According to the PASOK (government in place until 2004), the 2004 revision was little more than a politically motivated accounting twist to make the PASOK years look bad and alleviate some the fiscal pressures that the New Democracy government would face. PASOK claims that Eurostat allows countries to report military spending in two ways, and that New Democracy just switched from one to the other and thus "re-wrote" history. A few years later, Eurostat eliminated the reporting method chosen by New Democracy, vindicating PASOK.

So is this story accurate? It is indeed accurate but misleading. First, only 60% of the 2004 revision came from how military spending was reported - thus saying that the audit was merely about changing accounting methods is incomplete. Second, PASOK seems to suggest that all was good in its own accounting and that New Democracy merely changed the reporting method for military spending in order to make PASOK look bad.

The question of military spending is this: Eurostat says spending should be recorded when military equipment is delivered. But in Greece and many other countries, that information is confidential so statistical agencies and finance ministries often have trouble obtaining the data and compiling honest accounts. In those cases, Eurostat suggests that the spending be captured when the cash is delivered throughout the contract duration.

Greece was reporting data at the delivery date - and since the PASOK government had procured large pieces of equipment that would be delivered from 2007 to 2008, this spending would show up in the New Democracy government’s accounts. According to PASOK, that is why New Democracy changed the accounting method to “cash disbursements” rather than “delivery date.”

New Democracy answers that in fact, the reporting was done with neither method and that much spending showed up nowhere. According to Eurostat, the government said in September 2004 that, "although the method for recording expenditures was based on deliveries, in fact no information on deliveries was ever received by the NSSG and the Ministry of Finance since 1997. Therefore most military expenditures covered by borrowing were not recorded since the last 7 years."

Eurostat had raised the question of military spending in 1996, 1997, 1998, 1999 and 2002, at which point it considered the matter closed based on what it had been told by the government. So it was somewhat surprised when New Democracy said in 2004 that there was data missing and that no recording had taken place for significant amounts of spending. In that sense, the New Democracy government did not so much change the method but instead pick the only measure that was available to give some of what had been spent in the past.

At this point, it is very hard to know who is right: did the statistical agency and finance ministry indeed receive all the data as per PASOK’s claims or not as per New Democracy’s claims? It seems hard to say that New Democracy would just make a 7-year paper disappear, but again, I have no proof either way. Still, the impression one gets from reading the Eurostat reports is that there has been systematic under-reporting by the Greek government for several years and that Greek governments had failed to systematically address the subject. In that context - and this is pure conjecture - I am more inclined to believe the New Democracy line of reasoning.

Beyond 2004: The politics of statistics

The 2010 Eurostat report on Greek statistics highlighted two problems: "problems related to statistical weakness and problems related to failures of the relevant Greek institutions in a broad sense." My sense is that there are three views on Greek statistics: first, revisions are normal accounting practice and no big deal; second, that the revisions come from political pressure; and third, that revisions reflect the fact that no one actually knows what the truth is. The focus on the first two distracts the fact that much truth rests with possibility three.

Begin with the first view. Yiannos Papantoniou, finance minister when Greece joined the euro, holds this view, arguing that statistics and accounting is about judgment: "Greece did nothing different than what France or Germany or any other European country did in its effort to present the best possible fiscal picture to achieve entry into the Eurozone." George Alogoskoufis, the finance minister who led the 2004 audit, sympathizes; when asked whether Greece joined the Eurozone with fraudulent numbers, he says that Greece joined with "broadly speaking correct numbers." But obviously, he also thinks that there were systematic distortions in Greek statistics.

What is very interesting about the 2004 debate is that for the vast majority of people and pundits, their main issue was not that the Greece may be cooking the books but that Greece was getting a bad press for cooking the books. John Stournaras, a former economic advisor to PASOK and now in charge of the IOBE think tank, notes that the 2004 audit led to a minor revision for the 1999 deficit and that "for just 0.2% of GDP, Greece received very much bad publicity in the international press."

The second view, held by Nikos Karavitis, former Secretary General of the National Statistical Service of Greece, is that there are pressures from other parts of the government on the statistical agency to produce figures that conform to the predictions made by the other ministries. In that sense, the NSSG is really doing its job as well as it can and then others fiddle the numbers for political ends. This broad view is also what PASOK effectively accused New Democracy of going in 2004 - twisting the numbers to serve political ends. At the extreme end, there is also of course the view of outright manipulation – for example, Mike Lewis reports on how Greek inflation and budget statistics were systematically distorted.

This brings us to view number three, which is that there are deficiencies in the collection and reporting of Greek statistics with unclear and overlapping (or non-existent) authorities that carry ultimately responsibility for the numbers. If nothing else, this is the image one gets as one delves into the subject. The lack of statistics is a symptom of the broader lack of accountability - how to manage, how to assign blame if one has no idea what is happening? The public sector - from local governments to hospitals - is notoriously deficient in its book keeping. No supply of good data because there has been no demand for good data - until now.


In October 2009, Jean-Claude Juncker, president of the Eurogroup of finance ministers, said, "The game is over - we need serious statistics." As I look into Greek statistics, there is one other quote that keeps coming to mind from Mr. Willis of Ohio (from the namesake West Wing episode). Mr. Willis is a high school social studies teacher who replaced his deceased wife in the House of Representatives. This self professed "dummy" who is "not nearly as smart as [his] wife" has one issue that we see him struggling with: using statistical sampling to do the census. Toby Ziegler, White House Communications director, manipulates Mr. Willis' lack of experience into accepting sampling. In the exchange that follows between Mr. Willis and Mr. Ziegler, Mr. Willis says: "I think the problems that we're going to face in the new century are far beyond the Wisdom of Solomon, let alone me. But I think the right place to start is to say, fair is fair. This is who we are. These are our numbers." What a thought.

Thursday, October 07, 2010

Greece's Corruption Problem

Greece is a corrupt place. But how corrupt, in what areas, and it is getting worse?

A good place to start is estimating the size of the "shadow economy." Friedrich Schneider, an authority on the topic, has released new figures on Europe. He defines the shadow economy as activities that are "deliberately concealed from public authorities" to evade taxes or social security payments; to "avoid having to meet certain legal labour standards"; and to "avoid complying with certain administrative procedures."

According to Schneider, Greece's shadow economy was 25.2% of GDP in 2010, compared to an EU-27 average of 21.1% of GDP. However, Greece's shadow economy has shrunk since 2003. From seventh place in 2003, Greece was ranked eleventh in Europe in 2010. In that place, Greece is at the bottom of the EU-15 list but better than almost all the new member states (not the Czech Republic and Slovakia). 
Looking at which economic sectors are most susceptible to the shadow economy, Schneider calculates that 22% of the shadow economy comes from services (hotels, restaurants, etc), followed by entertainment and the leisure sector (21%).  The rest is split between "construction and skilled manual trades," "other trades and industries," and "miscellaneous trades and domestic services." Overall, the shadow economy in 2008/09 was estimated at 61.5 bn.

To zoom more into the question of corruption, Transparency International is the source. In 2009, Greece got a score of 3.8 (10 being least corrupt), which tied Greece in 71st place with fellow Balkan counties Bulgaria and Romania. These three were also the bottom of the European regional table, almost ten places below Italy which was next from the bottom. More worrisome is the deterioration in Greece's score in 2006; from 2006 to 2008, Greece ranked around 54th to 57th with a score of 4.4 to 4.7. So the main story is not just the extent of corruption but also the perception in 2009 that things got worse.

Transparency International also breaks down which sector the people perceive as most corrupt. The most distrusted institution is the political party - 58% of the respondents saw political parties as the "sector most affected by corruption." This number puts Greece at the very high end of concentration of corruption perceptions against political parties, tied with India (also 58%) and just below Nigeria (63%).

Notable also is how little distrust there is of business, at least in the sense of people perceiving business as corrupt. Just 4% of respondents thought the private sector was the most corrupt (versus 23% in Europe as a whole). Greece's corruption rating for business, however, at 3.4 is on par with the European average (5 being extremely corrupt). By contrast, the score for corruption perception for political parties is 4.4 versus a European average of 3.7.

Finally, Transparency International reports the share of the households that had paid a bribe in the last twelve months. In Greece, this was 18%, which is the second worst in Europe (behind Lithuania) and also more than three times above the European average of 5%. Other countries with an 18% response rate included Pakistan and Nigeria.

The picture one gets from these numbers is of a country at the bottom of the EU-15 scale in terms of a shadow economy and whose population is three times as likely as the average European to have paid a bribe. Greece is also one of the most political countries in the sense of political parties wielding excess power, which in turns means they both despised as well as admired, at least by the people who see them as the path to success.