Tuesday, July 21, 2015

Greece: Loose-Loose agreement is now place, additional pain for all parties enduring

The never ending Greek saga is now adding a new chapter to its drama. And dramatic indeed is going to be the situation of the Greek citizen that after yet another round of bailout funds are bracing themselves for yet more of the same failed medicine: austerity measures, cuts to public services, forced privatization, etc.

7 years of austerity measures that didn't work and nobody is thinking about perhaps changing the medicine. It is fascinating to see how an irrational behavior gets perpetrated over and over in spite of the evidence just to be able to preserve special interests, banks and the needs of the powerful Germany industrial apparatus.

So let's analyze the high-level outcome to see how whatever has been agreed so far; mind much more needs to be agreed in the terms of the bailout that needs to come.
  1. the current government of Greece had to swallow an agreement that it didn't believe in. Selve preservation? perhaps... needless to say Mr. Tsipras agreed on punishing measures that are worse than the one offered before the referendum he called. Defeat? Yes. As much as this can be promoted otherwise, his strategy didn't yield any advantage. The only person coming out as a hero out of this is the ex Greek Finance Minister Yanis Varoufakis that called himself out of the deal as soon as the referendum outcome was clear.
  2. The Troika forced terms onto Greece and the general feeling across Europe is that they were forced from the powerful and intransigent Germany, an abuse of power. This is bound to increase an anti European and anti German sentiment across Mediterranean Europe that will be used by anti Euro parties to gain vote at first opportunity. 
  3. The Troika came short of offering any haircut on the debt with the exception of vague allegation of the need of considering one from the IMF. 
So... 1, 2, 3... more of the same bailout in exchange for higher taxes, less social state, rampant cuts to education and health care, privatization of state assets to the benefit of foreign corporation. Mind that this recipe has failed over and over again over the next 7 years, it is therefore ludicrous to think how the new 80B EUR added to the overall Greek debt are even going to be repaid.

In the meantime, a weaker EUR is bound to help German export just for a little bit longer. With the US heading towards a rate increase in fall it is likely to see parity between EUR and USD in a short while.

This last round of negotiation represents a lost opportunity for both parties:
  • For Greece: an opportunity to start re-gaining sovereignty in the face of difficulties. It is clear that difficulties would lie down the road in case of a GrExit but with some proper policing there could also be a light at the end of the tunnel; I am sure that in case of a GreExit there would be new partners in the BRICS very interested in gaining access to the middle of the Mediterranean;
  • For the European leaders: the opportunity to re-evaluate the problem of the Mediterranean countries with a new set of measures. An alternative to austerity will require some debt haircut but it would also give confidence again in the European dream.

As pointed out before: there is no solution to the Euro problems without considering two fundamental steps:
A.  Issuing EuroBonds that would make the debt of European members: EUROPEAN;
B.  A system of significant transfers from richer states to poorer and less competitive states; this has been going on in the USA consistently;
C. A process leading towards a stronger political integration to limit fiscal discrepancies across all countries.

It is essential to point out that the differential in the interest rates applied in each country lies flooded certain less competitive countries with cheaper money from the most competitive one. These transfers in the private sector lead to a dysfunctional situation ONLY when during the fall out of the 2008 crisis we decided to bailout the banks with public money.

Since as it seems A-B-C remain something that is so far removed from the political elites in power in Europe we believe that the whole EURO experiment has failed already and it is just going to impoverish further not only Greece but also Italy, Spain & Portugal to begin with. Eventually the losers will outweigh the "winners" in the EURO game and the experiment will come to an end.

Wednesday, July 8, 2015

The ownership of DEBT in Europe: shifting from private debt of French & German banks to public debt on the shoulder of European Union citizen, saving the banks & the death of the European dream

Debt to be dealt as a main topic all over the news outlet. Although the general rhetoric seems to be rather simplistically dealt with.

It is therefore important for me to speak up against the general statement of: Greeks don't want to repay their debt and therefore they deserve the cuts and austerity?
Mind that the same goes for Italians, Spanish, Portuguese, and let us not forget Islanders and Irish too... 
The only difference with the Islanders has been the recipe applied to solve the debt problem. But we will get to it just a bit later.

Therefore, let's get into a bit of detail to get something straight. Debt comes in many shapes and forms for now we distinguish between Private Debt and Public Debt. (for a definition follow this link)
Credit (& therefore Debt) have been the cornerstone of modern economics, the capitalist version of global development is based upon CREDIT & DEBT.
Simply acknowledge that the most developed countries run a balance deficit and most countries run a positive Debt/GDP ratio: here is a link to a site that calculates it for most countries REAL TIME: http://www.nationaldebtclocks.org

The competitiveness of the credit rate therefore moves capital from one country to another. When in Europe countries started first to run a fixed rate with their local currencies and the EURO and later adopted the EUROs credit opportunities were created by making French & German money available at a cheaper rate in the countries of the south. That is because while the EURO was common the competitiveness of each country was different, the interest rate applied to national bonds were different and therefore Italian, Spanish and Greek bonds were more lucrative thank French & German, that is why money moved from French & German banks to Greece, and Italy, and Spain, etc. etc.

Banks, consumers and individuals in the receiving countries were therefore presented with cheaper money and therefore when presented with a choice they choose the cheaper option. The same natural behavior that takes place EVERYWHERE in the world, not any different than USA, Canada, Korea or Russia. When presented with a more convenient option for similar service people choose the less costly option. 

PRIVATE LENDERS therefore flooded Southern European countries with their money (and also their goods, but that is another story!). Higher yields were convenient to the German and French banks. Nobody complained even if the risk became higher and higher as the competitiveness of the borrowers (southern European countries) was deteriorating. 

At the bursting of the 2008 global crisis the whole game came to an end.

Private money dried up instantly, and the reckless lenders: German, French and Dutch banks for the most part had to be rescued quickly from the toxic waste that they created, and so they were rescued... BUT with public money.

It is ONLY at this point that the PUBLIC debt started to pile up very quickly on the country of Southern Europe, not before. A private debt became a PUBLIC debt issue because Greece and so the other countries started receiving bail-out money that was used to cover the toxic waste of large European Banks. In fact the money of the bailout went directly from the ECB, IMF, etc. directly into the private banks they were saving. 

The rhetoric then became: Greek (or Italians, or Spaniards) don't work hard, over borrowed, etc. 
This argument is simply not credible. The reality is far too complex to believe such an oversimplification.

Southern countries were allowed into the EURO in spite of the fact that they didn't meet the Maastricht requirements (arbitrary requirements nonetheless) because they were useful to keep the value of the EURO low, to allow more competitive countries to develop a new mercantilist strategy and be able to export their goods (and funds and services) to the near shore markets of the south and gain competitiveness abroad.

The imbalances of this strategies have now wrecked any solidarity around the European Union and killed the European dream. Barriers are rising, local nationalist movements are on the rise... sacrificed all in the names of the financial markets, banks and special interests.

I wonder if there will be time for adjusting the system or we have forever deprived the next generation of a united strong and united Europe.

Data: below is a graph (unfortunately in Italian) that shows the debt divided into Bank related Debt in blue (private debt) and State related debt (public debt), you can see the development of the debt from Dec 2009 to Sept 2014, shifting from a private debt into a mostly PUBLIC debt, at that point banks were already saved and the burden of the debt shifted onto European citizen.

Tuesday, July 7, 2015

EURO DOOM: The Greek vote, another significant step towards scrapping or rethinking the EURO as it is

The time has come to shake the fundamental construction of the EURO ZONE.

The Greek government has gambled its existence and won. The technocrats in Europe had stepped up a strong rhetoric in Greece availing themselves of some good connections in the press industry but it wasn't enough.

As we reported before back in 2011 (http://emerging-markets-investment-news.blogspot.com/2011/07/critical-juncture-euro-usd.html): the EURO project as it is has failed, and the latest is just the apex of this failure so far but we believe that more is coming, and depending on the tactics used now to handle the Greek situation an anti EURO domino effect could be in play.

Austerity measures have had an adverse effect across the entire set of the southern countries of the Euro zone: Greece, Spain, Portugal and the big elephant in the room: ITALY.
Anti EURO sentiments have been flaring in all countries together with some separatist movements.

In Spain the Podemos movement, in Italy the Lega Nord and the "Movimento 5 Stelle" (M5S) embody the anti euro sentiment growing in the south of Europe.

Austerity measures have brought unemployment, they have NOT reduced the debt/gdp ratio, have impoverished the poor and created further distance from the cast of technocrats and "main" street (Point 6 & 7 below for proof).

It has now come the time to reconsider some of the common well advertised misconception that have been used to ride the austerity measures till now and for simplicity we will use Greece as a base for our discussion, please note that the same reasoning have been applied to Spain, Portugal and Italy.

1.  Greek people retire too early!

Following is a graph visually representing the impact of pension reforms on the average effective retirement age from the labor force:


The graph shows in blue the long term (2060) pensionable age before the pension reform and in red AFTER the pension reforms enacted by the various governments. Pre-Austerity Greece (indicated with the two letters EL) had an average pensionable age set at 61.9 years for male, in line with the rest of Europe.

After the reforms Greek citizen will retire gradually later than Italians and all other Europeans, excluding Cypriots, Danish and Dutch citizen.
IF there are certain privileged segments of the populations that retire earlier (called baby-pensioners) this is true across the entire Western countries and not only for Greece.

2.  In Greece there are too many public servants: FALSE!

The following graph shows the ratio of public servants employed against the total employed population.


The data shows the ration between 1999 and 2007.
In Greece the public servants represent less than 8% of the total employed population. In Germany it is 8%! Greece is right on par with the rest of Europe, bar right from Greece marked as EZ.
In France as a term of comparison public servants almost represent 10% of the total employed population.
As a very important note: with austerity measures no European country has decreased the number of public servants as much as Greece has done to-date. In 2009 public servants were 907,351 and in 2014 they were 651,717. That is 255,634 units less for a total of 25% less! Greece post austerity would find itself at the very right of the graph above.

3.  Public spending is too high: FALSE


In the graph you can appreciate the average public spending value against the total GDP between 1999 and 207. Italy has been put in red as a point of reference. Greece is below the Eurozone average (EZ12 - EU27) and it is distant from the 50% of public spending against total GDP surpassed by France for example. This value has gone from 47% in the year 2000 to 43% in the year 2006.

4.  Greece hasn't implemented any structural reforms: FALSE
Cuts in the public sector and in the pension systems have been rather dramatic. Collective negotiations via trade unions have been overall eliminated all together, although the Tsipras government would like to reinstate them. Furthermore, Greece was in 2010 at the 109th place in the standings of the countries most convenient to open a new company and do business. In 2015 in the same standings Greece is now at the 61th place and has climbed tenths of positions getting close to Italy and all other "advanced" economies. Assuming that a flexible workforce is one of the most sought after criteria for development as per the "ease of doing business" criteria, Greece has made significant relative improvements, most than any other European "partners".


5.  Greek people work little: FALSE


Please don't confuse work time with productivity. It is clear that in spite of the longer hours the productivity of the hours is not at the same level let's say with Germany given the different type of infrastructure and industrial development between the two countries.

6.  Greece's crisis is determined by the high public debt: FALSE
The graph below shows the relationship between Public and Private debt leading to the 2008 world crisis.


Greece public debt remains constant during the entire period at around 115%, lower than the Italian one for example. It is the private debt that starts to run away after the fixed exchange rate is introduced and then the country adopts the EURO.
That is because Greece all of a sudden becomes the target of foreign creditors (mostly French and German) because the interest rates with the EURO become lower and Greece can't devalue its currency to bring the trade balance back to zero. Since export weren't enough, Greece finds itself financing its import with credits to the State and to foreign private institutions. At the unfolding of the world crisis of 2008 foreign credits suddenly stop and Greece is forced to austerity to pay its debt.
THEREFORE: it is a crisis of the PRIVATE debt favored by the EURO set up that strangles Greece and not a crisis generated by the PUBLIC debt as hailed by most.
IF later there is an explosion of the public debt/GDP ratio that now has reached approximately 180% from 125% in 2010 it is because AUSTERITY measures greatly increased unemployment from 7% to 25% and they have greatly reduced tax and vat revenues together with the GDP (-25%).

7.  Greece deserves austerity because doesn't pay back its debits: FALSE
As per the previous point the main debit comes from foreign banks, mostly French and German. These banks have inundated families, companies and Greek banks with money from the establishing of the fixed rate between Dracma and Euro, and even more at full establishment of the EURO till 2007. It is more convenient for Greece (companies, individuals and banks) to borrow from abroad since Greece cannot devalue its currency (and together with it its debts) and interest rates start becoming lower and lower because of the EURO. With the Lehman Brothers crisis of 2008, French and German banks stop any lending and start pretending their debts to paid off. Austerity and European loans to save "Greece" are used to save the credits of French and German banks, not to help the Greek people to stand back on their feet.

The loans of the ESM (European Stability Mechanism) end up for 90% of their value in French and German banks to save them. In parallel the debts of all countries that have participated to the "saving" of a country go UP (In Italy it accounts for 40B EUR) and the Greek public debt reaches 240B EUR of ESM loans. But the debt could be considered not legitimate as it is bore by European and Greek citizen to save private banks that to exploit the EUR lent money without paying attention to the fundamentals of the economies financed.


From 2010 the exposure of French, Dutch and German banks to the Greek debt diminish greatly. The banks have been saved! Now Greece could exit the EURO but the Troika is afraid of the domino effect for the other countries with similar problems and bigger economies, see Spain and Italy.

8. Greece has cheated the numbers to enter the EURO: true, but...
With the help of Goldman Sachs and the supervision of the EU, with governments favored by the European technocrats: Neo Demokratia and Pasok. That is because Greece in the EURO was useful to Northern Europe, especially Germany to keep the value of the EURO low against the Mark. All analysts were aware of the accounting tricks of Greek/Goldman Sachs.
A similar set up has been used for Italy which didn't respect the debt/gdp ratio of the Maastricht Treaty (60%) but that has been welcomed in the EURO zone nonetheless. In fact Italy outside of the EURO zone with its currency and the ability to have its monetary policy would have proven a formidable adversary to the mercantilist policy of Germany.
Please note that even Germany and France didn't keep the 3% deficit/gdp ratio during the first years of 2000 but they have never been sanctioned for it.

Data collected: