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.

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:

• Infodata: http://www.infodata.ilsole24ore.com/2015/02/18/lesposizione-di-banche-e-stati-europei-verso-la-grecia/
• Goofynomics: http://goofynomics.blogspot.gr/2015/01/cosa-sapete-della-grecia-fact-checking.html
• Parts translated from posting: Beppe Grillo Blog

Country review: the most cost effective access into the Schengen Zone and its vast market - Invest in Latvia

When we read economic news we are bombarded by events from the usual suspects: US, China, Russia, EU. The truth of the matter is that there are key geographical areas in the world that, although sometimes made up by small economies, offer instead very good attractive environments for investors that aspire to access a large markets in a very cost effective way.

One of these key countries is Latvia. Very interesting location among the Baltic countries I will provide a series of key competitive advantages that position this country as the natural gateway into Europe on one side and into Russia on the other side.

ACCESSIBILITY TO LARGE MARKETS: EU & Russia (and CIS Countries)

Latvia is uniquely positions in Norther Europe with equally good access to Europe as well as Russia and CIS countries.

Latvia in spite of his moderate dimensions has 3 large ice-free international ports: Riga, Leipaja and Ventspils. All the ports are closely linked to the country transportation infrastructure including: railway, pipeline system & highways.

Since Latvia is part of the European Union and a Schengen Zone member all custom regulation are based on free trade principles and are uniformed with the rest of Europe, although custom procedures have been standardised and simplified to make the movement of goods and cargo as effective as possible.

Further Latvian railway uses the same standards as Russia and CIS countries making it very easy to transport goods into Russia and Central Asia. As an example: NATO used Latvian ports to transport non-military goods to Afghanistan using the Russian railway systems. 

DEVELOPED INFRASTRUCTURE

Transportation & Logistics

All the global logistics and shipping companies are present and operate in Latvia (Schenker, BTL, Kuehne and Nagel, Maersk, etc.) and make wide use of the available intermodal infrastructure.

• Roads: Latvia is one of the only three EU countries with direct access to Russia making quite easy to move goods along an east-west route. The Russian highway M9 also known as the Baltic Highway connects Moscow directly with Riga (Capital of Latvia), this highway also crosses another important traffic artery for goods and people which is the Via Baltica highway which runs north to south and connects seamlessly Helsinki with Prague.
• Ports: Latvia is famous for its maritime routes and infrastructure, it features three international ice-free ports: Riga, Leipaja and Ventspils. All ports feature intermodal connections and Ventspils also features a free trade zone.
• Rail: the rail system is well developed and quite reliable with standards matching the typical one of Northern European countries. One important aspect of this system is that it matches the Russian rail track standards and therefore it is very suitable to move goods into Russia and other ex CIS countries adhering to the same technical standard. The system has been used by NATO for example to move non-military goods from the Latvian ports into Afghanistan to support the military effort in the country.
• Air: Riga airport (RIX) is the largest airport in the Baltic and offers direct flight to 80+ destinations and it is conveniently situated at the cross road between Via Baltica and the Baltic Highway.

Information & communication technologies

Latvia has one of the fasted telecommunication network in the world and this has favoured the development of the information system industry as well as contributed to one of the highest Internet literacy in Europe and the World.

• Latvia is 5th globally for the average measured internet connection speed (7 Mbps)
• 7th globally for broadband connectivity above 5 Mbps.

Source: State of the Internet 2011 Q4 Report, Akamai.

MACROECONOMIC STABILITY

Latvia is a member of major economic and political global organisations including but not limited to: WTO (World Trade Organization), NATO and the European Union (Schengen Zone).

As opposed to many European countries Latvia upon the 2008 economic crises has significantly reduced government expenses and immediately put in place a series of investor friendly laws that accelerated the quick economic recovery that is currently still in place.

Data shows that post crisis a healthy de-leveraging process truly took place in Latvia, as opposed to many countries in Europe such as Spain, Greece and Italy for example, and while painful at that very moment it gave way to the recovery and a new cycle of economic expansion.

Latvia has bilateral trade and tax agreements with more than 40 countries for the promotion and mutual respect of investments.

The country joined the EURO area on January 2014.

Intellectual Property Laws are well developed in full compliance with EU standards and the country is not part of the Special 301 Report maintained by Office of the United States Trade Representatives including all countries without adequate IP protection laws and IP enforcement. 

Heritage Foundation Survey 2013 results - Index Economic Freedom: Latvia 

COST EFFECTIVENESS

Latvia is one European country that allows for high productivity at low resource cost, especially what concerns human resources.

The main parameters that make Latvia a very investor friendly country are:

• very competitive and skilled workforce at low price;

• competitive tax rate.

Riga, the capital of Latvia, was ranked 7th best European City for Cost Effectiveness by FDI Magazine (European Cities and Regions of the Future 2012/2013), while Jelgava and Ventspils were ranked 6th and 9th respectively as Best Micro European Cities for Cost Effectiveness.

Latvian Labor productivity

Please note that Latvian workforce in addition to be very productive is also very versatile as the average Latvian speaks at least 2 languages and for the new generation it is common to speak 3 languages: Latvian, English and Russian making it an ideal place from which to conduct international business.

Labor expenses are also very reasonable as compared to the rest of Europe and the employment laws exceptionally liberal for a European country.

For example: Germany’s labor costs are approximately 4-5 times higher than Latvia.

Eurostat data available HERE

Latvian Tax rates

Latvia has one of the lowest corporate rates in Europe and one of the lowest in the world: flat rate 15%.

Personal income tax is also at a low flat rate of 25% according to a government decision such rate will be reduced by 5% in 2015. Dividends to EU citizen are not taxed.

Further note though that for re-export companies or manufacturing companies operating in the designated free zones there are significant tax benefits in place.

Latvia has 4 free economic zones (quite an anomaly in the European Union and something that the existing government negotiated hard to keep in spite of the entrance in the EURO zone this Jan 2014): Ventspils which has been ranked as 7th best free zone of the Future by fDi Intelligence. Riga and Rezekne - 49th and 50th respectively. Please note that Ventspils has also been named second best world port zone in the world.

Residence Program for Investors

Further to the various advantages above the country like few others countries in Europe has set up a residence program for investors with the exception that the entry costs are quite lower than respective programs in Cyprus, Spain or Greece for example.

Investors these days are choosing to buy a real estate property in Latvia that they can easily rent if necessary to be able to acquire a Schengen Area residency and unlock several privileges: unrestricted travel across the EU, access to resident only educational program at the European level, be eligible for European grants for business projects and so forth.

Many Russian and Chinese nationals have availed themselves of this program although recently we started noticing an increasing interest from Arab nationals, especially from the Arabian/Persian Gulf area. 

For additional information about the Schengen residence program please visit HERE.

Please inquire with me if you require additional data about Latvia, for reason of conciseness we avoided entering data about:

• Labor related incentives granted by the government to investors hiring Latvian personnel;

• Macroeconomic data about the different industrial sectors;

• List of investment opportunities in renewable energy and high value added sectors

• Quality of life data

All topics above are bound to be material for additional postings on this blog to further uncover opportunities in Latvia and neighbouring countries.

The Long Sunset of Europe

As we are witnessing a consistent stream of bad economic news from the Eurozone, I am a bit puzzled at the relatively shortsightedness of the analysis of the experts broadcasted across most of TV networks.

The main highlights surrounding Greece, Spain, Portugal and eventually Italy tend to focus around problems of fiscal nature.
In reality, fiscal problems are only an effect and rather not the cause of the matter.
In my modest opinion, the fundamental problem that is shared by many economies in the Eurozone is a fundamental lack of competitiveness. Cost of labor have soared, cost of welfare with it, productivity has decreased and the long term demographic trends, as shared in previous posts, are negative with no possibility of reversal.

The resolution of this matter is further complicated by the limited range of monetary policy options at the country level now that the EURO is in effect.

While in the old days each country made ample use of the monetary policy to boost competitiveness of goods and services, today the government of these countries need to come to terms with the fact that this option is no longer available. The ECB is working on a set of monetary policies that are to address the needs of a wide area of countries at times radically different from each other (look at the spread on the 10 years notes to witness the differences first hand). The end result is in fact a bit of an improbable exercise of equilibrium that tends to lack effectiveness.

Now it is the time in which the Eurozone needs to come to terms with a fundamental dilemma: one central bank setting monetary policies for all members but no strong political centre with the necessary powers and support to make difficult choices. The problem is therefore one of political nature just as much of economic one.

While Germany has been working very hard over the past 10 years to increase productivity without increasing the cost of labor (successful exercise, data shows), other countries have grappled with a consistent decrease in competitiveness and soaring costs. Moving forward given the fundamentals the differences between the central and periphery of Europe are going to unravel with: Germany/France on one side, the Mediterranean and Eastern Europe on the other.

I guess the concern that I would like to share is with regards to the remedy currently implemented.
From a birds-eye view, the liquidity offered in the forms of various loans by the ECB/IMF to Greece has a cost of 5%, hardly favorable terms. The loans can be activated in various forms upon implementation of structural reforms which are bound to further decrease internal consumption, which are going to drive down production and increase employment as well as decrease money velocity. (internal devaluation)

Aren't we running the risk of prolonging the agony, destabilize a country (people unrest is a real side effect) and arrive again at a point in which new injections of money is required?

It is indeed hard to evaluate other solutions given the existing exposure of German banks for example to both the Greek and Spanish debt. A potential return to the dracma for Greece would signify the failure of the EURO experiment. Nonetheless, sooner or later German & French voters are going to call for a better understanding of what is in it for them to bail out Greece now and who knows tomorrow.

Jean-Claude Trichet, President of the ECB, rightly said: "there is a need for a quantum leap in the governance of the Euro area". The real question is whether there is the political might and willingness of the single countries to make this necessary quantum leap. If I have to give odds to the Euro today, I would bet against its existence over the next five years, but let it be clear: as a European myself, I hope to be proved wrong.