A Greek on Greeks

I was privileged to sit beside a rather interesting Greek lady on a flight the other day. Well into her 80's, she was flying back to the homeland to spend a few weeks with her family. Her sons had seen her to the airport, but she was otherwise making the multi-segment journey alone. She was a very self-possessed and chatty lady, and the otherwise tedious flight simply flew by as we talked. She made an excellent sales pitch to me for spending a vacation in the islands where she would be staying.

We got talking, and the topic of conversation turned to Greece itself. She had left the country several decades ago to live and work abroad, and had prospered there. She was in no doubt about why Greece was in its current state. "They just don't pay taxes," she explained. "There's no respect for the law." She personally knew of several people in her small Greek home town who went to the town hall each month to claim their state disability benefit for blindness, then happily drove back home. She was quite happy to pay taxes in her adopted country, and benefit from the relatively ordered society that those taxes funded, but was appalled at the mentality of consumption without contribution back in Greece.

While "anecdote" is famously distinct from "data" (except in the case of short stories about Brent Spiner) it seems that even the Greeks don't feel that the structure of current Greek society is particularly sustainable.

Cyprus evolves a solution - or revolution?

So Cyprus has decided to shaft the rich Russians in preference to the poor Cypriots, preserving deposits under €100K while completely screwing deposits in excess of that amount by setting up a "bad bank" which is going to return cents in the Euro to the large depositors. Apparently this will disproportionately affect rich Russians who bank in Cyprus, and one can only speculate about how well these gentlemen will take the asset confiscation. Belgian poet Herman van Rompuy brokered the deal on behalf of the EU, and so I assume that he doesn't plan to travel to Russia on vacation any time soon.

The Streetwise Professor points to Germany as the ultimate determinant of the direction of the Cyprus settlement and wonders:

So why is Germany so insistent on doing something that inflicts large losses on Russia-and elite Russians? Can the impending German election explain it? Or does Germany think that the fate of the Euro is on the line, and if saving the Euro p*sses off the Russians, so be it. Or is it something else? I wonder.

Now that spring has started in Europe, presumably the Germans aren't too worried about Russia cutting back on gas supplies in retaliation for taking a few €bn from Russian depositors in Cyprus. I do wonder, however, how wise it is for Germany to try playing a long-term strategy game against a country who a) control a significant proportion of the reliable fuel source for Germany and b) play international-level chess when they're in kindergarten. If Russia arranges for an unfortunate drop in gas supply to German in, say, late December, who's going to cover the power deficit?

An experiment on Financial Transaction Taxes

This should be good. Ten European countries want to press ahead with a financial transactions tax (FTT) and intend to do so despite the other EU countries refusing to come along:

"I am delighted to see that 10 member states have indicated their willingness to participate in a common financial transaction tax (FTT)," said Commission President Jose Manuel Barroso.

Not as delighted as the city of London, the Chancellor of the Exchequer and similar entities in neighbouring non-FTT countries, I'll bet.

"This tax can [my italics] raise billions of euros of much-needed revenue for member states in these difficult times.
"This is about fairness - we need to ensure the costs of the crisis are shared by the financial sector instead of shouldered by ordinary citizens."

I will be fascinated to see how much tax is actually raised by this measure in France and Germany, who are the two most financially active nations in the group. It will also be interesting to see what the impact is on corporate tax takes - I would bet they'll drop significantly. And as for banking activity in those countries, I suspect this will finish the job in France that Hollande started with his tax hikes.

This is good, though. This is how democracy and nation states are supposed to work. Nations that want to press ahead with a demented idea can do so, those who don't want to be involved don't have to be, and when it all goes pear-shaped the voters can throw the relevant bunch of baboons out of office. I note that Greece, Portugal and Spain have all signed up, presumably on the basis that however this idea turns out it can't possibly make their situations any worse.

I give the idea 1-2 years of operation before it becomes manifestly clear that no extra net revenue is coming in, and indeed any financial activity that isn't nailed down has gone elsewhere.

Tax to save Europe!

Polly is on fine form today. Her screed arguing that Europe's best hope of saving itself is to tax the snot out of the wealthy stands as an almost canonically Polly article.

It's fairly clear what direction Polly thinks Greece should go in:

But anti-austerity was the only message. Either default on debt or repay only once solid growth makes it feasible: more austerity leads back down the death spiral vortex.

Problem is, Polly, this isn't really an either-or: defaulting outright, or deferring payment of promised interest until later will be treated the same way. Once Greece has defaulted once, who'd lend them money again for the next few years? And when no more money is coming in, and the wealthy have fled the country, how is Greece going to fund its promises to the poor, the sick, the pensioners? The results of anti-austerity look awfully like the results of austerity to me.

And here comes the attack on the Eurosceptics:

David Cameron on Monday yet again wagged his finger emptily at Germany, telling it to intervene, a bizarre stance from one who shares its austerity policy. In all the years of behaving badly to its neighbours, Britain has never been so ignored or so irrelevant to the key decisions taken by its vital trading partners.

In the same way that the captain of the Carpathia was irrelevant to the sinking of the Titanic, certainly Britain was irrelevant: Cameron has no power to make Germany intervene. (Mind you, it doesn't seem as if anyone else in Europe has much influence on Angela Merkel, so I'm not sure why Polly's singling out Britain.) Perhaps it would be better if Britain were lashed to the mast of the slowly but inevitably sinking S.S. Euro but it's not obvious why this would be so.

Never fear, though! Polly knows where Greece and the other heavily-overspending Eurozone countries can find their saving fiscal intervention:

Hollande proposes a £120bn redirection of EU funds to an emergency growth programme: he should throw in the CAP, too.

Because all that money is just floating around, and redirecting it to various parts of the European economies would in no way affect other parts of those economies that would otherwise have been the beneficiaries...

Abolishing tax havens, co-ordinating fair tax instead of destructive competition, ending secrecy of wealth and property ownership, cutting defence overspending by France, Britain and Greece: politically hard decisions are easier if social democrats can inspire people with the value of standing together, not falling apart.

I'd be really interested to see what tax havens Polly thinks the Eurozone can abolish. "Co-ordinating fair tax instead of destructive competition" sounds like "stop those bloody Irish from attracting lots of external investment which is the only thing keeping their economy from sinking without trace" and "ending secrecy of wealth and property ownership" seems like an attractive first step in the process of taxing the snot out of the wealth and property of the rich; because causing a massive trans-European liquidation of property and share assets to pay tax bills couldn't possibly make the economy worse, right?

She saves the best until last:

In wartime bonds are issued to finance a national emergency by encouraging (or, from the rich, coercing) investment in a time of crisis.

In war, Polly, you have an enemy that you and your populace believe you can defeat. It's not an open-ended commitment. Until the European governments address the problem that their liabilities are growing much faster than their income, no realistic level of additional income is going to make a difference to the imbalance. I'm afraid you'll find that the people who have the money have a much clearer-eyed view than you of the kind of problem this is, and they have the option to move elsewhere if they think their governments are looking too avariciously at their money.

Greeks not let off scot-free

Sam at Counting Cats makes a timely assessment of where the fault lies for the whole Greek shenanigans:

So the Greek government has spent money like it was going out of style for decades and now that the well has run dry, it’s the well's fault?

He goes on to deconstruct the claim "it's all down to the bankers!" and points out just how far down the hole the Greek government, egged on by its population, spent itself. Perhaps the banks should have stepped in and said "no, hang on, no more" but you can just imagine the pre-2008 attitude towards anyone trying to tell a sovereign nation "hey guys, it's time for the party to close".

Sam lays out the option the Greek demos had:

But they could have voted for small-government, fiscally-responsible, liberals who would have tried to change that (reducing the tax evasion problem into the bargain, as per Laffer). They, in general, didn’t.

Contrast this with the British media and trade union attitude towards below-inflation raises in Government spending ("savage cuts") and one has to wonder whether, if not for the example of the Greeks and other Mediterranean nations, we'd have been in the same hole in 10-20 years time.

I am reminded of My Big Fat Greek Wedding

Gus Portokalos: There are two kinds of people - Greeks, and everyone else who wish they was Greek.

I wonder what a 2012 sequel would be like:

Angela: There are two kinds of people - Greeks, and everyone else who gets down on their knees and thank God they are not Greek.

But, to be fair, Toula nails the Greek character:

So, what happens is my dad and uncles, they fight over who gets to eat the lamb brain. And then my aunt Voula forks the eyeball and chases me around with it, try to get me to eat it, 'cause it's gonna make me smart. So, you have two cousins, I have 27 first cousins. Just 27 first cousins alone! And my whole family is big and loud. And everybody is in each other's lives and business. All the time! Like, you never just have a minute alone, just to think, 'Cause we're always together, just eating, eating, eating! The only other people we know are Greeks, 'cause Greeks marry Greeks to breed more Greeks, to be loud breeding Greek eaters.

It's a miracle they kept in the Euro this long.

So about these Golden Dawn chaps...

doesn't their flag remind you of something? Reading their list of "interests" it seems like a group that would cause the BNP to step back and say "hang on, that's going a bit far isn't it?"

According to Greek election exit polls they look like getting a 7% share of the national vote. I don't know what this signifies for Greek politics and the Eurozone, but suspect it's not pretty. Nearly 25% of the vote went to the far left (Syrizia) or far right (Golden Dawn), and over 60% to anti-bailout parties. What with Hollande winning in France, it's looking a bit "interesting" for the Eurozone.

When the markets open this week, it's going to be an entertaining ride.

[Hat tip: Zero Hedge]

Timeo Danaos et dona ferentes

When the Greek PM decides to replace the heads of all three armed services plus the National Defence Force, eyebrows may reasonably be raised. Since this is less than 24 hours after he announced a national referendum on the Eurozone deal, followed by the opposition forcing him into a confidence vote on Friday, a tad more concern may be warranted.

As Kate of Small Dead Animals says, "It's Probably Nothing...."

A mistake, Nicko?

Nicko Sarkozy says that letting Greece into the Eurozone was "a mistake", putting in a strong bid for the "No shit, Sherlock" award of 2011. But let us take this and follow it along. So in 2001 Greece wasn't ready to migrate to the Euro. Now, ten years later, Greece has turned into an economic basket case with massive civil unrest, a tanking economy and horrific debt. But given all this, Nicko still thinks that keeping Greece in the Eurozone is the right plan?

I don't know what Sarkozy is smoking, but I bet it has a street value over $500/gramme.

ECB - capital requirements are for wimps

Alexander Gloy of Lighthouse Investment Management has done some digging and unearthed answers to two questions which have been bothering me: who is holding the Greek debt, and what does the ECB balance sheet look like?. It seems that the ECB is holding E55bn of Greek debt (16% of the total), Greek and Cypriot entities hold E100bn or so, and the IMF a fairly small E17.9bn. By Alex's math, a 50% haircut on Greek debt would conservatively wipe out E7bn of ECB capital even given generous assumptions about its purchase price. This is going to be a problem, because the ECB balance sheet shows E5.3bn in capital at the end of 2010, and I'm guessing it hasn't made too much money since then.

Alex also notes a balance sheet total of E165bn for the ECB, making it 30x leveraged. So for anyone wondering how the ECB could afford to buy up all the recent sovereign debt issuances (we're looking at you, Italy) there's your answer - it couldn't, but did anyway.

Supposing you were an Oriental power looking to make a relatively cheap investment that results in substantial leverage over European governments; where might you start?

[Hat tip: Zero Hedge which is still on the interesting side of crazy].

And the run has begin

While I normally treat the reports of the Daily Mail with a pinch of salt, the flight of Euros from Greece was only a matter of time. Whether justified or not in their fear of losing large chunks of their savings as banks go under, Greek taxes go up or (worst of all) Greece redenominates Greek Euros to devalued drachmae, the Greeks with significant Euro savings are putting it somewhere safer. Much, much safer. Note that they're not even going to Germany.

10b Euro is still relatively small in the context of personal savings, but it's only going one way. When (and it's when, not if) Greece imposes capital controls and searches outgoing visitors / citizens for Euros, that's the moment that Europe goes "foom".

I'd be interested to know, by the way, what fraction of the savings going into Swiss banks are being exchanged for CHF. I wouldn't guess more than 10%, but if that's a lowball figure then I'd be a sight more worried.

Accountability - are you really sure?

Seems like that nice Mr. Barroso wants to make individual criminal responsibility for financial players recognised in European law. I think that this is a fantastic idea, but suspect that Barroso has not fully thought this through.

I'd start off with anyone involved in accepting Greece's national accounts for the purpose of approving their entry to the Euro. I'd add in the French, German, Italian and Spanish governments for repeated and aggravated crimes of kicking-the-can-down-the-road, blaming-the-messenger and failure-to-do-basic-arithmetic. Olli Rehn gets a special mention here. Within the UK I'd happily indict Adam Applegarth of Northern Rock and Andy Hornby of HBOS in addition to the infamous Fred the Shred; but let's not forget the senior staff members of the FSA who did such a sterling job in supervising these institutions.

Any more suggestions?

The Streetwise Prof nails it

Streetwise Professor's game-theoretic take on the Euro crisis is one of the best recent descriptions I've read of the real problems underlying the signs we're seeing of Eurozone disintegration.

For me, the money quote:

But the outstanding losses are not distributed equally across countries. This leads to disputes among EU members over how to provide the public support. Those facing bigger losses want to use EU-wide mechanisms that spread the losses to other countries facing smaller losses. The latter want those facing bigger losses to contribute the lion’s share of any public support.

It pays to see the situation not as a team of finance ministers trying to co-ordinate the best overall response to the crisis, but rather as individual national actors trying to optimise the overall response with respect to their countries' own interests - or indeed, in several cases, their personal political ends.

For instance, I view the Slovakian SaS political party's opposition to the EFSF bailout as a perfectly rational national response - Slovakia has no doubt done the math on its current and future exposure and knows it's better off now. Of course, if the Eurozone countries want a "yes" from Slovakia (and they do) they can change the maths by either promising future aid / funding / projects to offset the Slovak projected loss, or take a cheaper option and effectively bribe the key SaS decision makers at a personal level with EuroParl appointments and favours.

So about those SocGen numbers...

SocGen are taking substantial write downs on their Greek sovereign debt holdings in Q2; a little under 20% on 2.6bn euro of holdings, taking out 30%+ of their net profits for the quarter.

I would just like to say I told you so and I wonder what other non-marked-to-market skeletons linger in the SocGen closet. This isn't investment advice, but I wouldn't touch SocGen with a faeces-stained stick. Thank goodness that Berlusconi is making a reassuring statement on the Italian banks, I don't know what we'd do without him.

We now return you to your scheduled programming (specifically, 24 Hours in A+E).

On the Greek bailout

So Sarkozy and Merkel have reached into the magical top hat and produced a bailout deal for Greece that involves haircuts of no more than 20% for bondholders. No need for further spending cuts for Greece beyond what's been agreed, everything's rosy. Yes, Greece will technically default but there won't be much significant chance in the credit ratings anyway. So everyone's more or less happy, Greece won't drop out of the Euro and no banks will take dangerous hits on their capital. Sorted!

My arse.

So Greek bondholders get rolled over to 15 or 30 year terms. That means that for the next 15 years the amount of debt that Greece holds (and pays coupons on) will not drop at all even if they don't issue a Euro more of debt. Will Greece spend no more than it receives for the next 15 years? I think not. They're going to run into the same brick wall of spending-vs-unaffordable-debt. I give it two years at the outside. What do they do then, roll over terms to 50 years? Who the hell are they kidding?

Incidentally, it'll be interesting to see if any French or German banks take significant write-downs as a result of the haircuts. If so, they were marking their Greek debt at over 80% of nominal value, and you can bet your bottom dollar that a lot of other things on their balance sheets are similarly 'optimistically' marked.

It'll be interesting to see how Angela sells this to her fellow Germans.

The Greek end-game

It's not a novel observation that Greece is screwed. It fails the most simple of income vs expenditure tests. Mr. Micawber could have spotted the imminent tragedy with his eyes shut. But what's going to happen?

The conventional wisdom, by which I mean the opinion of journalists in the dailies whose collective economic expertise could be bettered by an orang-utan, is that at some point Greece will default (adminstratively or in practice, it makes little difference), fall out of the Euro, devalue the new drachma, endure a couple of years in economic purdah (c.f. Argentina, Russia) then benefit sufficiently from devaluation that it gets a small economic surplus. Bingo, problem solved. Bad luck for the Franco-German banks that lent to Greece of course, but them's the breaks of international finance.

I'm going to stick my pseudononymous neck out here and say that the degree to which Greece is screwed has been massively understated. What does Greece produce apart from olive oil? Iron, aluminium and copper which are highly vulnerable to global recession. Greece defaults, Europe is forced to recapitalise its banks as they write down their Greek loans, the China-driven commodity bubble pops, Greece suffers a decrease in exports despite devaluation. No way this ends well.

Michael "Liar's Poker" Lewis wrote of Greece and taxes in Vanity Fair and convinced this writer that there is no feasible way of persuading Greeks to pay taxes on time and in full in anything like the same proportion that German and Britons do. So there goes the state's income. No way that the rioters will countenance anything like the necessary cuts in Government spending. Any potential Government prepared to balance the budget will not get elected. For the next 3-5 years I see Greece staggering from one collapsing coalition to another.