it’s in your hands

April 9, 2010

You can do your bit to help this decent, hardworking but misunderstood nation by donating at least £5 here. No amount is too small, every penny is important. You showed your charity to the people of Haiti, now the proud Greek civil servant is asking for a helping hand.

Before you leave remember to browse through the comments left by distinguished donors like Angela Merkel, Jean-Claude Trichet, Gordon Brown and many others.


floating shorts

January 26, 2010

The markets have pounded Greece heavily last week, both in the equity and the debt front. There is widespread concern on the ability and comittment of the new government to service the country’s debt. Social unrest is evident. Greece also stands acused that, for years, statistics produced by her agencies were flawed at least.

Unlike statistics that are subject to interpretation, creative public accounting or outright reporting fraud, I take a look at the debt Greece issued over the last few years. These amounts are unambiguous, and any patterns that change over the years can give useful insights. To this end, I collected all information on Greek bonds and bills that Bloomberg records from 1993. As debt before 2001 was issued in old dracmae as well as an assortment of different currencies (ranging from pessetas to yen), I focus on the data after 2001. I expect Bloomberg to keep a representative, if not complete, sample.

Hopefully the data can shed some light on any policy changes that relate to the structure of debt. Also, the historical issues can serve as a yardstick to assess the magnitude of new bond or bill issues. One of the key years is 2004: this is the year of the overly expensive Olympic games, and also the year when the “socialist-technocrat” government of Costas Simitis was ousted, with a “conservative-liberal” government of Konstantinos Karamanlis taking their place in power.

In the attached tables you can find 105 short term Bills issues and 88 longer term bond issues. Number 23 in this list is the infamous structured bond that was in the center of the scandal that rocked the country, involving hedge funds, Greek state-run pension funds and JP Morgan.

The table below gives my summary, year-by-year:

2009 14,560 60,589 7.25 18.30%
2008 1,788 35,736 6.66 15.67%
2007 1,364 46,527 18.50 0.60%
2006 1,804 24,562 7.11 11.11%
2005 2,072 40,416 13.40 14.56%
2004 2,273 32,526 7.81 13.37%
2003 1,702 33,004 9.94 1.00%
2002 1,471 31,713 10.36 2.21%
2001 1,178 10,041 8.21 4.86%

Treasury Bills are issued many times in a year, offer no coupons, and have maturities of 13 weeks (~3 months), 26 weeks (~6 months) or 52 weeks (~1 year). Bonds offer coupons payable every six months that can be fixed or floating, and have maturities that range from 2 to 50 years.

One immediate observation is the spike of T-Bills issued in 2009, which is an order of magnitude larger than the typical amount of the previous decade. Presumably this is an attempt to accommodate the appetite of the lenders (or lack of it) to long-term commitments. It also indicates severe cashflow or liquidity problems on the part of the borrower (in the same way one goes to loan sharks for a few weeks until the benefits’ check comes through). And this trend looks likely to continue, if January auctions are an indication (EUR1.6bn and EUR1.2bn borrowed this January, compared to a total of EUR2.55bn last year).

Longer term borrowing has also increased substantially, standing now at about six times what is was 10 years ago, and two times the 2004 levels. But there are some details here worth mentioning: up to 2004, nearly all debt had maturity up to ten years, with the exception of only EUR18bn issued for longer maturities. After 2004, there appears to be an attempt to spread the debt across maturities, a policy that ended abruptly in late 2008. From this point on, most of the debt is very short, with the typical maturity being 5 years. And the new bonds issued this month will also have a 5 year maturity. Investors don’t seem to like putting their money on Greece for the long run.

Another interesting policy shift that happened in 2004 was an increase of floating debt. Up to this point practically all bonds offered fixed coupons, while at the moment about 20% pay interest which is linked to an external index, like the Euribor or some other combination of interest rates. A notable exception is 2007, which follows the scandal of the structured bond (yes, I know that correlation does not mean causation…) The last issue of 2009 pays 2.5% above Euribor; the new EUR8bn 5-year January issue will pay a premium of an extra 3.5% (for comparison, in January 2009 Greece borrowed EUR12.5bn, at 5.50% fixed coupon rate). This means that any interest rate rises in the next years will be increasingly painful for the Greek government, since interest payments for these new bonds will also increase.

These observations indicate investors that are only prepared to lend short-term, demand substantial premiums to do so, and do not want to bear any risk of future interest rate moves. These inverstors are nervous, and nervous investors can pull their money from the table if the going gets tough. Had Greece been able to borrow long-term and at fixed rates, she would not have to worry about investors getting itchy and pulling their money.

And all this matters. The Greek government keeps repeating that it is “they” and not “the markets” that determine their policy, but reality is different. As the figure above shows (borrowed from this FT article), Greece is heavily dependent on foreign investors, as they are holding about 30% of issued debt. As Greece takes her place as a central node in a potential systemic crisis, the probability of foreign banks that try to get out first increases. And this is an event that sets the domino off. The Greek government is desperately trying to front-run this eventuality, trying to expand the debtors’ base by promising bonds in USD and JPY.

The finger will remain on the trigger until investors decide to move away from short term government debt into long term fixed-rate issues. Only then will Greece have the space needed to produce a meaningful strategy that will put her house in order. It is chicken and egg once again…

should i stay or should i go

January 13, 2010

go: Desmond Lachman: Why Greece will have to leave the eurozone.

stay: Willem Buiter: Sovereign default in the eurozone and the breakup of the eurozone: Sloppy Thinking 101 (article is one year old, but the essence remains the same).

Lachman is with the American Enterprise Institute for Public Policy Research (AEI), a neo-conservative think tank that provided the framework of G. W. Bush’s policies.

Buiter is the chief economist of Citigroup, a major bank that was bailed out by the Fed in November 2008.

the small print

January 11, 2010

It appears that the IMF will send a team to Greece in order to offer ‘technical assistance’. I am as clueless as you are on what ‘technical assistance’ actually means, but everyone in Greece is forcefully repeating that it does not mean ‘money’.

Greek bond description

I noticed the small print in the screenshot above, which describes a bond issued by Greece which is denominated in Yen (and is held mostly by a Japanese syndicate)

If issuer loses IMF membership or use of IMF funds, majority of hldrs (sic) may request issuer to call

I was not sure how to interpret that statement. Does it mean that using IMF funds constitutes an event of default, or that losing the potential use of IMF funds is actually the default event? If the former is the case, the Greek government is right to steer clear of any note with the IMF stamp on it. But I suspect it means the former, which is rather unlikely as even Zimbabwe remains an IMF member to date.

always in your debt

December 24, 2009

This is how the Greek debt looks like for the next thirty years. EUR349bn is due, of which EUR95bn (or 27%) is interest and the remaining EUR254bn is the face value.

Distribution of the Greek national debt. Principal and interest in million euros. Source: Bloomberg, Dec09

Greece would typically issue 5- and 10-year bonds. As an example, the notional due in 2012 (approx EUR30bn) would consist of 5-year bonds issued in 2007 and 10-year bonds issued in 2002 (perhaps EUR15bn each). There are also some smaller notional from longer issues, but the bulk of the debt expires before 2019 (the weighted maturity is actually 2017 or thereabouts). This means that in 2010 the government can issue bonds that expire in 2015 and 2020, say EUR15bn each. Then, the notional for 2015 will increase to something around EUR28bn, and a new notional of EUR15bn will be added for 2020. There is a suspiciously large peak in 2019, but I did not have time to investigate its origin. I will collect some more information on each issue and come back with the breakdown.

The bonds Greece issues have typically fixed coupons, that is to say they pay fixed interest. Only a very small number of the issues in the chart pay floating or variable coupons, meaning that the whole current debate on interest rates is irrelevant to Greece’s current exposure. But they will affect the forthcoming issues, as investors will demand higher coupon rates in order to lend to the Greeks. Also, given that Greece might need to borrow money just to pay off the interest of previously issues bonds, there will be a refinancing cost as new coupons will be added. The new orange bars will be a bit larger than they would have been if debt was issued three months ago, and since Greece borrows at fixed rates they will remain higher for the duration of the debt.

Interest rates are close to historic lows, so even with this extra premium the actual amount will not be that different from what it was before: the new orange bars will not be a lot bigger than the existing ones in the chart. It is more of an opportunity missed: other EU countries will take advantage of the low rates to either improve their balance sheets or spend their way out of recession, Greece can do neither. The recession will bite harder, as there will be insufficient fiscal stimulus given the higher cost of money. Moreover, Greece is missing all infrastructure improvements that take place elsewhere in the name of fiscal stimulus. And when interest rates finally pick up, Greece will find herself in the back seat: she did not invest when money was cheap, but still has the same debt burden as if she did.

So who are the immoral bankers that pile up Greek debt, taking advantage of the high spreads that has driven the whole country in despair? Hugh Edwards brings forward some analysis by Goldman Sachs on Greek banks making extensive use of the ECB liquidity facility (which allows institutions to draw funds from the ECB using rated bonds or ABS structures as collateral). This facility was put in place in order to provide liquidity to the holders of highly rated but ‘misunderstood’ securities, and certainly not to provide cheap funding for speculative activities. For some reason Greek banks are always there asking for more, even though they do not appear to be liquidity drained under any measure. In fact, it appears that Greek banks have overdone that to the point where the Central Bank of Greece had to tell them off (presumably under instructions from a pissed off ECB). What do Greek banks do with all that money?

[…] the current spreads on Greek government bonds […] offer Greek banks an exceptional arbitrage opportunity, since by taking advantage of the uniform ECB liquidity rate Greek banks can buy higher Greek government bonds with a much higher yield than the government bonds which their French or German counterparts buy. Regardless of the risk implied through by the Greek CDS spread, Greek government bonds carry a zero risk weighting when calculating riskweighted assets for capital purposes. So for Greek banks this arbitrage carries no capital impact whatsoever. That is to say the Greek banks have been doing very nicely indeed out of the Greek sovereign embarassment, than you very much. Hence it is not difficult to understand the ECB’s growing sense of outrage with the situation.

This means that essentially ECB money is given to Greek banks at very low interest rates, under a scheme designed to help banks that are genuinely in distress. Greek banks use these funds to buy Greek government bonds, which offer a substantially higher rate of return. As far as ECB rules are concerned, these are risk free bonds and Greek banks are not penalized for holding vast amounts of them. The end result is that Greece ends up paying through the nose for funding that comes from the ECB printers via a Greek bank, and Greek banks make huge profits for just taking advantage of a loophole in the rules. One might say that Greek banks are taking on sovereign risk (at the end of the day there is a non-zero probability that Greece will default), but the fates of the Greek state and large Greek banks are so highly intelinked, that a Greek default will wipe them out anyway.

Surely, Greek banks must feel embarassed of employing a regulatory arbitrage scheme that many in Europe see as immoral, especially when the purpetrators are state-owned institutions. Enter Apostolos Tamvakakis, the newly appointed (by the newly elected government) CEO of the National Bank of Greece, the country’s biggest banking institution. Even befor Moody’s decided to let Greece go with a slap on the wrist, he made the bank’s intentions clear:

A downgrade by Moody’s would not affect our decision to fund the Greek state

Enough said.

the case for transparent taxation

December 19, 2009

Imagine a corporation that is not required to share financial information with its own shareholders. Imagine that there is no independent external auditing in place to verify the claims of employees, ensure good financial governance and protect shareholder value. Such an organisation will be soon plagued with problems: even if the CEO has the best intentions, without external scrutiny, pockets of corruption will soon form and grow. At some points these pockets will cross and a network will be formed, indicating the point of no-return: each corrupt cell will cooperate with other corrupt cells, offering support and protection. Changing the CEO is now irrelevant; the shareholders must take their role as owners, step in and clean up the mess.

Such an organisation exists, and it is called the Hellenic Republic: the financial information concerns tax receipts, and the shareholders are the citizens, the ones who own the country and are the beneficiaries of this tax. At the moment, rampant tax evasion means that large amounts never find their way to the government coffers where they belong, while widespread corruption inflates expenses and directs assets into the hands of the few that have ‘a special relationship’ with the system.

A casual investigation of Greek internet posts, discussions and blogs reveals strong feelings and confusion: Civil servants blame the self employed enterpreneuers for not declaring their full income, paying little tax and drawing benefits; the self employed claim in return that civil servants are corrupt, produce next to nothing, and provide no tangible return for their tax-funded salaries; while White collar workers blame both, as they are forced to work long hours in the private sector for a fully taxed salary. Everyone blames the politicians for indecision or for dipping their hands in the honey pot too, but no one offers hard data or evidence, largely because such evidence is not accessible. Everything is based on conjectures and rumors, but still fuels resentment, finger pointing and anger. It is not a healthy state of affairs, creating frictions between different strata of the social fabric.

The newly elected government seems to be willing to use new technologies to remove some of the archaic layers of opaqueness, having promised to publish online key committee minutes, hiring decisions and some payroll data for senior civil servants. This is certainly a step in the right direction, but it is not going far enough. It adressess to some extent the mismanagement of cash outflows, but does not touch the bigger problem of tax inflows. The new measures just implement something that is common state practice in other Western Countries for years, nothing radical or impressive. Coupled with a barrage of new taxes, it has left the holders of Greek debt unconvinced that these measures are sufficient to halt the downward spiral of the economy. Anyway, what is the added value of imposing new taxes in a country that cannot collect the taxes already due?

And the Greek government needs a radical, decisive, headline-grabbing initiative to convince. They must attack the tax evasion problem head on, by publishing online all income tax statements and receipts every year, starting from 2010. Every citizen will be able to go online and check the declared income and contribution of any tax payer. There are compelling reasons for doing that:

1. It is feasible, cheap and easy to implement. The relevant government departments already have this information in digital form. All needed is a front end that can be set up in a matter of days with minimal cost. A lot more cost-effective than the alternatives.

2. It has been tested elsewhere. Nordic countries have implemented similar methods successfully for years, and they should know: they have some of the highest tax rates in the world, and manage to collect them efficiently. There you can access this information digitally or even by sending an SMS. If they solved the problems associated with the privacy of financial data, why can’t the Greeks? The new government certainly has a very comfortable majority to pass any law required to achive that.

3. It is fair and transparent. Tax contributions belong to everyone, and everyone has the right to know what their fellow citizens contribute (or not contribute). By publishing everyone’s receipts, no one is pointed at, treated unfairly or victimised. And the government shows that they are serious when it comes to transparency and equity, treating all citizens equally and without discrimination.

4. It puts the problem into perspective. Now everyone has data to construct arguments and back up theories; no one can falsely blame dentists, doctors, lawers or plumbers for undercontributing. The true magnitude of the issue becomes real to everyone, when her own contribution is compared to the ones made by her peers. It brings home the notion that tax evasion is theft from schools, hospitals and the classes that need support.

5. It allows everyone to spot the discrepancies between declared and apparent wealth. At the moment the scale of tax evasion for certain classes is the stuff of rumors, and there are doubts on the contributions of individuals that have a lavish lifestyle with villas, yachts and frequent appearences in magazines. But nobody knows for sure what the real situation is.

6. Fear and shame are strong deterrants. Fear, because when everything is in the open it is easy to report obvious cases. Shame, because no one will want to be the odd one out that sticks below the bottom: it will be bad for business if you are known as the dentist that declares substantially less than his peers in town. Not before long, websites will be offering aggregated information, and I am sure that many Greeks would prefer to hire a plumber with an decent looking tax record. Such an initiative can create a race to the top, increasing dramatically the tax receipts.

The Greek government must make decisions that enhance transparency in the ways the country is run. There is an opportunity to take back the initiative, and show financial markets that the Greeks mean business. They can also illustrate that they are not afraid of bold statements or using novel ways to tackle age long problems.

something’s got to give

December 18, 2009

For all terms and purposes Greece is a country under a fixed rate regime. Yes, it is part of the Euro which is a freely floating currency, but in reality (i) Greece’s state or actions do not affect the Euro rate, apart from creating worries that other more systemically important countries might find themselves in choppy waters, and (ii) the largest part of Greece’s trade is with Eurozone partners, and this takes place on a fixed trivial Euro-to-Euro basis (55% of imports and 65% of exports are with EU partners, of which the bulk is with Eurozone members).

This implicit peg has served well as an anchor for inflation, but might not be optimal in the current circumstances. If one were to give an IMF-style advice to Greece, then one would probably recommend a currency devaluation or resetting the peg (as this IMF surveillance document points out, where advice is given this is towards more flexibility). It would not inflate the debt away, as this is denominated in Euro, but it will (i) improve the balance of payments in the short run, (ii) inflate away wages that are currently sticky, and (iii) reduce the size of the housing bubble which is also sticky due to the unwillingness of sellers to accept reductions. Perhaps this would have been already optimal in a beggar-thy-neighbor fashion, as recession hit the country.

Paul Krugman suggests, in the case of Spain, that the only option is for nominal wages to drop. This is the route that Ireland has taken, but Greece seems to be unwilling to follow due to pre-election commitments. Does that mean that for Greece the only remaining alternatives are (i) exit the Eurozone, get back to the old Drachma and devalue, or (ii) wait for the IMF to enter the frame and force the wage cuts that the government will not?

just form an orderly queue

December 17, 2009

Perhaps unsurprisingly, creditors start lining up. You can’t blame them for getting worried… Greece was one of those countries that announced that the whole population would be vaccinated against swine flu, rather than the more cost saving selective vaccination followed by others. This will certainly add fuel to the fire, as it will raise concerns that the true amount of Greek deficit is not yet well defined.

Dec. 17 (Bloomberg) — European health-care companies told the European Commission that Greece’s public-health system owes them almost 7 billion euros ($10 billion) for medicines and other items, the Financial Times reported. The companies’ trade body has filed a formal complaint with the commission, saying the Greek government is in breach of an EU directive on timely payment of bills, the newspaper said. Yiannis Chryssopathis, the legal counsel of Greece’s
pharmaceutical trade group, said drug and device suppliers were owed 6.5 billion euros by last summer, the FT said. The Greek health ministry has made no regular payments since 2005, when a settlement was reached on outstanding bills from previous years, the newspaper added.

top of the popped

December 16, 2009

After today’s downgrade of the Hellenic Republic, the league table looks like that:

Ukraine 1339.95 B2/CCC+/B-
Venezuela 1223.13 B2/BB-/B+
Argentina 956.21 B3/B-/B-
Pakistan 687.50 B3/B-/NR
Latvia 544.38 Baa3/BB/BB+/
Iceland 436.48 Baa3/BBB-/BBB-
Dubai 436.08 NR/NR/NR
Lithuania 314.45 Baa1/BBB/BBB
Romania 281.25 Baa3/BB+/BB+
Lebanon 269.60 B2/B-/B-
GREECE 236.86 A1/BBB+/BBB+
Egypt 235.60 Ba1/BB+/BB+
Hungary 233.78 Baa1/BBB-/BBB
Vietnam 230.67 Ba3/BB/BB-
Kazakhstan 226.73 Baa2/BBB-/BBB-
Bulgaria 217.18 Baa3/BB/BB+
Croatia 217.11 Baa3/BBB/BBB-
Bahrain 207.39 A2/A/A
Turkey 192.81 Ba3/BB-/BB+
Russia 191.47 Baa1/BBB/BBB
Estonia 187.69 A1/A-/BBB+
Indonesia 187.23 Ba2/BB-/BB
Philippines 164.92 Ba3/BB-/BB
Ireland 155.38 AA1/AA/AA-
Abu Dhabi 152.90 Aa2/AA/AA
South Africa 147.69 A3/BBB+/BBB+
Colombia 143.09 Ba1/BBB-/BB+
Mexico 136.48 Baa1/BBB/BBB
Panama 131.45 Ba1/BB+/BB+
Peru 121.55 Ba1/BBB-/BBB-
Israel 121.40 A1/A/A
Poland 119.76 A2/A-/A-
Brazil 118.69 Baa3/BBB-/BBB-
Morocco 117.00 Ba1/BB+/BBB-
Qatar 99.12 Aa2/AA-/NR
Spain 94.05 Aaa/AA+/AAA

If you ask me, the BBB+ rating is probably still a bit high, given the company Greece keeps in the table. The next BBB+ country, that is Estonia, is insured for half-a-percent less. The markets keep saying that Greece is a straight BBB country, and rating agencies are typically lagging behind in their actions. Hence the ‘rating watch negative’ and the further downgrades that seem likely in the next month or so.

will higher tax rates bring more money?

December 16, 2009

This week the Greek prime minister produced an array of measures to cut the deficit over the next year or so. Most of them amount to either direct tax increases (a progressive tax rate with a maximum up to 50%, a tax or millage levy on large properties, the re-introduction of inheritance tax, 90% tax on bank bonuses) or indirect taxation (freeze of civil servant salaries beyond a EUR2,000 threshold, no bonuses in government run organisations). The question is of course whether or not these measures will bring more money in the depleted state coffers.

What is the evidence? Kurt Hauser in 1993 observed that “no matter what the tax rate has been, the post-war tax revenues in America have been stable and around 19.5%”. This observation became known as “Hauser’s law”. Taxation is not ‘static’, as economic agents will have an increasing incentive to use accounting techniques to shift or hide their tax exposure. In addition, increasing tax rates will have an adverse impact on the GDP and thus increasing taxes will reduce the actual Euro amount that comes in the government coffers.

This article in the WSJ revived Hauser’s law in 2008, and the 15 years of new data also confirm its validity.

Tax receipts and rate

Greek tax receipts (blue) and the tax rate (red). Dotted line for projected values. Source: Eurostat

But what is the evidence for Greece? Unfortunately the statistical data are scarce and not overly reliable, but I managed to dig some information from the EuroStat website from 1995 onwards. The effective tax rate for a family of two full-time working individuals with two children has risen from 18% in 1995 to about 24% in 2000, 25% in 2004 and 27% today. On the other hand the tax receipts as a percentage of GDP have remained without a clear trend at about… errrr 20%.

For that allow me to be sceptical on the effectiveness of these measures.

PS: The data I managed to dig are as follows (P denotes a projection, otherwise known as a wish :–) (a) tax rate 96-08: 17.9, 18.2, 18.5, 17.8, 23.9, 23.7, 24.6, 23.2, 25.5, 26.1, 27.8, 27.6, 27.2; (b) tax receipts 95-04 projected to 07: 19.0, 19.1, 20.0, 21.6, 22.6, 23.5, 22.1, 21.7, 20.0, 19.8, P20.3, P20.3, P20.3