Posts Tagged ‘history’

memory lane is a place greeks avoid

August 3, 2011

[…] in my first talk with him, referred to many government employees as “camp followers” and “coffeehouse politicians” and described the whole civil service as a kind of pension system for political hacks. These are harsh words, but are not unwarranted. The civil service is overexpanded, underpaid and demoralized. The low salaries have been augmented by a completely baffling system of extra allowances by which a few civil servants probably get as much as four times their base pay.

The result is complete disorganization. I have never seen an administrative structure which, for sheer incompetence and ineffectiveness, was so appaling. The civil service simply cannot be relied upon to carry out the simplest functions of government – the collection of taxes, the enforcement of economic regulations, the repair of roads. Thus the drastic reform of the civil service is an indispensable condition to getting anything else done in Greece. But the civil service is just the beginning. There is far more intricate and explosive question of the political leadership of the country.

One could be excused for guessing that the above was taken from a recent report on the Greek sovereign crisis. Unfortunately, it was written in 1947 by the (former by that time) US Presidential Emissary to Greece. And it highlights the Greeks’ acute lack of memory, who strongly believe that their current plight can be traced to either the 80s or 90s, depending on which “camp” they follow. The grim reality is that the Greek psyche has been stubbornly refusing to modernize; the dreams, aspirations, motivations, hopes and fears of the modern Greek family are the same as they were when the Greek state was established in mid 1800s.

And the flirtation of the Greek state with bankruptcy, collapse and chaos is not new neither. This week hordes of taxi owners have been blocking airports, ports and major roads at will, as new legislation would open their profession to competition. Next week another group will take to the streets and make a complete mockery of the state. The head of the British Economic Mission in the 40s makes a point, which seems to be as valid today as it ever was:

When visitors on arriving in a new country [..] run into a sandstorm or a hurricane, they are always told how unusual the weather is. But the situation you are running into here in Athens – the monetary crisis, the possible civil service strike, the pending fall of the government is the normal [..] political climate of Greece. So far as I could see, the Greek government has no effective policy except to plead for foreign aid to keep itself in power [..] It intends, in my judgement, to use foreign aid as a way of perpetuating the privileges of a small banking and commercial clique which constitutes the invisible power in Greece. [Assurance of foreign aid] was not to stimulate the government to further efforts, but to give it the relaxed feeling that it was delivered from the necessity of having to do anything at all. So it declared a national holiday; there was dancing in the streets. And at the same time it shelved a plan for the immediate export of surplus olive oil – a plan which had stepped on the toes of some private traders

The collective amnesia of the Greeks is constantly kept in check by an army of incompetent journalists, commentators, politicians, academics and general “public” figures. A little bit before Greece had her Will E. Coyote moment, I found myself at a round-table event where some hotshot from the National Bank of Greece was speaking just before me. Rather than boring the audience with equations and figures, he went through the script: the “common journey of the NBG and the Greek nation”, the many ways “NBG supported the Greek state throughout the journey”, and how neither of them have anything to fear if they stick together. I am sure that the audience left the event relieved that this long-standing special relationship of mutual support has been there. The Emissary has a different opinion:

[..] behind the government is a small mercantile and banking cabal, headed by [Georgios] Pesmazoglu, governor of the National Bank of Greece and a shrewd and effective operator. This cabal is determined above all to protect its financial prerogatives, at whatever expense to the economic health of the country. Its members wish to retain a tax system rigged fantastically to their favor. They oppose exchange controls, because these might prevent them from salting away their profits in banks in Cairo or Argentina. They would never dream of investing these profits in their country’s recovery

The Pesmazoglus were a family of bankers from the Greek community of Egypt, which moved to Athens in the late 1800s. Since, they have produced generations of politicians, bankers and newspaper owners. Georgios was all three. The Pesmazoglus are now revered in Greece as national heros; the old Athens stock exchange is on Pesmazoglu street.

Greek shipping was born in the 40s, and the great Greek shipowners of the past are the stuff of legends. Everyone speaks of their business acumen, their ability to succeed where others have failed, their courage entering new markets and pushing frontiers, and ultimately their undying love for their country. The ones that spared some change to build an orphanage or a girls’ school have achieved sainthood to the eyes of the modern Greek.

The shipping interests are in a particularly scandalous position. Today the Greek merchant marine is enjoying a boom, and the shipowners are raking in the profits. But the bankrupt Greek government is benefiting almost not at all from this prosperity.[..] Greek shipowners are making most of their profits out of Liberty ships sold to them by the US Maritime Commission after the Greek government had guaranteed the mortgages. The yearly earnings of a Greek-owned Liberty ship will probably run between $200,000 and $250,000. Of this, only the ridiculously small amount of $8,000 goes to the government in taxes. Foreign experts have urged the government to raise the tax requirements to about $30,000. But the political strength of the shipowners has prevented any effective action.

The US Emissary finished his article on a positive note: although Greece has issues that need to be addressed, when you compare her to Turkey or the Communist Balkan states she is still a long way ahead. This was in the 1940s; now Turkey and the Balkan states are marching forward, while Greece is once again bracing herself for default. The collective amnesia will take care of the rest.

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…

The case for fragile regulation

April 7, 2009

Arnold Kling has a very interesting piece on regulation. Crises are endogenous, as economic agents and market participants learn how to game the system. He argues, that we are facing two alternatives: a system that does not break easily, but when it does it is costly and difficult to fix, or a system that breaks more frequently but is easier and cheaper to repair.

Kling argues that measures taken following crises are pivotal in creating the next one. He draws his examples from the mortgage markets from the Great Depression of the 30s, to the Savings and Loans crisis of the 80s, to today’s securitization dead end.

After the Depression it was acknowledged that mortgages with balloon payments are too sensitive to credit shortages. Balloon mortgages have a short term, say 5 years, but the monthly payments are similar to a long term mortgage, say 30 years. This means that in the end of the 5 year period there will be a substantial part of the capital still in place (the balloon), which has to be refinanced. If there is a credit crisis, refinancing might not be an option, leading to foreclosures. To this end long term fixed rate mortgages and adjustable rate mortgages (where refinancing is essentially mandatory) were subsequently encouraged. Such mortgages were given by Savings and Loan associations in the US, or Building Societies in the UK. Fannie Mae was established to promote and guarantee mortgages to families with lower income.

But this shifts the maturity mismatch from the mortgagor (borrower) to the mortgagee (lender). They would borrow short (from their depositors) and lend long in the form of mortgages. In the high inflation and interest rate period of the 70s and 80s, they would receive low cashflows from past mortgages, while at the same time they had to pay higher interest rates to their depositors in order to cling on their deposits. This eventually led to the crisis, where it was made clear that such maturity mismatches were also unsustainable. What emerged from the crisis was securitization, as a means of offloading the long component of their assets. In an ideal world, institutions that had long term liabilities (like insurance companies) would be the buyers of these long term assets.

Unfortunately, it didn’t work as intended with the current crisis being a direct result. Rather than insurance companies, it was investment banks and hedge funds that were left with mortgage backed assets. Also, the originating mortgage providers lost the incentive to monitor the quality of the mortgages they were granting.

The bottom line is that regulation, albeit well meaning, cannot be all encompassing and accommodating. Market participants will eventually work their way around, and there will be unforeseen consequences. It would be better then to have a fast moving framework that keeps the spirit rather than putting rigid constraints.

This is al good in paper of course, but how would such a flexible regulatory framework look like? What capacities should regulatory bodies have to make sure that the system does not descend into chaos? In a world run by politicians that want to cover their bases, the easy option is to talk big and construct a rigid international financial system. Which will probably take us back to the 1930s.

King Henry and his mint-men

March 30, 2009

Henry gives a lesson on how to deal with rogue bankers, as described in the Anglo-Saxon chronicle. A G20 special

A.D. 1125
In this year sent the King Henry,
before Christmas, from Normandy to England,
and bade that all the mint-men that were in England
should be mutilated in their limbs; that was,
that they should lose each of them the right hand,
and their testicles beneath.
This was because the man that had a pound
could not lay out a penny at a market.
And the Bishop Roger of Salisbury
sent over all England, and bade them all
that they should come to Winchester at Christmas.
When they came thither,
then were they taken one by one,
and deprived each of the right hand
and the testicles beneath.
All this was done within the twelfth-night.
And that was all in perfect justice,
because that they had undone all the land
with the great quantity of base coin.

(from Private Eye)