Tuesday, 26 July 2011

The Loneliest Place In Athens

The loneliest place in downtown Athens these days is a high-end retail store. If you so much as pause in front of the store salespeople who normally would only snarl at you for daring to interrupt their cigarette break or their phone conversation now grab you by the arm and drag you into the store. “Would you like a bottle of water, a cup of coffee, anything at all?” When you try to explain that you’re really not interested in yet more silver plate trays or elaborate tea services they rush to show you the ‘new’ inventory. Sadly this ‘new’ inventory turns out to be carton after carton of merchandise they have been unable to sell for the last several months.

If the constant round of protest marches was not enough to deter even the hardiest shopper the taxi drivers are now striking. One of the unexpected side-benefits of the strike is that pedestrians now have a decent chance to cross a street without having to twirl and twist like a matador dodging speeding taxis displaying their utter disdain for traffic signs and stop lights.

The cabbies object to the fact that the government is planning to break the taxi cartel by issuing more licenses to would-be cabbies. In one sense the cabbies have reason to be furious. It’s not so much the extra cabs competing for fares that upsets them, but they stand to lose most of their investment in the cab license. Many of them paid over €100,000 for the licenses and some even mortgaged their homes. Now, with the threat of an unlimited number of cabs hitting the streets, the value of those licenses has dropped like a stone. Cabbies planning to sell their licenses and retire now face the prospect of not being able to retire for several more years.

Despite the searing heat Athens is quite pleasant in the middle of the summer. Many people have deserted the city for the islands, and even the hardiest of protestors seem to have taken a break from the hot work of marching, chanting, and battling riot police. Tour buses from the cruise ships grind through the narrow streets up to the splendid Acropolis Museum. The braver passengers leave the air-conditioned comfort of the museum and trudge up the steep hill to view the splendors of the Parthenon and the Erechtheion – even if the six original caryatids on the latter have been replaced by reproductions. As they dutifully follow their ‘Marvels of the Mediterranean’ tour guide under the broiling sun while she expounds at length on the sublime architecture, Harold from Columbus is beginning to wilt as he starts hallucinating about the more immediate marvels of an ice-cold gin-and-tonic served by some young Russian waitress in the air conditioned bar back on the cruise ship.

People in Greece breathed a sigh of relief when the latest rescue package was announced last Thursday. It will stave off immediate bankruptcy, but serious questions remain about the willingness and the strength of Greek politicians to make the radical long-term changes required if Greece is ever to become a competitive economic entity. The rescue plan comes with a healthy dose of Euro-fudge that makes heroic assumptions about budget balances and proceeds of privatizations. With revenues down because most tax collectors are on what they call a job slow-down (this begs the question of when there was ever a job speed-up) and spending remaining stubbornly high the primary budget deficit has actually increased.

There is an uneasy feeling that Greece has somehow ‘gamed’ the system and successfully called the European Union’s bluff. As long as the threat of financial contagion to other countries remains Greece can basically threaten the European Union with the old cry “If we go down you all go down!” At this delicate point in European finances no one was willing to test this thesis. Athens is filled with skeptics who believe that the Greek government has no intention of making the hard reforms required by its European benefactors and the International Monetary Fund, and will simply play the same game when it runs out of money again in about a year’s time. In truth, the reforms will be hard. The socialist government will have to break up the cozy jobs-for-votes scam it has been running for decades. Favored groups may be faced with the cold  wind of competition. The pervasive corruption that affects all levels of government will have to get cleaned up. It’s much easier to threaten the rest of Europe with chaos and get some extra money. Only next time it may be different. If the EU can spend the next several months protecting Portugal, Ireland and Spain from the potential tsunami effect of a Greek default, the leaders may be less willing to throw more money at Greece.

Adding insult to injury, there are news reports that the number of illegal immigrants landing on Greece’s shores has dropped significantly. Apparently the word has filtered down the immigrant pipeline that Greece is no longer such an attractive destination. When you're down, you're really down.

Pity the National Bank of Greece. It can’t buy a break. It had planned to help its own capital situation by selling 20% of its very profitable Turkish bank, Finansbank. The potential deal was announced several months ago when the market capitalization of the Turkish bank was around $8 billion. Unfortunately for NBG, the Turkish market has been hit with a bad case of investor jitters and has dropped sharply this year, making any deal very hard to complete. Investors have become spooked by Turkey’s large current account deficit, about 9% of GDP and have started dumping the Turkish lira. With the market cap of Finansbank now hovering just above the 2008 purchase price of $5 billion any deal looks like it will have to remain on the shelf for a little longer.

We’re now back in Turkey for several days to see the view from the other side of the Aegean and see how Turkey is dealing with its own economic problems.

Wednesday, 6 July 2011

From Players to Mere Spectators

Despite the drama, the protests, the widespread moaning and shouting surrounding the recent narrow approval of austerity measures imposed by its European partners the Greek government will look back on that vote as the easy part of the long-overdue reform process. When you’re in water way over your head and going down for the third time you tend to climb on any life boat that comes along and worry about the conditions of your rescue at some later time.

Now, if Greece’s political leaders are serious about the country’s long-term health, they face the extremely difficult task of actually reforming the stagnant, self-serving economic system that has become completely dysfunctional over the last several decades. Unfortunately, so far none of the political parties has demonstrated the strong will that is required to undo the structure that generated the current quagmire because it is that very structure that has, up to now, kept them in political power. Every time the political leaders attempt to unravel the tangled web of the Greek economic structure and smooth the way for personal initiative the affected interest groups – ranging from self-important bureaucrats to taxi drivers – threaten retaliation. And the politicians beat a hasty retreat.

On top of this problem there is even some question whether the political leaders truly understand the gravity of the situation they face. Newly appointed finance minister Evangelos Venizelos recently went to Brussels and attempted to re-negotiate the most recent bail out agreement. Before the words were out of his mouth the usually mild mannered Finnish commissioner Olli Rehn angrily told him that renegotiation was out of the question. Prime Minister George Papandreou addressed a European gathering of socialists and slammed the rating agencies for suborning democracy in Greece. Papandreou seemed unaware that the rating agencies were merely responding to conditions that he and earlier generations of Greek politicians had created. Opposition leader Antonis Samaras is not much better. His contribution to the debate is that Greece should be lowering, not increasing taxes. He may be right, but his point is irrelevant because there is absolutely no chance that Greece’s paymasters in Brussels will buy that one. So far Samaras has resisted any attempt to climb out of the rut of narrow, short term political interest and join in a national coalition to forge a better future for Greece. If he did join a coalition he might actually have to come up with some positive, realistic suggestions.

He misses the point in that the actual tax rate is less important than collecting taxes at any rate. So far no Greek government has been particularly good at this. Samaras says he wants a ‘creative shock’ for the economy that lower tax rates could bring. Again both he and Papandreou miss the point that there is a great deal they could do to ramp up the Greek economy without spending a penny. Simplifying obscure regulations that strangle innovation at birth, modernizing the legal system, eliminating over-lapping jurisdictions in ministries, etc., etc. could encourage investors to take a more favorable view of Greece.

As one Greek friend put it, “Right now there is no sign that our so-called leaders recognize their errors. The first step in any recovery is for each and every one of our politicians to get on their knees and apologize for their mistakes and the mistakes of their fathers and grandfathers. Then we might actually get somewhere.”

The reality of Greece today is that it has lost control of its own fate. Mandarins in Brussels, Paris and Berlin have more influence than Greece’s own politicians. Jean-Claude Juncker, Prime Minister of fiscally prudent Luxembourg and head of the Euro Group, put it bluntly in a recent interview that Greece faces a ‘massive’ reduction in national sovereignty. This is a very hard pill to swallow for people who believe they brought democracy and civilization to the rest of Europe.

This situation is nowhere more evident than in the Greek banking system. Every Greek bank went on a lending binge over the last several years that saw the loan-to-deposit ratio climb to more than 130%. This is no problem if you have reliable funding to cover the yawning gap between deposits and loans. Now, however, the only funding source available to the Greek banks is the European Central Bank. And if Greece ever falls into formal default this funding is in real danger. And it does not help matters that the flow of deposits out of Greek banks has picked up from a stately walk to a jog. Any more bad news and the jog could move up to a sprint. Their fate is entirely in someone else’s hands.

The tragic irony of this situation is that if the Greeks had devoted half the energy they spent on fiddling an admittedly corrupted system to real economic activity the country would be flourishing. If Greeks who loudly proclaim their patriotism demonstrated this patriotism by actually paying taxes instead of resorting to every dodge known to man and God their country might have been able to retain a vestige of sovereignty. Instead of major players in this drama, they are reduced to mere spectators.