Thursday, 17 April 2014

Is The Greek Glass Half Full Or Half Empty?

Is Greece finally emerging from the long, dark tunnel of economic, political and social woes? Is there light at the end of the proverbial tunnel? Or is that light merely another train thundering down the track about to crush whatever feeble hopes the long-suffering Greek people may have?

Opinions differ sharply. Some have taken heart from Greece’s recent successful heavily over-subscribed issue of €3 billion in long term bonds at less than 5%. To them, this signals a return of investor confidence and a just reward for the country’s economic reforms. They note that the primary budget surplus – a surplus before any interest payments – is forecast at 2.7% of gross domestic product this year and set to rise further next year. The current account is in balance and there is a glimmer of growth.

But others, notably Wolfgang Münchau of the FinancialTimes, are less sure. Münchau mentions some damaging statistics to show that Greece has barely begun to climb out of the very deep hole it has dug for itself. He uses data collected by Greek political economist Yanis Varoufakis to show the size of the task.

He notes that of 2.8 million Greek households, 2.3 million have tax debts they cannot pay. Youth unemployment stood at 60.3% in 2013. Bank loans to businesses are down sharply. Non-performing loans that the banks record reached 38% of total loans. One bank manager told me that several of his customers simply don’t acknowledge that their bank loans have to be repaid. And 3.5 million employed people in Greece have to support 4.7 million unemployed or inactive people. Perhaps most damaging is that the country’s long term debt amounts to about 175% of GDP.

“The Greek economy is not in recession. Nor is it recovering. It has collapsed,” Münchau says.

The only caveat I would add to this dismal list of numbers is that it doesn’t appear to reflect how much of the Greek economy has gone underground, i.e. how much activity is off the books, unrecorded. If Greece is anything like other emerging economies I have worked in, the amount of unrecorded activity increases sharply in times of trouble. In order to avoid onerous social payments and taxes people are paid off the books, cash is king, borrowing from friends, relatives and local loan sharks replaces bank borrowing.

“Greece’s return to the bond markets last week was a symbolically important for the euro crisis,” he wrote. “For a country at the centre of the crisis to draw €20 billion of foreign demand for a five-year bond yield under 5% shows that the market now believes Greece will stay in the euro zone, that it won’t collapse into chaos and that any further debt relief will be provided by official rather private lenders. A year there were few takes for that bet.”

 PaulTaylor of Reuters cautions that Greece is a long way from being able to fund itself unassisted in the market. He suggests that one road to relieving the crippling burden of Greece’s long term debt is to extend the maturities from 30 to 50 years and reduce interest rates. Private sector banks have long practised this ‘extend and pretend’ policy by keeping bad loans on the books rather than classifying these loans as write-offs. Like Dickens’ Mr. Micawber they are hoping that ‘something will turn up.’ Whether Greece’s official creditors will go along with this gamesmanship is another matter altogether.

One point of agreement for all these assessments of Greece’s progress is the absolute need for to spur growth in the country by sweeping structural reforms to unblock the many obstacles to such growth. These reforms cover everything from instituting more flexible labour laws, breaking cartels that control many industries and keep prices high, reforming the legal system, cutting red tape, and clarifying the tax system.

The real risk in Greece and other southern European countries, as Nixon points out, is “that easier financial conditions will sap political commitment.”

The ruling coalition in Greece has a very slim majority. With elections coming up it will take a very brave politician to press for these reforms to spur long-term growth when he faces a very-short term problem of getting re-elected. The main opposition party Syriza has loudly proclaimed its rejection of the tough reform conditions imposed by the so-called Troika – the International Monetary Fund, the European Commission, and the European Central Bank. This stance is popular with many voters because they are fed up with more than five years of penny-pinching austerity and are ready to support anyone who promises an end to their struggles, even if those policies might push Greece right back into the situation that created the mess in the first place.

Yes, the successful bond issue was an encouraging sign. One should be careful, however, not to read too much into that. Investors notoriously tend to have the attention span of fire-flies and can disappear as quickly as they arrive. Whether that bond sale was merely a one-off blip in an otherwise stagnant economy or a sign of real improvement depends entirely on the political will to create conditions for growth instead of government hand-outs. This takes much more time, effort and political will than a single bond sale.

Monday, 7 April 2014

Erdoğan’s Election As President Is No Slam-Dunk

After the local elections in Turkey on March 30th there are undoubtedly millions of voters who would agree with the late American journalist and essayist H.L. Mencken about the value of democracy.

The ruling Justice and Development Party (AKP) won another large victory in the municipal despite allegations of massive government corruption and the increasingly intolerant, authoritarian behaviour of Prime Minister Tayyip Erdoğan. Opposition political leaders must be scratching their heads wondering what it takes to shake the faith of the mass of voters about the value of the AKP.

Mencken would probably tell them they had a very difficult task indeed.
Democracy, he once wrote, “is the theory that the common people know what they want – and they deserve to get it good and hard.”

Still others would share his cynicism that “democracy is a pathetic belief in the collective wisdom of individual ignorance.”  Or perhaps they would agree with him that “Every decent man is ashamed of the government he lives under.”

Certainly there are many in Turkey who are ashamed of the government they must live under. Unfortunately for them they don’t seem to agree what to do about it. In the old days it was easy. Simply dial up the army and let them deal with it. Now, the opposition has to do the hard work of grass roots politics. And that takes time, money and commitment to deliver services rather than merely bleat about the evils of the existing government. Twitter and YouTube alone are not going to deliver the hard-to-earn votes.

You may not like the AKP, but you have to admit they are very, very good at grass roots political organising. The opposition needs to take a page out of their book to make a dent on the mass of voters.

As Sedat Ergin notes in the Turkish daily HurriyetDaily News, however, Erdoğan may find it more difficult to translate victory in the local elections into victory in the presidential race due to be run in August this year. The president used to be selected by the parliament, but now for the first time the Republic’s history the president will be chosen by popular vote. The victor has to get 50% + 1 vote in a two-round battle.

Some numbers show the difficulty of his decision about running for president, a position he has long coveted. Despite his impressive win last month the fact remains that Erdoğan’s party received 19,455,000 votes, almost 2,000,000 votes less than it did in 2011.

There were 44,725,000 total valid votes cast in the 30 March elections. Assuming the same number of valid votes in August the winner of the presidency will have to receive 22,362,501 votes. In other words, Erdoğan has to pick up another 3,000,000 votes – not a slam dunk. The obvious place to turn is the Kurdish party that just happened to receive almost the magic number of 3,000,000 votes. But the Kurds are far from stupid and will definitely want some tangible reward for giving him their votes.

Therein lies the problem. How much can he give without alienating his core nationalist/conservative base? This problem is particularly acute because the right-wing Nationalist People’s Party recorded 7,875,000 votes last month, up 17.6% from 2011. Too many concessions to the Kurds could see these numbers climb even higher.

He may also face a different political landscape. The anti-AKP vote has always been splintered among several different parties. There is a lot of talk now about the two major opposition parties uniting behind a common candidate in a rare concession to common sense.

In the first few days after the municipal elections Erdoğan showed absolutely no sign of reaching out to the 57% of the electorate that did not vote for him. Indeed his first public remarks were to scold the Constitutional Court for overturning the ban on Twitter and order the theoretically-independent Central Bank to reduce interest. His actions over the next couple of months could even alienate that block further.

Another factor in his calculation is that he has been unable to change the nature of the presidency from its largely ceremonial role. The president has some authority, but real day-to-day power and patronage lie with the prime minister. Will Erdoğan give up that power base for the symbolism of the presidency? Or would he rather remain in his more-or-less guaranteed role as prime minister?

And then there is the economy. For the moment Turkish assets are booming in a post-election glow. But growth forecasts keep getting cut, and now are under 4% for 2014. Unemployment cannot be reduced with these sliding GDP growth numbers. Meanwhile inflation is creeping up, and the important middle classes could soon start to feel a squeeze. How will Erdoğan react? If he forces the Central Bank to reduce rates to spur growth he risks a sharply devalued currency and reduction of the required foreign fund flows. If he lets rates remain high the key construction sector – filled with his cronies – could be hurt.

Given these difficulties no one would be surprised if Erdoğan makes a deal with Abdullah Gül, the current president, to allow Gül to run for another term while he remains at his power base as prime minister. In either scenario Turkey is, unfortunately, in for another several more months of political turmoil.