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hill to view the splendors of the Parthenon and the Erechtheion – even if the six original caryatids on the latter have been replaced by reproductions.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.

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.

Tragedy Becoming Farce

The woeful state of Greek economic and political affairs is about to cross the thin line from tragedy to farce. So far the Greeks are way ahead of the other European Union players – after all they invented the art form. In fact, only someone like Euripides or Aristophanes could do this situation justice.


This tragic farce in Three Acts has the following dramatis personae including the off stage choruses of wailing people, foreign banks and hedge funds.

In Act One we have:

Happy Greek People
Happy Greek Banks
Happy Foreign Banks
Happy Politicians
Silent Economists
Silent Eurocrats

Act One opens with the Happy People dancing and borrowing from the Happy Banks to spend money they don’t have. Need a vacation? Call your friendly Happy Bank. Need a car or a gift for your wife or mistress? Call your friendly Happy Bank. The banks lend much more than the deposits they have and are confident in getting cheap loans from Europe to cover the difference. Don’t have a job to repay the loan? Don’t worry. Your Happy Politician will fix that. Government needs money to pay for all this joy? No problem. Borrow from the friendly Happy Foreign Banks. Why not? Thanks to this marvellous invention of the Euro the rates are so low it’s almost free money. Some junior economist in Brussels sees a tiny problem with all this happiness because somewhere, somehow, this money is supposed to be repaid. Before this junior economist named Ernst can voice his doubts too loudly his fellow Eurocrats send him on a two-year fact finding trip to Central Africa.


In Act Two we have:

Less Happy People becoming Angry People
Stiff Upper Lip Greek Banks
Nervous Foreign Banks
Nervous Politicians
Very Happy Hedge Funds
Suddenly Righteous Eurocrats
I-Told-You-So Economists
Baroness von Brandenburg
Sly Duc de Versailles
Bewildered Vikings
Stern Headmaster
Loud Choruses

Act Two opens with storm clouds over the Acropolis, offstage clashing of cymbals, angry wails from the chorus. We won’t pay! This is not our problem! Nervous Politicians discover that the cash drawer is empty. No money can be repaid. Something Must Be Done! Cuts! Austerity! And, God forbid, Taxes! Offstage chorus of whinging masses becomes louder. Delighted hedge funds set up an opposite chorus. Default! Default! You’re Broke! Admit It! The I-Told-You-So Economists are indulging in an orgy of self-congratulations at one of the few times their predictions actually came true. Self-righteous Eurocrats proclaim loudly that they are shocked, shocked that Greece is broke. How can this be? You told us you were a member in good standing of the Euro Club! We took your numbers at face value! You mean they weren’t true? Say it’s not so! The Baroness von Brandenburg proclaims that good, thrifty Northern European (German) taxpayers will not pay one more pfennig (oops, Euro) to the shiftless bums stealing money for their holiday homes on Aegean islands. The Sly Duc de Versailles, whose banks own about €30 billion of Greek paper, rushes to the baroness’ side to plead for caution. His pleas are accompanied by another loud chorus of Contagion, Contagion, Contagion. Think of Ireland, Portugal and Spain.

 -You’re absolutely right Baroness. They are shiftless bums that don’t deserve another centime. But    let’s not be hasty here. Remember all those nice Teutonic toys, those Volkswagens and Mercedes they bought with all that money we gave them? All those nice roads and airports you Germans built. Maybe we can find you a nice little island. Just a few Euros more and we’re out of the woods here. Now is not the time to be pedantic.

Then the Bewildered Vikings start complaining about all the money they’re spending on Greece. The Duc de Versailles flies into action once again as the Vikings get nervous.

- How can this be? How can a country not know how much money it has or doesn’t have? This does not happen in real countries! This should not happen!

-That’s the point Olaf. You’re absolutely right. But how many times have I told you to forget the word ‘should’ when talking about the Mediterranean. It works with your reindeer and igloos, but loses a lot in translation when you head south.
- But . . .
- Sit, Olaf. Calm down. Just a few more Euros and we’ll pretend this never happened. Just raise your hand at the right time and we’re home and dry – or whatever you say up on the glaciers.

The Stern Headmaster, who knows the real condition of European banks, is petrified at the thought of default. Impossible, he thunders. At the same time he knows full well that he, or his lucky successor, is going to wind up with most of the dud Greek paper.

The Baroness and the Duc finally agree to have the sturdy, frugal, work-ethic obsessed Northerners make extra payments on the condition that the Greeks completely reform their economic life and become more like, well, Germans.

Cue puzzled looks by Nervous Greek Politicians. Reform? What are they talking about? We’ve been doing this for years. Oh, I get it. They want us to agree to their terms. Of course we will. How simple. We’ll agree to anything. Actually doing anything is another matter, but agreeing is easy. This is accompanied by much offstage banging about, shuffling of chairs, and loud cries heard by the audience. Oh, do be quiet and do what you’re told for once! Don’t you realize we have the upper hand. They have to give us the money or they go bust along with us. Just shut up and go through the motions of these so-called reforms. Then things will return to normal. Trust me.

Curtain.

Act Three opens with more wailing by the chorus of Angry People. The Sly Duc de Versailles once again takes the centre stage he loves so much.

-See, my friends. There is a magic word here. Pretend. This is what the Baroness and the Vikings don’t really understand. You don’t have to Do anything. (He shivers at the very thought of this.) But we pretend to pay the Greeks who immediately turn around and give the money back to our banks for all those nasty Greek bonds. The Greeks pretend to reform, jettison a few hapless cabinet members pour encourager les autres, and in a few years everyone has forgotten about this petite je ne sais quoi. The only people left holding the bag, as you Anglo-Saxons put it so well, are the Stern Headmaster and the people at the IMF who, tant pis, seem to be without a leader at the moment. They will perhaps understand in about five years what a great game this all was.

He gives a very Gallic What Else Can I Do shrug and slithers off the stage.

Meanwhile the Eurocrats are left with a problem. How to make sure the Greeks at least try to implement some of the reforms? The solution? Find someone to go to Athens to oversee the process. Who better than young Ernst? Honest and dependable young Ernst, and, more important, expendable young Ernst. An urgent call goes out to Central Africa to find young Ernst, if possible, and bring him home.

Young Ernst is dispatched to Athens with firm instructions to make sure the shifty Greeks stick to the Northern European plan. His zeal distresses his Greek counterparts no end, and they particularly don’t like this business of working through lunch and even on the weekends. At last they come up with a solution. They call upon shapely young Maria to do her national duty and introduce this handsome young Teuton to the ‘lighter side of Greek life.’ In time nature takes its course and the work hours begin to slip, the cigarette and ouzo breaks become more frequent, and Ernst’s reports back to Brussels and Berlin get shorter and shorter.

In the final scene we see the sun setting slowly over an Aegean island, and Young Ernst, clad only in shorts and adorned with a new tattoo, is dancing the sirtaki with Maria to the sounds of bouzouki music. Happy People have once again returned to a Happy Country.

                                                             The End

Returning To The Drachma Is Not The Answer

Writing about the Greek economy is like trying to catch a ball rolling rapidly away from you down a steep hill. The moment you write something, that ‘something’ becomes outdated by yet more very strange behaviour by Greece’s juvenile political class.


As the country stands on the brink of bankruptcy the major political parties still cannot work together on a common solution. My favourite comment comes from a former cabinet minister who loudly proclaimed he was against the structural reforms required for the country’s financial life line. “Our economic policy has failed, and we are putting the achievements of the last 25 years on the auction block,” George Lianis said today in the Financial Times. Achievements?! What achievements is he possibly talking about?

Does he mean the bloated state payrolls with an unrealistic retirement age and pension benefits? Or possibly he is referring to the rampant corruption in many sectors of the Greek economy. Maybe he is referring to the highly efficient, competitive state run companies. Just possibly he means the very effective barriers that the state has placed in the way of anyone trying to build a business, employ people and increase productivity. Please, Mr. Lianis could you be a little more specific? Unfortunately his comments are typical of the nonsense that passes for mature political and economic debate in Athens these days.

There is, unfortunately, no easy way out of this very deep hole that Greek politicians have dug for themselves over the last several decades. Anyone who thinks the solution would be to drop out of the Euro and adopt the old national currency, drachma, should think again. Far from helping Greece such a move would make any lasting reform and recovery even more difficult. To see the folly of such a move without fundamental economic reforms people should simply look across the Aegean at the experience of Turkey during the ‘lost’ decade of the 1990s when runaway inflation and a disappearing currency were the order of the day.

I remember those days very well when annual inflation averaged 60% - 70% and it took more than 1,000,000 Turkish lira to buy one U.S. dollar. There was a daily race to see if the pace of the currency depreciation could keep up with the inflation. One time I was giving a presentation in Switzerland, where they take currency stability very seriously indeed, and was asked an embarrassing question at the end of my talk. One disbelieving Zurich banker stood, checked his notes, and asked if it was true that the currency had depreciated 5% during my talk. Alas, I had to tell him that was very possibly the case.

The disappearing currency really didn’t benefit anyone because merchants would rapidly adjust their prices or simply list the prices in a hard currency. Prices in the Grand Bazaar, for example, were almost always in U.S. dollars, and now they are in Euros. Tourism prices like hotels were always listed in hard currency. What was worse was that much of the country’s mounting sovereign debt was also denominated in hard currency, and that meant that more and more Turkish Lira had to be printed to meet the interest and principal payments.

The corrosive nature of this condition was temporarily obscured by bursts of high growth and very, very high corporate profit margins. Companies would adjust prices upward much faster than they would increase wages, pay taxes, or contribute to the social security fund that was always in large deficit. Lending by banks was much less important than their buying and trading government securities. The government needed the banks to buy this paper when not many other people would touch it, and the banks loved the high interest rates.

The music to this mad dance finally stopped in February 2001. The day that Turkey was facing one the largest bond redemptions in history the prime minister got into a hissy fit with the president and went on television to announce that he could no longer work with him. We all watched horrified as interest rates soared to near 1,000% and the currency lost more than 50% by the close of trading. The long-running financial charade quickly unravelled, and 20 banks went out of business in the aftermath of this mess.

The time for gimmicks and covering bad management by printing more money was over. As a Turkish saying puts it, “The sea ended.” This time it ended on the rocks and not a nice smooth beach. What saved Turkey and put it on the road to sustainable growth, a solid financial system, and more transparent public finances was a rigorous reform program prepared by the International Monetary Fund and administered by serious Turkish officials.

The current ruling Justice and Development Party (AKP) swept into power in the 2002 elections on a wave of voter disgust at the failures of the previous regimes and the promise of continuing economic reforms. To a large degree AKP’s electoral success ever since 2002 is due to the country’s continuing economic success story. Yes, there are weaknesses in this story, but no one can deny the vast improvement over the economic management of previous governments. The improvement was so great that the currency is no longer a national embarrassment since the government removed six zeros from the denominations a few years ago.

The recovery in Greece will be long and painful in the best case, and the current behaviour of the political class only means that it will be longer and more painful than it has to be. Turkey showed that old economic taboos like fighting privatisation can be broken and that government finances can be made more transparent. Greece could do worse than to look across the Aegean for the model of how to do this.

The Election Was The Easy Part

Turkish Prime Minister Tayyip Erdoğan has once again proved himself to be the most successful vote getter in modern Turkish history. In Sunday’s election he increased the ruling Justice and Development Party’s (AKP) share of the vote from an already high 47% in 2007 to a staggering 50%. Give the man his due. He knows his audience, and he knows what buttons to push during a campaign.


Now the real work begins. Despite the massive vote total, AKP could have a more difficult time because it actually has fewer members of the new parliament than it did in the previous one. Due to the peculiarities of the Turkish election system AKP has 326 members of parliament, down from the 340 in the previous parliament and less than the 330 required to re-write the constitution unilaterally and submit it to a national referendum. Voters gave a clear message that that dreaded word in Turkish politics, compromise, will be needed to change the constitution. This will not be easy.

One of the major reasons for the relative shortfall in AKP members of parliament is that independent candidates representing Kurdish voters won 36 seats, mainly from the southeast. Normally a political party in Turkey must win at least 10% of the total vote to enter parliament. One way around this is to run as an independent and avoid the 10% national barrier. This is essentially what the Kurdish party members did, and it now has a strong voice in the parliament. The other two parties in parliament are the main opposition Republican Peoples’ Party (CHP) with 26% of the vote and the National Movement Party (MHP) with about 13%.

This new alignment in parliament will present Erdoğan with an early challenge. But perhaps his major challenge will be to rein in an economy that is forging ahead, but on increasingly shaky foundations. This, too, will not be easy. One indication of those shaky foundations is that the April 2011 Current Account Deficit (CAD) increased 75% over the same month in 2010. For the first four months of the year the CAD jumped 114% compared with last year. This deficit will most likely reach 9% of GNP by year-end. Alarm bells should be ringing, but so far the government shows no signs of hearing them.

One London-based bond trader noted that spreads on Turkish debt have not changed much since the election and last CAD data, but traders are anticipating that the Central Bank will be forced to raise interest rates soon. Although the government may not be doing very much about the deficit, equity investors are beginning to get nervous. The Istanbul Stock Exchange index is down almost 8% for the year, and leading stocks like Garanti Bank are down 9.2%, Akbank is down 14.7%, and Isbank has dropped 11.3% so far this year.

But slowing down the economy will be politically difficult. The booming economy, especially the real estate sector, of the last eight years has made many people extremely wealthy, and the strong economic growth was a major part of the AKP election campaign. As one investor put it, “Erdoğan has never met a bulldozer or ton of cement that he didn’t like.” The prime minister has announced major projects like a third bridge over the Bosphorus, a canal from the Black Sea to the Sea of Marmara to supplement the Bosphorus strait, and ambitious plans for nuclear power plants on the Mediterranean coast and the Black Sea Coast. Russia and Japan are the leading contenders to build these plants in a country that rivals Japan for earthquake risk. So far, no one has mentioned just how Turkey will finance these projects. All these ambitious plans are in addition to the roads and construction projects that have turned much of the country into a huge building site. Tighter fiscal policy combined with increasing interest rates could put a lot of these projects at risk, and developers and banks that lent to them could face difficult days. The prime minister will need all of his renowned leadership qualities to manage this transition to more controlled growth without alienating some of his core constituents.

And then there are the Kurds. No one is quite sure how they will deal with their increased representation in parliament. How much autonomy will they demand during negotiations on the new constitution? In theory it shouldn’t be too difficult to pry four votes from the 36 independent deputies to approve a constitution that can be submitted to a national referendum. But exactly what will the Kurdish deputies demand in return for their votes? Will the restive Kurdish population be satisfied with the changes or will it resort to more direct action like the so-called Arab Spring? How much will the prime minister be willing to compromise on his own plans for a new constitution, plans that could include changing the entire Turkish political system from parliamentary system to a system with a strong president similar to the French model? Compromise has never been a major part of Erdoğan’s agenda, and it remains to be seen if the election results will change that attitude.

And what about the ‘culture wars’ in Turkey between the old elite and the new power structure based in Anatolian towns and cities instead of Istanbul? “What good does it do to replace one authoritarian regime (the old military/political/business elite) with another one based on uneducated Anatolian AKP supporters that want revenge on Turkey’s traditional power structures,” asked one very well educated young Istanbul woman.

Also lost in the election campaign and immediate aftermath was any positive mention of the European Union. In his speech immediately following the election Erdoğan mentioned Turkey’s goal of having good relations with countries ranging from Bosnia to Azerbaijan and the Middle East in general. Not once did he mention the EU. The EU is increasing seen in Turkey as an intrusive, condescending force in Turkish affairs, and negotiations for membership are going through the motions without any real commitment on either side.

If the prime minister’s inbox wasn’t already full to bursting, he’s also got Israel and Cyprus to deal with in his spare time. The Israel issue will come to a head fairly soon if the so-called aid flotilla starting in Turkey actually attempts to run an Israeli blockade of Gaza. Now that the election is over some people are hoping that the Turkish government quietly directs this flotilla to Egypt where the goods can be transported to Gaza without provoking a harsh Israeli response. And then there’s Cyprus where he not only has to deal with intransigent Greek Cypriots but also with Turkish Cypriots opposed to Turkey’s policies on the divided island.

It promises to be a very interesting summer in Turkey.