Where not to invest in Europe

Economist
October 29, 2014

Doing business in Europe's periphery is hampered by slow legal systems

The World Bank released its annual "Doing Business" report on October 29th, ranking the world's 189 countries by how attractive they are to companies. That tiny Singapore led the list again this year and Eritrea was stuck in last place was not particularly surprising. Other performances were less easy to explain. Ukraine—which since February has been embroiled in a conflict with neighbouring Russia—leapt up the rankings, partly because some of the data capturing improved administrative practices was collected before hostilities flared.

Yet the report's most interesting data—on the time it takes to settle a dispute, or wind up a company—sheds light on the lacklustre business investment in Europe's periphery since the financial crisis. Countries where it is quick and easy to enforce contracts or wrap up failing firms are usually more attractive to investors than places with lethargic legal systems. In Greece and Slovenia, hit hard by the financial crisis, it takes much longer to do these things than countries such as France and Germany, whose economies have generally performed better. The situation has got much worse over the last few years. It now takes over two months longer to enforce a contract through the Slovenian court system than it did a year ago. And to do that in Greece now takes more than four years, up around 18 months from 2010. The only bright spot is that there may be a lot more business for Greek lawyers in the near future.

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Lower levels of clientelism in Portuguese politics explain why Portugal handled austerity better than Greece during the crisis

by Alexandre Afonso, Sotirios Zartaloudis & Yannis Papadopoulos

LSE
October 27, 2014

Greece and Portugal were two of the worst hit countries by the Eurozone crisis, yet the domestic political reaction within each state was notably different. While in Greece there were difficulties agreeing to austerity policies and the party system underwent substantial change; Portuguese parties negotiated a broad political consensus over reforms and the mainstream parties largely retained their support base. Alexandre Afonso, Sotirios Zartaloudis and Yannis Papadopoulos argue that the key reason for this difference relates to the varying levels of clientelism in each country, where political ‘patrons’ provide goods or services to their backers in return for political support. They write that the fact Portugal had lower levels of clientelism before the crisis ensured that Portuguese parties were more capable of backing austerity policies without alienating their supporters.

Which factors shape the willingness of political parties to pursue or agree to fiscal and welfare retrenchment? In a recently published article, we argue that the strength of clientelistic links between voters and parties shape party strategies toward austerity reforms. Political parties that draw extensively on clientelistic links and the distribution of rents to their party supporters seek to avoid or delay agreements on fiscal retrenchment because their own electoral survival depends on the control of public sector employment, regulatory powers and budgets in order to reward clients. By contrast, parties that rely less on clientelistic links have a larger margin of manoeuvre in austerity reforms because their electoral fortunes are less tied to public spending as an electoral resource.

Recently, research has shown that parties of different ideological orientations display different stances toward retrenching the welfare state. Some parties can even be rewarded electorally for retrenching social programmes and cutting public spending. However, ideology is only one mechanism that ties parties and citizens: many parties around the world do not win elections only because of their ideological programmes, but also thanks to the material resources (cash transfers, jobs, services, rents, investments or privileges) that they are able to deliver to targeted groups in exchange for votes (often referred to as ‘pork barrel politics’). We use the strength of these connections to explain different party stances toward retrenchment.

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ECB stress tests: Three out of four Greek banks fail

Financial Times
October 26, 2014

Three out of the four participating Greek banks failed to pass the European Central Bank’s Comprehensive Assessment on Sunday but the picture is completely reversed when the banks’ approved restructuring plans are taken into account in the dynamic balance sheet assumption.

The aggregate capital shortfall for Eurobank, National Bank and Piraeus Bank amounted to about €8.7bn at the end of 2013 with just Alpha Bank exhibiting a capital surplus. Piraeus featured the smallest capital deficit with €660m at end-2013.

But the Comprehensive Assessment, which included capital accretive measures and projected future earnings in the banks’ restructuring plans approved by the European Commission in 2014, showed three banks met the capital requirement while the fourth, Eurobank, just missed it for 5 basis points with an adjusted CET I ratio of 5.45 per cent under the adverse, dynamic scenario.

“We are pleased with the results of the Comprehensive Assessment under the dynamic balance sheet projections as taken into account net capital already raised, our bank has practically no capital shortfall,” said Christos Megalou, chief executive of Eurobank.

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Patronage and bribery will persist in Greece

by Tony Barber

Financial Times
October 26, 2014

At first sight it is puzzling that Greece should be in a hurry to exit the EU-International Monetary Fund bailout on which it has depended since 2010. The yield on Greek 10-year sovereign debt soared above 9 per cent a couple of weeks ago.

Even at 7 per cent, the market rate is much higher than the rate at which Athens borrows from its official creditors. Like a sprinter falling at the last hurdle, Greece is in danger of tripping up because it wants to beat the clock.

For Antonis Samaras, prime minister, and his colleagues, however, this is not primarily a financial matter. It is about national dignity and, as is to be expected in a democracy, political calculation.

A yearning for restored national dignity pervades Greek attitudes to the EU-IMF bailout. The social and economic costs of the rescue, from mass unemployment to business closures, have been punishingly high.

The bailout reminds Greeks of how big powers have often exercised control over their country since the 1821-32 war of independence against Ottoman rule. For older Greeks, the 1941-44 Nazi occupation and British and US influence over postwar Greece are vivid memories. A quest for self-determination is central to the Greek identity.

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Not so fast: A spike in bond yields is bad news for the government

Economist
October 25, 2014

Greece's plans for a clean exit from its international bail-out are in disarray. A sharp rise in bond yields has stymied the government’s plan to borrow about €9 billion ($11 billion) abroad in 2015 to meet debt repayments and ease the impact of austerity measures, which have left more than 35% of Greeks at risk of poverty. Instead, the prime minister, Antonis Samaras, will have to negotiate a new credit line with the European Union or, worse, accept 15 more months of tough supervision by the IMF, in return for €12 billion.

Mr Samaras still insists the “era of the memorandum” (as Greeks call the bail-out) is ending, and talks up renewed foreign investment. Following a record summer tourism season, international hotel chains are eager to snap up properties on popular Aegean Islands. The Greek privatisation agency, Taiped, is considering three bids from international groups seeking to manage 14 regional airports. China’s Cosco group is spending €230m to enlarge its container-handling terminal at Piraeus. According to the EU and the IMF, Greece’s economy will grow by 0.6% this year and 2.9% in 2015.

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Misrule of the Few: How the Oligarchs Ruined Greece

by Pavlos Eleftheriadis

Foreign Affairs
November/December 2014

Just a few years ago, Greece came perilously close to defaulting on its debts and exiting the eurozone. Today, thanks to the largest sovereign bailout in history, the country’s economy is showing new signs of life. In exchange for promises that Athens would enact aggressive austerity measures, the so-called troika -- the European Central Bank, the European Commission, and the International Monetary Fund -- provided tens of billions of dollars in emergency loans. From the perspective of many global investors and European officials, those policies have paid off. Excluding a one-off expenditure to recapitalize its banks, Greece’s budget shortfall totaled roughly two percent last year, down from nearly 16 percent in 2009. Last year, the country ran a current account surplus for the first time in over three decades. And this past April, Greece returned to the international debt markets it had been locked out of for four years, issuing $4 billion in five-year government bonds at a relatively low yield -- only 4.95 percent. (Demand exceeded $26 billion.) In August, Moody’s Investors Service upgraded the country’s credit rating by two notches.

Yet the recent comeback masks deep structural problems. To tidy its books, Athens levied crippling taxes on the middle class and made sharp cuts to government salaries, pensions, and health-care coverage. While ordinary citizens suffered under the weight of austerity, the government stalled on meaningful reforms: the Greek economy remains one of the least open in Europe and consequently one of the least competitive. It is also one of the most unequal.

Greece has failed to address such problems because the country’s elites have a vested interest in keeping things as they are. Since the early 1990s, a handful of wealthy families -- an oligarchy in all but name -- has dominated Greek politics. These elites have preserved their positions through control of the media and through old-fashioned favoritism, sharing the spoils of power with the country’s politicians. Greek legislators, in turn, have held on to power by rewarding a small number of professional associations and public-sector unions that support the status quo. Even as European lenders have put the country’s finances under a microscope, this arrangement has held.

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'Poets and Alchemists': Berlin and Paris Undermine Euro Stability

Spiegel
October 20, 2014

Following three hours of questioning at European Parliament, a visibly exhausted Pierre Moscovici switched to German in a final effort to assuage skepticism from certain members of European Parliament. "As commisioner, I will fully respect the pact," he said.

Moscovici was French finance minister from 2012 until this April and will become European commissioner for economic and financial affairs when the new Commission takes office next month. But can he be taken at his word? There is room for doubt.

In response to the unprecedented euro-zone debt crisis, the European Union agreed to strengthen its Stability and Growth Pact in recent years. Member states gave the European Commission in Brussels greater leeway to monitor national budgets and also bestowed it with rights to levy stiffer fines for countries that violate those rules. Smaller member states have already been forced to comply. Still, as German Chancellor Angela Merkel herself has told confidants, the real test will come when a major member state is forced to submit to the EU corset.

That time is now. And the big EU member state in question is France. The development is creating a dilemma for Merkel.

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The Eurozone’s Problems Are Based in Politics

by Simon Nixon

Wall Street Journal
October 19, 2014

Some say the euro crisis is back; others argue that it never really went away. A gloomy forecast from the International Monetary Fund suggesting a 40% chance of a slide back into recession and a flurry of weak data pointing to a faltering recovery, particularly in Germany, have spooked markets.

Once again, the eurozone is the focus of global attention amid fears that low growth will tip the Continent into outright deflation. European equities fell last week to their lowest level for 10 months, German bunds rallied and peripheral-country bond yields rose. Most eye-catching: Greek government 10-year yields briefly soared above 9% and ended the week just below 8%.

A bit of perspective is necessary. First, the origins of this slowdown lie not in the eurozone but in emerging markets. This emerging-market downturn, which caught the IMF by surprise but has in fact been under way for most of the year, was the inevitable result of the U.S. Federal Reserve’s decision to start turning off the monetary taps.

As the extraordinary liquidity flows that fueled developing-country booms and commodity-price bubbles have unwound, developed countries with major export sectors such as Germany have been hit too.

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Greek Exit Plan Lacks Backing From Economists

Bloomberg
October 17, 2014

Antonis Samaras’s plan for Greece to exit its bailout early is crumbling in the face of a market rejection. Economists say it might not have been such a good idea anyway.

Eighty-five percent of respondents to a Bloomberg News survey said the prime minister’s proposal didn’t make economic sense, partly because of Mario Draghi’s insistence that junk-rated countries must remain under some kind of surveillance program to benefit from new European Central Bank measures.

Greek 10-year bond yields have surged to the highest in nine months as Samaras’s plan for a year-end exit unraveled. The prime minister’s push met resistance from euro area and International Monetary Fund creditors, with finance ministers from the 18-nation currency bloc publicly voicing doubts at an Oct. 13 meeting in Luxembourg.

“What’s important from an economic perspective is that Greece continues to commit to a strong reform program,” said James Nixon, an economist at Oxford Economics Ltd. in London. “The government is to a certain extent desperate to take its foot off the reform gas pedal and ease back a bit to try to boost its popularity.”

Samaras has said his government may pass on IMF funds available in 2015 and cover its financing needs from markets after selling bonds for the first time since 2010 this year.

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Greece Still Needs Intensive Care

by Mark Gilbert

Bloomberg
October 16, 2014

Being hooked up to beeping machines in hospital is no fun, so it's understandable Greece wants to discharge itself from the supervision that came with a 240 billion euros ($307 billion) transfusion of emergency aid in 2010. The bond market, however, is saying Greece still needs intensive care.

Greece's 10-year yield has surged to 9 percent from 6.5 percent this week. While the scale of the move partly reflects current market turmoil, the direction of travel was established before global stocks decided to head south for the winter:

As a condition of Greece's rescue, the country has had to submit to regular examinations by the so-called Troika -- the European Central Bank, the International Monetary Fund and the European Commission -- which then prescribes various economic medicines, mostly in the form of financial dieting pills. Prime Minister Antonis Samaras, starry-eyed after his 10-year borrowing cost dipped as low as 5.56 percent at the beginning of September, said last week he'd like his freedom back.

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Greek Financial Markets Slump

Wall Street Journal
October 15, 2014

Greek financial markets slumped Wednesday, extending steep losses from a day earlier amid growing fears of renewed political instability and worries that the country may leave its bailout program before it is ready.

As stocks fell elsewhere in Europe and in the U.S., the Athens Stock Exchange’s general index closed 6.2% lower, recovering from earlier double-digit percentage declines, at 899 points, the lowest level in more than a year. Greek government bonds were also hit hard, with the yield on the 10-year bond reaching an eight-month high of 7.8%.

“Greece clearly has its own issues, but against a global market backdrop where we’re seeing such huge losses across so many different areas, any market with even a chink of weakness is going to get hammered and that’s exactly what we’re seeing here,” said David Vickers, a senior portfolio manager at Russell Investments, which has around $280 billion of assets under management.

Those issues have gained prominence in recent days. The current government is aiming to leave the bailout program, or scale back the degree of control international authorities exercise, at the end of the year, 18 months earlier than the rescue plan now calls for. The prospect that the antireform, radical-left Syriza party could come to power shortly after that, in elections early next year, has added to the concerns.

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36 Hours in Athens

by Joanna Kakissis

New York Times
October 15, 2014

Μηνύματα από το ΔΝΤ

της Μιράντας Ξαφά

Καθημερινή
12 Οκτωβρίου 2014

Στο τέλος του έτους λήγει η χρηματοδότηση από τον Ευρωπαϊκό Μηχανισμό Σταθερότητας (ΕΜΣ), με 1,8 δισ. ευρώ να απομένει προς εκταμίευση. Η κυβέρνηση δηλώνει ότι δεν προτίθεται να ζητήσει νέο δάνειο, ενώ σκοπεύει να αποδεσμευτεί ταυτόχρονα και από το ΔΝΤ, παρόλο που εκκρεμούν 16 δισ. ευρώ προς εκταμίευση μέχρι τον Μάρτιο του 2016. Αν η κυβέρνηση αποφασίσει να θέσει τέλος στο Μνημόνιο και στη χρηματοδότηση που το συνοδεύει, θα πρέπει να αναζητήσει γύρω στα 10 δισ. ευρώ από τις αγορές για να καλύψει τις χρηματοδοτικές ανάγκες του Δημοσίου το 2015.

Το ποσό αυτό είναι πιθανό να μπορεί να αντληθεί από τις αγορές, υπό προϋποθέσεις: Πρώτον, να κλείσει η τρέχουσα διαπραγμάτευση με την τρόικα ώστε να εισπράξουμε τα 11 δισ. ευρώ που συνδέονται με αυτήν και να σταλεί το μήνυμα ότι το πρόγραμμα παραμένει σε τροχιά. Δεύτερον, η κυβέρνηση να δεσμευτεί να συνεχίσει τις μεταρρυθμίσεις προς την κατεύθυνση της βελτίωσης της ανταγωνιστικότητας και της δημοσιονομικής πειθαρχίας. Για να είναι αξιόπιστη, η δέσμευση αυτή πρέπει να είναι συγκεκριμένη. Θα πρέπει δηλαδή η κυβέρνηση να ανακοινώσει κάποιο πλαίσιο οικονομικής πολιτικής με μετρήσιμους στόχους στη μεταμνημονιακή εποχή, που θα συνοδεύεται από επιτήρηση στο πλαίσιο του αναμορφωμένου Συμφώνου Σταθερότητας της Ε.Ε. και της εποπτείας μιας χώρας που χρωστάει 240 δισ. στους επίσημους δανειστές. Χωρίς πρόγραμμα και εποπτεία, η ΕΚΤ δεν προτίθεται να αποδέχεται τα ομόλογα του Ελληνικού Δημοσίου ως ενέχυρο για την άντληση ρευστότητας, εφόσον παραμένουν στην κατηγορία «σκουπίδια» (junk), ούτε να αγοράζει τιτλοποιημένα δάνεια από τις ελληνικές τράπεζες ώστε να τους δοθεί η δυνατότητα παροχής νέων δανείων. Οπως δήλωσε ο πρόεδρος της ΕΚΤ Μ. Ντράγκι την περασμένη εβδομάδα, «no program, no purchases». Τέλος, πρόγραμμα και εποπτεία είναι απαραίτητη προϋπόθεση για να συνεχίσει η Ελλάδα να εισπράττει τα κέρδη της ΕΚΤ και των κεντρικών τραπεζών της Ευρωζώνης από τα ομόλογα Ελληνικού Δημοσίου που κατέχουν, ύψους 2,5 δισ. ευρώ το 2015.

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Greece’s shadow economy: The treasures of darkness

Economist
October 11, 2014

Two out of three Greek workers either understate their earnings or fail to disclose them to the taxman altogether, according to Stephen Hall, an adviser to the Bank of Greece. Last year an estimated 24% of all economic activity in Greece went undeclared to evade tax and regulation, well above the European average of 19%.

The IMF, which was in Athens this week to check up on Greece’s public accounts, would like to bring more of this activity into the sunlight, to boost government revenues. After a calamitous recession in which the economy shrank by 30%, government debt now stands at 174% of GDP; the budget deficit last year was almost 13% of GDP. But there is a risk that an overly aggressive tax-raising drive will compound the problem.

Greeks, even more than their counterparts elsewhere, feel that their taxes are wasted. One study, using data from the 1990s, put Greece’s “tax morale” fourth-lowest of 26 countries. Greece’s public sector is more corrupt than that of any other EU state, according to Transparency International, a pressure group. Satisfaction with public services is extremely low. No wonder, then, that many Greeks have few qualms about not paying their share.

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