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Solution To Greece Sovereign Debt Default Scare, Easy…Kick Them Out Of The E.U.

Economics / Global Debt Crisis Feb 06, 2010 - 03:49 AM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleOn Friday European monetary affairs commissioner Joaquin Almunia declared;

 “There is no bailout and no "plan-B" for the Greek economy because there is no risk it will default on its debt”.

The good news is that as we speak there is a team from Brussels which will start advising Greece on how to fix its finances. The bad news is that they might have to have to start from the very beginning, like with grade-school math.

Apparently Greece got into a bit of disarray all of a sudden when someone noticed a little mistake (presumably arithmetical), and it turned out that the projected budget deficit of 3.7% of GDP for 2009, would actually be 12.7%, and they found that out, apparently some time in January 2010.

So while we are on that subject, I was just wondering how Joaquin Almunia is so sure about “plan-A”…I mean did he check the math? And well if there is indeed a “plan-A”, then what are all those armies of EU financial wizards advising about?

Or is “plan-A” that the Germans will just hand over a load of money?

Anyway the EU was not well pleased to hear about the arithmetical mistake, this is what they said:

The European Commission has published a damning report on Greece's "unreliable" economic figures, increasing the chances of the EU executive launching infringement proceedings against Athens. The report on Greek government deficit and debt statistics highlights the general "lack of quality of the Greek fiscal statistics" and "failures of the relevant Greek institutions in a broad sense."

One thing I like to do is figure out chaotic countries that don’t have good statistics and aren’t very good at arithmetic, so thought I’d spend a couple of hours digging around trying to figure out how the Greek economy works.

I can report that statistics, you know those boring things like National Accounts and all that tedious stuff; are evidently not something that comes easy over there.

I say that because you would have thought that with 40% of the population employed in the public sector, they might have been able to come up with a set of National Accounts that you can access on the Internet, even poor countries like Kenya and India have that sort of information, and Greece is supposed to be a rich country.

Perhaps that’s one of the problems? I saw a documentary the other day that reported the Greek public sector doesn’t actually do very much; outside (according to the report) of getting the police and military to beat people up and sometimes kill them, which is something that they seem to have a very special talent for. This is what Amnesty International said last year:

A report published on Monday 30 March by Amnesty International reveals a pattern of serious human rights violations by Greek police and other law enforcement officials. The report highlights allegations of excessive use of force and firearms, torture and ill-treatment, arbitrary detention and denial of prompt access to lawyers.

I remember when I last went to Greece which was in 1975, how time passes, seems like yesterday, lovely people. I used to hang around with some students in Athens and they told me some pretty horrifying stories. But I was surprised to hear they are still doing that sort of thing, over thirty years later.

I thought the EU had standards about that sort of thing? Although I suppose if you can’t get a country to put together a reliable set of national accounts, well it’s probably unrealistic to hope that you can persuade them to stop torturing their own citizens.

Anyway, after giving up on the obvious sources; like for example the Ministry of Planning, the National Statistics Office, and the Greek Central Bank, about the only thing I found of any use was this:

Athens, 04 February 2010: The Minister of Finance, George Papaconstantinou, sent today to Parliament a bill rendering the statistical service independent. The draft legislation entitled "Hellenic Statistical System. Establishment of the Hellenic Statistical Authority (ELSTA) as an Independent Authority - Legal Entity under Public Law" represents a major step to restore the credibility of Greek statistical data and fiscal accounts.

So what that basically says is that they don’t have many statistics right now, and the ones they have are not reliable, but the good news is that they have recognised that if you want to run a country in the modern age, they do come in handy now and then.

Come to think of it, I’m not sure what the word “restore” means?

However there was some information on the Ministry of Economy and Finance website, for example a Power Point presentation titled “The Greek Economy”, that did not unfortunately have any economics statistics on it, just percentage growth rates, plus some stirring sub-titles, like:

 “Dynamic Progress, Great Potential, Bold Reform Agenda”.

I also noticed that Greece had (proudly) secured 24.3 Billion Euros of handouts for 2007-2013. That must be presumably for instruments of torture and Tazars?

But the best bit was an account of 216 new PPP infrastructure projects although I only counted ninety on the list (like I said arithmetic doesn’t seem to be a core skill), but out of the ninety projects I counted, there were:

Nine “Security Systems for the Ministry of defence (MOD) i.e. 10% of 90
Fourteen Buildings for the MOD (16%)
Fourteen Police Stations (16%)
Three Prisons (3%)
Five “Pr Government Houses” (Pr means private?) (6%)
Three Courts (3%)
Eight Port Security Systems (9%)

Clearly they take the business of torturing their own civilians in Greece very seriously! Lucky they have the EU to support them in that vital role, the Belgium and German taxpayers in particular can go to bed at night with a warm fuzzy feeling knowing that they paid for that.

Personally I don’t care, I’ve seen a lot worse, just I object to paying for that.

Anyway, that was the sum-total of the information that I managed to glean from those sources on the Economy of Greece, so I was reduced to Wikipedia in my search for the “truth”. But sadly the account on the economy appeared to have been written by a public relations firm and from that story-board you would think that Greece is one of the most economically vibrant countries in the world. But it did include a few snippets of information, for example:

In 2004, Eurostat, the statistical arm of the European Commission, after an audit performed by the New Democracy government, revealed that the budgetary statistics on the basis of which Greece joined the European monetary union (budget deficit was one of four key criteria for entry), had been massively underreported by the previous Greek government (mostly by not recording a large share of military expenses).

That might explain it, “Military expenses”?  Perhaps that might have something to do with what Amnesty International called a “pattern of serious human rights violations by Greek police and other law enforcement officials”.

Perhaps they were shy to report what proportion of their GDP was deployed on that activity? Anyway the report went on to say:

 However, even according to the revised budget deficit numbers calculated according to the methodology in force at the time of Greece's application for entry into the Eurozone, the criteria for entry had been met.

Well that’s nice, although by that time I suppose it might have been a bit late, and so the bureaucrats from Brussels might have figured “Oh well, what the heck”? Or perhaps someone paid some kickbacks – that’s the way things generally work in the EU.

Anyway after Wikipedia, I found some data on EUROMONITOR which I cross-checked to the other snippets I had picked up. If I’d been willing to pay I suppose I might have got more, although you don’t actually need much to figure out which way the wind blows.

Big picture when you get in a hole, all that matters is cash flow; these what I think are the big numbers for 2008 which was the year before the wheels started falling off:

GDP (nominal)                                244      Billion Euros.
Current Account Deficit                   36      Billion Euros
As % GDP                                       15%

Imports                                           98       Billion Euros
Exports of Goods & Services            29       Billion Euros
Tourism Receipts                             18       Billion Euros
External revenues from shipping        6       Billion Euros (that’s a guess)
EU Aid                                              4       Billion Euros

Total external income                        55       Billion Euros
Government Revenues                     60       Billion Euros (24% of GDP)
Government Expenditure                 69       Billion Euros (27.5% of GDP)

 I think that’s right, although it’s hard to work it out since most of the statistics are just percentages, it’s hard to figure out of what? I get the feeling that was deliberate, although I suppose someone has got a copy of the National Accounts somewhere, but so far as I can see, that’s “National Security”.

In 2009 two things happened, (1) tourism tanked, it’s hard to get a number on that but it looks like revenues might have gone down 20%, (2) shipping tanked, I wouldn’t be surprised if the external revenues from the huge external shipping fleet owned by Greek Shipping Tycoons (many of whom live in London), might have gone negative.

I suspect that the tourism industry and the shipping industry were the big cash cows, those are hard to hide unlike what is reported as a large grey economy in Greece (people tend to resist paying taxes if the taxes are used to pay policemen and soldiers to beat them up and torture them), and so when those tanked – well there was no money. And since those revenues are pay-as you go, they didn’t know how bad it was going to be until the bombshell hit.

An presumably the 40% of the working force that are employed in “public service” were too busy torturing people and figuring out how to add 2+2 together and come up with “four” be able to anticipate that?

So what’s “plan-A” going to be?

Well tourism receipts depend on the nominal GDP of the source countries (mainly UK and Germany), and that’s not looking too hot. Plus the margins there are affected by oil prices (and I’d be surprised if they average less than $70 going forwards regardless of the current “volatility”), since Greece is a low budget destination and therefore fuel costs matter a lot, so don’t expect an uptick of any size in the immediate future.

With regard to the debt, Greece is classified as number eighty-one in terms of doing business; in other words, it’s basically a corrupt police state. The ironic thing there is that I wouldn’t be surprised if a big part of the external debt was loaned out to the cronies to build hotels and other tourism infrastructure, and that a big part of that is now unable to service its loans.

Ironic since if it had been easier for foreigners to invest, the government which probably guaranteed those loans (that’s how it works in a crony capitalist police state), it would be foreign investors who were on the hook.

My suggestion for Plan A:

1: Get rid of half the police force and 75% of the army and re-train the rest, the European Union has no place subsidising a crony capitalist police state, or corruption and torture.

2: Call the real estate loans and go after any shortfalls, do not allow them to slip out by saying they were “non-recourse”,  and set up a transparent mechanism to make sure the creditors get properly treated; aim to sell the real estate after removing all of the hidden restrictions on other EU nationals participating in the Greek economy.

But don’t be too soft on the creditors, after all if you lend money to banana republics that make a habit out of torturing their own people, and lie on their application forms, don’t ***** if they don’t give the money back.

And if they don’t want to play ball, cut them lose and let them sink, they lied to the EU to get in, so if they don’t want to take their medicine, kick them out.

The EU regulations are very clear; the budget deficit should not be more than 3%, and you shouldn’t lie on your application form; allow that sort of thing and you might as well let Zimbabwe join the EU.

And if you really want to twist the knife; let Turkey in.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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06 Feb 10, 22:02
Greece Sovereign Debt Default

What about your past advise to invest in Dubai real-estate?

Andrew Butter
11 Feb 10, 17:51
Dubai Real Estate - response

What about it?

My advice in 2004 was jump in, I developed some project, my advice was sell at 2004 x 3 in 2008.

My advice was buy at 2008 X 0.4

Now good stuff is 2008 x 0.4 x 0.6

Please find one of my clients or any investors who regretted doing what I told them, I'd be interested to hear from them.

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