Thursday, 14 September 2017

Gold miner’s woes cloud Greece’s investment skies

 This article was published by Al Jazeera International

The extended plant at Olympias, which received a permit on Friday 15 Septemebr

ATHENS, Greece – The fate of one of Greece’s biggest foreign investments hung in the balance on Wednesday, as relations between the government and Canada’s Eldorado Gold Corporation seemed close to breaking point.

Push, literally, came to shove outside the energy and environment ministry, as dozens of yellow-vested miners tried to force their way past a blue wall of riot police to gain an audience with minister Yiorgos Stathakis.

“The miners are going crazy. They don’t know what’s going to happen tomorrow,” said Yiorgos Hatzis, a senior member of one of the four unions that chartered overnight buses from northern Greece to picket the ministry.

At stake are 2,400 jobs and a $3bn investment into what was once touted as Europe’s largest gold mining operation. Instead, says Eldorado, it is becoming a bottomless pit of expenditure and delay that now threatens to suck in the Greek government’s reputation for attracting desperately needed investment.

The trouble began on Monday, when Eldorado announced it would suspend all its operations, located chiefly on the Kassandra peninsula in Chalkidike, because the government has held back operating licenses. Massive, rock-pulverising machinery is sitting in crates at its Skouries mine, and the company recently cancelled the unveiling of a new processing plant at its Olympias operation, because its temporary operating license runs out on September 21. Between them, the two locations are thought to contain eight million ounces of gold, currently worth over $10bn, as well as silver, copper and lead.

“Should we not receive these permits, we will be suspending our investment and moving into full care and maintenance mode beginning September 22nd,” said Eldorado President and CEO George Burns.

Minister Stathakis on Wednesday told workers that the government would be renewing the Olympias permit, obviating a shutdown. “That’s news to us,” commented a senior company official. “We await the pending permits for Olympias and Skouries imminently,” said a company statement.

Workers remained unconvinced. “We will continue our struggle because we haven’t been fully vindicated,” said Christos Zafeiroudas, a union leader. He announced that the miners would encamp outside the ministry until permits are issued.

The dispute triggered the involvement of the Canadian government on Wednesday. “I will always intervene and always will have the back of Canadian companies when they face unfair situations around the world,” Canada’s trade minister Francois-Philippe Champagne told Bloomberg.

A mixed marriage

The Syriza-led government campaigned against the development of the Kassandra mines ever since Eldorado bought the concessions in 2012. The party embraces a strong environmental ideology, which Prime Minister Alexis Tsipras gave voice to on Sunday at the Thessaloniki International Fair – a forum where Greek leaders traditionally spell out their economic vision for the year ahead.

“We believe the production model of the country can better succeed if we invest not in labour intensity but knowledge intensity and the comparative advantages of this country, which is nature. The Greek natural environment, quality agricultural goods and locations in this country offer the prospect of a high flow of tourism. But if we destroy the natural environment and our human resources we’ll have no production in the country,” Tsipras said.

Eldorado has proposed earth-moving works on a scale not seen in Greece in recent decades. It faced severe scrutiny of its Environmental Impact Assessment, which took seven years to approve.

Then there is Syriza’s traditional stance against privatisation. When it came to power on 25 January 2015, it was quick to nail its colours to the mast. As ministers were sworn in on the 27th, they publicly proclaimed the cancellation of two high-profile privatisations then underway, that of the Public Power Corporation and the Piraeus Port Authority. The Athens Stock Exchange collapsed as foreign institutional investors pulled out, and Deputy Prime Minister Yannis Dragasakis scrambled onto the airwaves late at night to announce that Syriza would come up with its own privatisation plan. It was the first indication that the reality of markets could sway the ideology of Syriza, but it was also an example of how tin-eared the inexperienced Syriza could be towards markets.

That is a lesson CEO George Burns took to heart on June 8, a day after he met with minister Stathakis. Speaking to Al Jazeera, he sounded stricken as he related the tale. “I’ve got a group of analysts at the investment, touring them around, to show them how proud we are of the work, how far we’ve been advancing since the last time they visited, and to paint a picture of how this is going to be a great investment for our investors and for the country - actually doing exactly what the Prime Minister is wanting, trying to develop interest and confidence that Greece is a great place to invest - and he put a press release out that day announcing that he is going to take us to arbitration… and we got hammered that day in the market.”

The arbitration process, due to begin on Friday, concerns the most contested of Eldorado’s proposals – to build a flash-melting plant at Stratoni that is to produce bars of gold and would mark the final phase of the investment. The government is skeptical about the company’s ability to adapt flash-melting technology, which avoids the use of poisonous cyanide, and has demanded rigorous technical and environmental explanations.

“The company has done a proposition,” said the ministry source on condition of anonymity. “The ministry returned this study of the company with an extensive list of technical notes which did not satisfy the ministry, in July 2016.”

Eldorado ultimately chose to appeal to the Council of State, Greece’s top administrative court, where it has won 18 cases against challengers, including the government. The government responded by taking Eldorado to arbitration. “According to the initial agreement, we should go through an arbitration process for issues that cannot be resolved because this is the best way to do it. The process is binding for both sides,” said the ministry source.

Tsipras has dragged his party towards the political centre ever since he saw a realistic prospect of winning power. In 2012, Syriza dropped its pro-Grexit stance and embraced the euro. After battling creditors in 2015, it embraced austerity. But these about-turns produced defections and embarrassment, which Syriza has yet to make up by increased prosperity or social spending. Greece’s growth did reach 0.4 percent and 0.8 percent in the first two quarters of the year after a flat performance last year, but with unemployment at 23 percent, the Federation of Hellenic Industry called it “a recovery that did not meet expectations.”

Some Eldorado officials believe Syriza chose the arbitration process to extricate itself from its own political left wing, and that this is part of the process of moving the party to the centre.

Burns agrees that the problem is one of severing political alliances that have outlived their use. “I think there is a connection between the anti-mining interests and the reluctance for the government to be openly supportive,” he tells Al Jazeera. “In every jurisdiction there are people who are ideologically against mining… at some point the government says, “OK, we’ve given people who don’t want the mine to move forward all the chances they’re going to get and now we’re going to be supportive to the investment.’ That’s what typically happens. It hasn’t happened yet here.”

The ministry source disagrees: “We do not read it as a political issue but as a legal-environmental issue.” The government points out that Greece earned $3.3bn in foreign investments last year, an eight-year high.

Eldorado’s relations with Syriza reached a low point in February 2016, after the company again threatened to pull out, causing its share price to fall 19 percent. Then-environment minister Panos Skourletis accused CEO Paul Wright of shorting his own company, triggering a lawsuit. There were echoes of that tone on Monday, when the prime minister’s strategic planning advisor called on Greeks to encourage Eldorado to leave Greece. “Good riddance, Eldorado. May you find no footing anywhere,” Nikos Karanikas tweeted. The tweet was later deleted.

Burns won’t publicly put a figure on losses suffered in Greece, but says the delays have impacted cashflow and share price. The Kassandra mines’ first privatisation to another Canadian miner, TVX Gold, ultimately failed because of the permitting process, bankrupting the company. Asked if he would consider a pullout, however, Burns says, “I am confident these mines will be built. These are fantastic assets.” 

Saturday, 29 July 2017

Greece’s Pivot toward China

This article was published by The Weekly Standard under the title, "How China acquired a major port in Europe". 

COSCO's first of two 80,000-tonne capacity floating docks, new additions to the Piraeus Port Authority's ship repair division. (Handout photo)

ATHENS, Greece - In the Salamis strait where an Athenian-led fleet of 380 ships once sank a Persian fleet of more than a thousand and altered the history of the Western world, the China Ocean Shipping Company (COSCO) is redrawing global trade routes. The strait lies just outside the port of Piraeus and is the heart of its cargo business. Container ships arrive around the clock to be loaded or unloaded with pinpoint precision. The only sound is that of whirring motors as containers are lifted from decks and placed on flatbed trucks to be stacked on the quay.

Since 2008, when it signed a 35-year lease from the Piraeus Port Authority to operate two container piers, COSCO has increased throughput from 700,000 twenty foot-equivalent units (teu) to what it estimates will be over four million this year. Within the next five years, Piraeus is scheduled to handle 7.2mn teu a year, making it the Mediterranean’s biggest cargo hub and putting it behind only Rotterdam, Antwerp and Hamburg in Europe. COSCO has sunk €600mn into shoring up the strength of the piers to shoulder the weight of container cities stacked six storeys high, doubling the size of the second pier, and installing 33 of the tallest gantry cranes in the world, capable of loading and unloading container ships so large, they have not yet been built. By the time COSCO finishes its investments, Piraeus will be the only Mediterranean port capable of harbouring five giga-container vessels simultaneously.

In 2013, Chinese premier Xi Jinping announced the One Belt One Road (OBOR) initiative, a dual strategy of developing an overland trade route across Asia and a maritime trade route around the subcontinent to facilitate the export of Chinese goods. China says it will spend almost a trillion dollars on roads, ports and other infrastructure, mostly being built by its state-operated companies. Piraeus has become a critical link in the OBOR, acting as the main European import and transshipment terminal.

Although it is the Chinese who are accomplishing this transformation, Greeks helped provide the vision, and they view it as a patriotic endeavour. “Piraeus’ strategic position is clear. It’s the first harbour as you steam north from Suez that provides inland access to Europe, which means that apart from using it as a transit point to other European ports, you can also use it as an import point. No other regional hub provides this,” says Tasos Vamvakidis, Commercial Director of COSCO’s subsidiary, Piraeus Container Terminal (PCT). Offloading at Piraeus saves a week’s sailing to the ports of northern Europe - and at least two million dollars per trip. Using Piraeus as an import point provides perquisites to Greek rail. PCT has bought a contract for up to ten freight trains a day to southeast Europe, and plans to eventually raise that. This is transforming how freight moves across Europe, explains Professor Stratos Papadimitriou of Piraeus University. “What happened in the past, because Mediterranean ports were useless,” he says, “was that cargoes sailed across the Mediterranean to deliver in Rotterdam, and the cargo would come south by road again to be delivered south of the Alps.” Vamvakidis envisions a future in which southern European ports rival those of the north. “We will be what in previous decades the large ports of northern Europe were when transatlantic trade was the rule. Now the Asia-Europe route through Suez is our great opportunity for the next eight years,” says Vamvakidis. After that, he believes, the export-driven economies of Asia will “reach the point where they consume what they now export,” and trade volumes from east to west may diminish.

On 8 April 2016, the Greek government announced the sale of PCT’s landlord, the Piraeus Port Authority itself, to COSCO. PPA is the body in charge of operating and developing the entire port, including its passenger and cruise shipping, freight operations, ship repair and vast property holdings. COSCO has announced investments of €294mn in the first five years. Among other things, it plans to build new cruise ship berths outside the harbour mouth. By the time the work is finished, Piraeus will be able to host 14 cruise ships simultaneously, including four behemoths, and turn Piraeus into a homeport for much of the Eastern Mediterranean cruising industry. This means that passengers will fly into Athens International Airport, stay in hotels before and after their cruise, eat and shop. Much of COSCO’s development budget is to be spent on hotels and shopping malls within the port.

COSCO promises to use its dominant position in China to help bring Chinese cruise passengers. One company, Celestyal Cruises, has signed up to bring 2,000 Chinese cruise passengers this year.  “We believe that this will increase astronomically,” says Theodora Riga, the PPA’s head of marketing and strategic planning. Cruise passengers landing at Athens airport already increased by 86 percent last year to 123,000. So far this year the increase has been more than 100 percent. “We consider this a very dynamic niche market,” says the airport’s marketing and communications director, Ioanna Papadopoulou. What will turbo-charge this increase, however, is an imminent direct flight from China. Air China has had a flight from Beijing to Athens via Munich since 2011. “The information we have is that very soon, perhaps this winter, it will establish a direct flight… This is very important for the arrivals of Chinese tourists in general,” says Papadopoulou.

Increasing the number of container, freight and cruise ships visiting Piraeus also means more ship repair business at the PPA-owned shipyards. Cruise ships in particular, says Riga, “can’t be based here eight months a year and then be obliged to go abroad for repairs. It’s not cost-effective for them.” COSCO is restoring drydocks to working order, building two floating docks to repair ships of 80,000 deadweight tonnes, and advertising the comeback of shipbuilding and repair to Piraeus.

In spring last year, the Institute for Economic and Industrial Research, a think tank, estimated that COSCO’s buyout and investments in the PPA deal, along with all the secondary economic activity those will create, has the potential to reduce the Greek debt by 2.3 percent of GDP, create 31,000 new jobs and increase GDP by 0.8 percent.

The best possible deal?

Despite the fact that COSCO’s two deals in Piraeus are putting the port on the global map and contributing much to the beleaguered Greek economy, some people harbour serious doubts about whether Greece got the best possible bargain.

COSCO’s original lease of two container piers was the result of 18 months of intensive negotiations. Its value to the Greek economy in rent, dividends, taxes, salaries and investment was estimated at €4.93bn over 35 years – seven times the market capitalization of the PPA. PPA’s share price shot up 14 percent on the day of the announcement[1] and 10 percent the following day. The deal increased in value through two revisions, in 2011 and December 2014, to reach a net present value of €1.08bn. This meant that the PPA could have floated a bond worth at least a billion dollars on the strength of that one contract alone. Many politicians therefore questioned the wisdom of selling the government’s two-thirds stake in the PPA to COSCO less than two years later, for a mere €368mn.

The sale had been in the works for years. “When China finally bought the 67 percent, the money it spent was particularly good for the Greek economy at that time but generally for the location of the Piraeus port it could have spent more,” says Yiorgos Tzogopoulos, a close observer of Greece-China relations.  “Greece should have combined the privatisation with an increase of Greek exports to China but it did not do so.”

Foremost among the critics has been Yiorgos Anomeritis, the merchant marine minister who at the turn of the millennium did much to engineer COSCO’s involvement in Piraeus, and was responsible for the original lease of the two container piers. “Ports are not privatised through the wholesale disposal of shares,” he says. “Ports are privatised section by section, infrastructure by infrastructure, service by service, to a multitude of buyers. To turn a state monopoly into a private one, which is what’s happened here, is not reform.”

He is incensed that by acquiring PPA, COSCO became the beneficiary of what it committed to spend as a tenant. “PPA’s income after 2019, when the infrastructure was complete, would be €110mn a year. So the Chinese will make their money back for the purchase of the PPA shares in three years,” he says. He worries that COSCO’s ramping up of container traffic is not the result of its superior management of the cargo business, but rather due to its ability to divert cargo streams from its vast global business: “Do you know how much the cost of shipping containers has risen between 2010 and 2014 for importers and exporters? 28.4 percent,” he fumes. “The private monopoly behaved like a highway robber, which the state monopoly never did.” 

As if to pre-empt further criticism, the government recently announced that it would end the practice of selling the stock of port authorities for ten ports still under privatisation. “We will no longer do sales; we will subcontract operations,” said a government official.

Why did the Greek state sell the PPA for as little as it did? Indeed, why did it sell it at all? And why did it sell to a Chinese state-owned company?

The right price?

The price was the product of share performance in a volatile political climate. The conservative government of Antonis Samaras first announced an open tender process for the privatisation of the PPA in March 2014. In January 2015, before it could be completed, the government lost an election to the radical leftwing Syriza. Syriza attempted a confrontation with the country’s creditors, the Eurozone and the International Monetary Fund, which ended in disaster. Greece defaulted on a loan to the IMF in July, and days later signed onto its third bailout loan under humiliating terms. From May 2014, when the conservatives’ poor showing in European Parliament elections made a general election seem inevitable, to July 2015 when the Syriza government signed the third bailout, the interest rate international markets demanded to buy a 10-year Greek government bond rose from six percent to 15 percent[2], and the Athens Stock Exchange plummeted from over 1,300 points to 460 as institutional investors pulled out. When the original tender process for the PPA was announced in 2014, there were six interested bidders. By the time Syriza re-launched the sale, only three were left and only one, COSCO, eventually submitted a binding offer. Under pressure to make €6.4bn from privatisation over three years, Syriza accepted.  

Touting the deal a month before it was finalised, Stergios Pitsiorlas, head of the government privatisation body, called the €22 per share COSCO was paying very satisfactory. Four valuators had set PPA’s share value between €18.4 and €21.2. “[The COSCO offer] puts PPA’s total value at €550mn, which I think exceptional,” said Pitsiorlas. The state was tired of earning meagre profits from its companies, he said. “The COSCO rent was financing the PPA’s deficits, and the state was earning peanuts. At this rate, it would take the state 300 years to earn what it will earn in 40,” Pitsiorlas told Avgi newspaper.  

Anomeritis pish-poshes this way of thinking. “What is stock value anyway?” he says. “A load of hot air. Ports have docks, piers, buildings, an enormous electrical infrastructure. How can you match that with stock value when the Athens stock market is nosediving? We’re talking about 550 hectares of storage space and 40km of docks.”

Why sell?

Greece’s three memoranda of understanding with creditors (2010, 2012 and 2015) listed the PPA as a privatisation target, but did not specify selling its fixed assets, only its voting shares. Though recognition of the Greek state’s crippling inefficiency has become almost universal over the last quarter-century, the sale of infrastructure remains anathema to the Greek way of thinking.

Privatisation was unheard of in the statist Greek economy of the 1980s. While Margaret Thatcher was divesting the British state of carmakers, utilities and infrastructure, Greece was nationalising bankrupt industries to save jobs. All that changed after the fall of communism in Europe. The conservative government of Konstantine Mitsotakis in 1990 embarked on an ambitious programme of rolling back state monopolies or dominance in banking, telecommunications, the broadcast industry and the airline industry. But the infrastructure underpinning network industries such as ports, airports, rail and copper wire networks, was kept under strict state ownership and control. A quarter of the PPA was eventually floated in 2003, but the government held absolute control through the remainder.

The second great impetus for privatisation came with Greece’s bankruptcy in 2008. Wall Street’s financial crisis led bankers to price risk into Eurozone sovereign bonds that had previously been treated as failsafe. Greece was forced out of markets and in May 2010 signed its first memorandum of understanding with its fellow Eurozone countries, whereby they would bankroll the Greek state to the tune of €110bn, while Greece would balance its budget and reform its economy to make it more competitive. Unnoticed in the reams of the loan’s terms and conditions was an undertaking to sell €50bn euros in state assets. While this unrealistic target was eventually revised to €6.4bn in the third bailout loan signed by Syriza, the memoranda annexes contained lists of every major state company or entity, including the PPA, and irreversibly placed their development by private entities in the political vocabulary.

Still, nowhere else has a sale of Greek infrastructure happened. The telecommunications network, electrical grid and railway network remain under state ownership as their operations are privatised. PPA stands as the sole example of a buyer assuming control of state assets - moreover, assets whose value it had previously increased as a licensee. “The Chinese would not have made the deal if they didn’t have total control of the infrastructure,” says a source with knowledge of negotiations between the Greek government and creditors. “They could see how policy was prone to change with every new government.”

Why sell to China?

Under pressure to attract investment, Greece has looked both for government-to-government deals in the east, and private sector deals in the west. Neither exercise has been particularly successful, because the Greek state, jealous of monopolies and natural resources, has earned a name for obstruction, obfuscation and delay.

Through Greece’s tribulations with creditors and investors, COSCO has spoken softly and carried a big stick. It complained publicly only twice, once in January 2016, when refugees shut down the main rail link north into the Balkans for several weeks, and once in June that year, when the government tried to surreptitiously change the agreed terms of sale in parliament. However, when crane operators went on strike for 53 days in 2006-7 over the imminent lease of the container piers, diverting dozens of ships to other ports and costing the PPA at least $12mn in lost business, COSCO waited patiently. Hostile electoral rhetoric left it unimpressed. Socialist leader George Papandreou came to power in October 2009, after COSCO leased the container piers, vowing to throw the Chinese back into the sea. By the end of the following year he had received Chinese premier Wen Jiabao in Athens and signed ten agreements to strengthen maritime cooperation[3].

COSCO’s strategic patience has obviously been easier with the deep pockets and political backing of a state-owned company than with a free market corporation answerable to shareholders for quarterly results. This became clear in January 2016. Under pressure for key investors, Canada’s Eldorado Gold announced it was suspending what was going to be Europe’s biggest gold mining operation, in the northern regions of Halkidiki and Thrace, after its painstakingly won environmental permits were revoked. The investment was worth almost €3bn over 30 years, and $700mn had already been spent. “Since 2012, we have experienced the Ministry of Energy and Environment and other agencies failing to fulfill their permitting and licensing obligations,” said CEO Paul Wright in Athens. “These investments are seen a litmus test by all potential large investors – both domestic and international.  They should serve as an advertisement for investing in Greece.  It is personally very disappointing to be here today telling you otherwise.” Eldorado Gold has since relaunched its plans in Halkidiki, but the investment was shelved for three years critical to the Greek economy, and the damage to Greece's image was done. 

Other signature investments have also languished, such as a 600-hectare redevelopment of the old Athens airport on prime city real estate; private electricity generation; and the sale of billions of dollars’ worth of public real estate. Yet COSCO has quietly executed its timetable of investments, demonstrating that it is a dependable stakeholder.

In pure revenue terms, the Greek state might indeed have done better with COSCO as client rather than owner of the Piraeus Port Authority, but the state was unlikely ever to streamline the PPA and develop the port. As COSCO invests, the results speak for themselves. The PPA’s revenue rose by 3.6 percent in 2016, to €103.5mn. Anyone who bought PPA stock in the last year saw its value rise by 20 percent. The FT’s forecast is that the stock will outperform the market and come close to realising the $22 value COSCO paid for it within the next year.

The fact remains, however, that Greece’s deal with COSCO is statist in nature. COSCO assures the success of its investments as much through attracting clients competitively, as through its ability to contract other Chinese companies like Huawei, ZTE and the Shanghai International Ports Group, all of which it has signed deals with, to ship goods through Piraeus. The imminent Athens-Beijing air connection through Air China, the flag carrier of the People’s Republic of China, also suggests Beijing’s nod. Piraeus is therefore more than a business deal. It presumes a new political understanding between Greece and China. This has not gone unnoticed in Brussels. “European institutions wanted the privatisation, but would have been happier if the buyer was someone other than COSCO,” admits the source with knowledge of government talks with its creditors.

The China Pivot

Greece faces a broader difficulty in its relations with the West. It has been shut out of capital markets for most of the past decade. The glaring contradiction between creditors’ exhortations to grow through reform and the recessionary effect of government spending cuts has convinced many Greeks that the medicine was intended to weaken the Greek state and open it up as bargain basement for capitalist interests. The balance of power in the European Union has shifted, too, with the departure of Greece’s ally, Britain, and Germany’s sudden rise to undisputable hegemony over the European project through its control of the Eurozone. Germany has persistently refused to countenance a rescheduling of the Greek debt along the lines proposed by the IMF to make it sustainable. Absent that restructuring, the Greek state remains too predatory and arbitrary to attract private investors. Divesting itself of key public assets with no prospect of a growing free-market economy seems to many a game leading to Greece’s expulsion from the Eurozone. The US, Greece’s Cold War protector and key ally, has come across as unable to influence Eurozone policy towards it. Furthermore, US interests in the Middle East dictate a continued close relationship with Greece’s adversary Turkey. Greece thus lacks confidence in the alliances it has known since 1945, and feels increasingly alone in a shifting world. Its difficulties and disappointments have dramatically altered Greeks’ perceptions of traditional allies.

Defending COSCO’s buyout of the PPA in parliament, merchant marine minister Thodoris Dritsas described the disillusionment in Greece with what the free market economy has become: “Current conditions, and the days through which Europe and other parts of the planet are living, are tragic. There is the deconstruction of the rule of law, the deconstruction of the welfare state, the deconstruction of the principles of public interest, and venal policy as a desperate way out for certain powerful economic interests from the crisis.” Dritsas was directly implying that the state was being sold piecemeal to private interests, which had no other way to grow.[4]

While disillusionment with the West has grown, Greece and China have discovered that they have the makings of a strategic relationship. Greeks own one in five merchant ships plying the oceans today. That fleet is gainfully employed ferrying raw materials to China and finished goods from China. Greeks are doing much of their shipbuilding and repair in China, and look favourably on the prospect of repatriating that activity under Chinese management. Through the stellar performance of its subsidiaries in Greece, China is keen to demonstrate the alleged superiority of its model of state capitalism even as it abandons socialism. Greece’s geopolitical position is good for Chinese interests in the EU even as it has become less interesting to the US. And a close relationship with China seems to bear none of the risks of a shift towards Russia, with its brash and confrontational style towards both Europe and the US.

“Everything starts from economics and trade but China is certainly looking for a more important geopolitical role, a more important international role, and Greece is a country where this can start from,” says Tzogopoulos. Greece is a key member of China’s so-called 16+1 discussion and investment forum linking the countries of Eastern Europe. In April this year Greece and China further tightened their relations by inaugurating the Ancient Civilisations Forum. The Forum’s declaration recognises “civilisation and cultural diplomacy as a soft and smart power”, hails the preservation of cultural heritage as a defence against “terrorism, radicalisation, extremism… and other forms of related intolerance.” It is a signal that Greece and China intend to use what they have in common to cultivate a closer political bond.

The Truman Doctrine was inspired by the need to prevent Greece (and, by extension, Turkey) from falling into the communist bloc in 1947. It led to the Marshall Plan, which spent $13bn on the devastated economies of Europe and was key to lifting Greece out of postwar poverty. It is no coincidence that the only statue of a foreign leader in downtown Athens is a giant bronze of Harry Truman. Just as his legacy will never be forgotten here, the want for American cash and the lack of American political reach are palpable. In announcing a trillion dollars in overseas investment, China is consciously echoing the Marshall Plan. It is a choice partly dictated by necessity. The post-2008 recession has left the developed world with little money for investment, and the Chinese government is looking for a return on its stockpile of three trillion dollars. But just as the Marshall Plan cultivated political loyalties and favourable markets for the US, so surely will Xi Jinping’s Belt and Road initiative do so for China.

Friday, 16 June 2017

Eurogroup grants the beginnings of long-term debt relief for Greece

This article was published by Al Jazeera International. 

Greece came away from Thursday’s Eurogroup meeting with a $9.5bn (€8.5bn) loan instalment and the beginnings of a commitment to longer-term debt relief – the Syriza government’s key demand since it came to power in 2015.

The six hour-long meeting of Eurozone finance ministers effectively brought the International Monetary Fund on board with Greece’s third bailout loan, currently held only by European institutions, because the IMF insisted on debt relief as a precondition.

“Nobody claims that this is the best solution,” said IMF chief Christine Lagarde, who attended the Eurogroup session. “That would have been a final approval on debt relief so that there would be clarity. This is second best.”

Eurogroup Chairman Jeroen Dijsselbloem called the agreement “a major step forward” which prepared Greece for graduation from its programme in 2018.

The Eurogroup praised Greece for legislating all 140 prior actions required to pass its second review under the programme – specifically in terms of tax reform, pension reform and labour market reform, all of which aim to make its economy more competitive.

In terms of debt relief, the Eurozone made two concrete concessions. First, it promises to link Greece’s rate of debt repayment to its rate of growth. The better the economy does in a given year, the more Greece will pay back. The corollary is that if Greece has little or no growth, it ought to receive a reprieve from creditors. This was a key demand of former finance minister Yanis Varoufakis in 2015, who claimed that a depressed economy could not reasonably be squeezed for debt repayment.

As if to underline this point, Greece is being asked to spend about two percent of its economy on debt repayment after 2023. It has committed to spend 3.5 percent until then.

Second, the Eurogroup agreed to defer and extend repayment of Greece’s second bailout loan by up to 15 years. This loan, which ran from 2012 to 2015, was Greece’s largest and $145bn (€130bn) of it is still outstanding. That amounts to almost half of the entire debt.

These two measures will be put into effect between now and the end of the programme, but the Eurogroup will specify further debt relief measures to take effect after the summer of 2018. It has to specify these by July 27, in order for the IMF to become a participant in the third bailout. The extension of Greece’s second bailout loan is something the IMF had recommended in late 2015, and the implication is that it expects the Eurozone to follow its other recommendations as well – such as an extension of Greece’s first (2010) bailout loan, now worth $59bn (€53bn) and a fixed, low interest rate of not more than 1.5 percent until 2060.

“The Greek side got what it wanted,” said a statement from the prime minister’s office. “The most important part of today’s decision is that for the first time there is a clear Eurogroup commitment to help Greece graduate from its programme and return to markets.”

Another reason for announcing debt relief a year before the end of the programme is to encourage investors to return to the country. As of Thursday night, it was still unclear whether the Eurogroup’s statements were going to achieve those goals.

A new period of friendship?

European politics are also divided on the issue of debt relief, because of the fear of encouraging other fiscal laggards to expect similar treatment. The lead-up to this agreement has been acrimonious, and it is still unclear whether Greece will convince Eurozone hardliners, led by Germany, to give it the full debt relief the IMF has outlined.

On Wednesday Greek economy minister Dimitris Papadimitriou took aim at the powerful German finance minister Wolfgang Scheauble in an interview with Die Welt. “For eight years we have been following the creditors’ demands, but the progress is slowed down by the fact that new conditions are constantly being raised,” he said. “Wolfgang Schäuble also said that we had met the requirements. But then he changed his mind. You ask yourself what is behind it. I have not yet met Schäuble, and I do not want to be rude, but his behavior seems to me dishonest.”

Prime Minister Alexis Tsipras published an op/ed in Die Welt and Le Monde on the same day. “For the French, the Germans or the Italians, the Greek debt is just a newspaper headline. For my fellow-citizens it is a source of daily concern as they try to change their country, to stand on their feet, to create businesses that will bring back jobs and growth.” 

“The answer to the question of Greek debt sustainability is growth,” he said. “For that to happen, the debt has to be rescheduled so the economy can breathe and markets can restore their confidence.”

Pensioners marched in protest on parliament in Athens on Thursday morning. “They’re legislating to cut our pensions in 2019, even after this government’s term in office is over,” said Vasilis Epikaridis, a retired aircraft mechanic. “That will take another 30 percent out of our pensions, and they’re reducing tax exemptions. Pensioners who have paid in for so many years will be poorer.” Epikaridis says his pension was meant to be €2,800 a month, but has been cut to €1,250.

The Greek economy was forecast to grow by 2.7 percent this year, but the Hellenic Statistical Authority reports that it Grew by just 0.4 percent in the first quarter. The Federation of Greek Industry today reports 53.6 unemployed people for every job vacancy.

Greece came away disappointed from the May 22 Eurogroup, where it had hoped to win the debt restructuring the International Monetary Fund says it needs. That meeting produced no communiqué, because the 19 countries couldn’t agree a common position on the IMF’s recommendations, Tsakalotos told reporters in Athens.

“There was one line in the Eurogroup statement that made it impossible for us to accept,” Tsakalotos said. “That line said, ‘We the Eurogroup understand that the above measures on debt are not enough for the IMF to consider the debt sustainable.’ That statement essentially is a signal to markets – ‘don’t invest in Greece’.”

Tuesday, 6 June 2017

Banks to liquidate €11.5bn of property

Attention is focused on whether Greece will receive a rescheduling of its public debt at the June 15 Eurogroup. Less attention is lavished on private Greek debt. 

The Bank of Greece on Tuesday published its targets for the reduction of non-performing exposures (loans that haven’t been serviced for at least 90 days), which have reached a staggering €105.2bn, or 60 percent of GDP.[1]

The banking system plans to reduce these to €98.2bn by the end of the year, €83.3bn by the end of next year and €66.7bn by the end of 2019 (see table). The targets are back-loaded, which means €7bn in this year, €15bn next year and €17.5bn in 2019, an election year.

Source: Bank of Greece, 7 June 2017

The Bank says this will happen mainly through rescheduling and write-offs, and to a lesser extent through liquidation (property repossessions), loan sales and collection.

This total of €40.2bn of loans to be adjusted breaks into the following main categories:
Collections:  €6bn
Liquidations: €11.5bn
Sales: €7.4bn
Write-offs: €13.9bn

Source: Bank of Greece, 7 June 2017

The assumption, therefore, is that banks have the financial health to absorb €13.9bn in write-offs over three years.

Liquidation is also a major political issue. Ever since Greece’s third bailout loan of 2015, primary residences are no longer protected, so families could be turfed out for the first time in the eight-year depression.

It is also a legal issue. Bankers do not feel entirely comfortable making €11.5bn in property repossessions and sales over three years, because they don’t feel the law protects them from accusations of fraud should the entire operation sour politically on the government. There has been a precedent. Last September, notaries-public recused themselves from home auctions saying that the legal framework contained too many grey areas, leaving them to draw people’s ire. Auctions drew to a halt. 

[1] Non-performance is high across all categories: 42.2 percent in residential, 54.2 in consumer and 45 percent in business loans.

IMF chief offers Eurozone time on Greek debt relief

Christine Lagarde

International Monetary Fund chief Christine Lagarde is offering to wait a little longer before Germany and other Eurozone countries come around to the IMF’s analysis on the Greek debt.

“If the creditors are not yet at that stage where they can agree on and respect our assumptions, if it takes them more time to get there, we can acknowledge that and give them a bit more time,” she told Handelsblatt on Tuesday.

The IMF and Germany are in a spat over Greece’s ability to repay its debt. Germany believes Greece can spend 1.5 percent of its GDP over the next 40 years on debt servicing. The IMF believes the figure is closer to one percent.

The difference between the two assumptions leads to wildly divergent conclusions over such a long time period.

A recent analysis carried out by the European Stability Mechanism, presently Greece’s biggest creditor, shows that depending on which of two growth scenarios one accepts, the Greek debt could amount to anything between 49 percent and 226 percent of GDP in 2060. The first scenario, based on the more optimistic assumptions of European institutions, forecasts average growth of 1.3 percent and a primary surplus of 2.2 to 2.6 percent. The second, favoured by the IMF, forecasts growth of one percent and a primary surplus closer to 1.5 percent.

The Eurogroup is scheduled to meet on June 15 to make another attempt at finding a compromise solution for Greece. Lagarde articulated the IMF’s position in favour of a debt package now, which would be implemented after Greece emerges from its current programme in August next year: “Our conclusion with total intellectual integrity is that the debt relief is needed - without implying a haircut, but with significant extensions of maturity and deferral of interest payments. That’s our preference and for that to be credible for the markets, for the investors, it needs to be articulated now. It doesn’t have to be delivered upon by the creditors until the end of the program, but it needs to be articulated very clearly now to be a game changer. So that markets can say: “That country’s debt is sustainable – therefore we can invest. We can buy their bonds, we can put our money in the country.”

Should the IMF’s scenario prevail and Greece be given until 2080 to repay its loans to its Eurozone partners, they would lose €123bn by some estimates. It is unlikely that German finance minister Wolfgang Schaeuble will agree to ask his parliament for such an arrangement before German elections in September. His party has promised taxpayers that Greece will repay its creditors in full. 

Greek finance minister Euclid Tsakalotos agrees with the IMF on the necessity of the debt rescheduling, and with Germany on the more optimistic growth scenario. Last week he ramped up pressure on the Eurogroup to agree with the IMF on a package that included approval of Greece’s second review and debt relief.

Friday, 2 June 2017

Greece raises pressure on Eurogroup for deal

Greece ramped up pressure on its creditors this week to deliver a policy package that renders its debt sustainable.

“The Greek government feels it has done its part of what it promised,” finance minister Euclid Tsakalotos told journalists in Athens on Monday. “We feel that the ball is very much on the side of our creditors and the IMF [International Monetary Fund]. There are no excuses for not getting this overall deal that the Greek economy so desperately needs to access the markets and be able to leave the programme as planned in the summer of 2018.”

The Syriza government was humiliated at the May 22 Eurogroup, four days after it passed $5bn in measures over and above the requirements of the programme it agreed to in July 2015. It had fully expected a deal at that Eurogroup meeting. The office of prime minister Alexis Tsipras had issued a statement on May 17 saying he had spoken with German Chancellor Angela Merkel. “The two leaders agreed that a solution [to the debt] is both necessary and feasible at the upcoming Eurogroup,” the statement said.

Greece’s creditors, the Eurozone and the IMF, have already agreed on short-term measures that allow the country to pay its debts until 2022. Tsakalotos says the government now wants them to “specify the medium-term debt with what would happen if Greece successfully left the programme in the summer of 2018… and finally to reaffirm the nature of the long-term measures considered as part of the contingency mechanism should also be specified.”

The IMF has said that Greece’s debt is not sustainable, and recommends extending its repayment period to about 2080. Germany and some other Eurozone members say there will be no debt deal until Greece successfully completes its programme in August next year.

Tsakalotos says the measures could take effect then, but should be agreed now, “so an investor knows a the structure of gr debt, knows the likelihood of Greece being able to pay back its debt, and therefore can invest with increased certainty.” Greece’s economy was forecast to grow by 2.7 percent this year. Figures released by Elstat on Friday showed growth of just 0.4 percent for the first quarter.

Tsakalotos said the Eurogroup had agreed that Greece had passed its second review and was prepared to continue disbursements of its loan. That removes the possibility of a default next month, when Greece must pay the European Central Bank €7bn. But, he said, the meeting debated debt measures for five hours fruitlessly, making it impossible to issue a joint statement.

“There was one line in the Eurogroup statement that made it impossible for us to accept. That line said, ‘We the Eurogroup understand that the above measures on debt are not enough for the IMF to consider the debt sustainable.’ That statement essentially is a signal to markets – ‘don’t invest in Greece’.”

He refused to say whether Greece would abandon its adjustment programme if it does not receive satisfaction on the 15th. “I don’t think any player wants us to go to that situation… they understand after the 22nd of May that what was on the table was not a solution,” he said

“How can the European partners, the IMF, defend a position where Greece does its part of the bargain, and we say that ‘we’re not going to provide the clarity that the Greek government wants, the financial community wants, to be able to return Greece to growth’?” he said.

Tsakalotos said the root of the disagreement was that the IMF and Germany could not agree on how Greece’s growth and tax revenues would evolve after 2018. German finance minister Wolfgang Schaeuble confirmed this in an interview with Handelsblatt on Wednesday. We’re arguing with the IMF about what is the right growth assumption for Greece for the next 40 to 50 years,” he said. The IMF is reportedly forecasting 1 percent growth for Greece over 40 years.

He was quoted by Greek Reporter as saying, “We disagree with the IMF about what it predicts for growth in Greece in the next 40 to 50 years. The Fund is not ready to forecast growth of more than 1% over the next 40 years… With 1% growth, Greece would not be able to close the gap with the other members of the eurozone. That is why all the country’s adjustment programs are in vain.”
Greece has received support from northern European officials since the May 22 Eurogroup. European Central Bank board member Bernard Couere supported Greece’s quest for a rapid solution on Tuesday, saying that an agreement ought to be reached at the June 15 Eurogroup. Last week Germany’s foreign minister, Sigmar Gabriel, declared that it was time to make good on promises of debt relief to Greece. As a Social Democrat, he was upholding his party’s anti-austerity line against the Christian Democrats ahead of a September election (the two parties are coalition allies but election adversaries). But other European officials told Bloomberg on Thursday that a deal this month was unlikely.


Saturday, 27 May 2017

China sees opportunity in the West’s loss of confidence

This review was published in the Weekly Standard under the title Tigers at Bay. 

There is little doubt among economic forecasters that over the medium term Asia’s emerging economies, China and India foremost among them, are expected to drive global economic growth. Taken as one, the region from India to Japan is not only the biggest market for raw materials, energy and the shipping industry that carries them; it is both the European Union’s and the United States’ biggest trading partner.

As a region, it is also more robust than either the EU or the US, where the International Monetary Fund forecasts that growth will rise from 1.6 percent last year to two percent next year. In contrast, ASEAN will grow by more than double that rate - 5.2 percent in 2018 - and even though growth is forecast to slow in China, it will still stand at an enviable six percent next year. In India, it will be 7.7 percent.

The sustainability of this growth is an object of study for obvious reasons. In China, the key trading partner on whom much of the region’s and the globe’s prosperity rests, concerns currently focus on finance and the state.

First, there are concerns that state owned enterprises, with all their attendant nepotism and inefficiency, still dominate. While they are only a fifth of the economy by size, state players tend to distort legislation and deprive the private sector of growth opportunity in key industries such as transport and energy. 

The lingering hand of the state affects finance. The OECD estimates that corporate debt has soared from 120 percent of GDP five years ago to over 160 percent today. In most emerging markets it stands closer to 60 percent. Two thirds of that debt belong to state-owned enterprises, and much of it may be subject to write-downs.

Nonperforming loans have risen fourfold in the last three years, particularly ‘special mention loans’, offered on lenient terms. Chinese banking statistics are opaque by Western standards and nonperformance is thought to be under-reported. Given that China’s banking system is now the biggest in the world, and that even less accurate reporting exists of a shadow banking industry living off the largesse of state investments, the potential effects of a Chinese financial meltdown can only be imagined. The “regulatory windstorm” recently unleashed by China’s banking regulator must be taken as a sign that Chinese authorities, too, are concerned about the systemic risk of defaults.

A final element of concern over China’s financial system is that its capital controls are creating too high a surplus inside the economy (last year alone, Chinese households saved five trillion dollars) instead of allowing that money to be invested overseas. This not only deprives other economies of growth; it puts all of China’s eggs in one basket.

Second, there are fears of a housing bubble. House prices have surged by a staggering 10 percent of GDP in two years, yet entire cities’ worth of real estate goes unsold and uninhabited because of overcapacity. A housing bubble would further undermine financial stability.

Third, the rising level of inequality goes unaddressed. Wealth discrepancy, recently measured by the IMF, rose from a Gini coefficient of 0.71 in 1995 to 0.81 in 2002. Given that China is (at least nominally) a socialist country, this is unacceptably close to the US wealth discrepancy of 0.78. The communists can claim an enormous victory against poverty in the countryside, which has fallen by a stunning 90 percent over the past 35 years, but this has happened thanks to China’s growth rather than redistribution. The IMF study reveals that what applies in capitalist economies largely applies under socialism: Less educated, older and non-state workers have been those most hurt most by the transition from a low-skilled, rural economy to a manufacturing economy.

Fourth, Premier Xi Jinping has chosen to uphold the Chinese standard policy of resisting any political liberalisation. Freedom House, the civil society watchdog, has tracked a sharp uptick in authoritarianism and a move away from civil freedoms. In the last year the government has imposed strict supervision standards for NGOs, increased surveillance of people through the Internet, and imprisoned human rights lawyers and their clients for months or (in older cases) years without charging them.

Given all this, there are justifiable concerns about whether the Chinese Communist Party can competently manage a transition to slower growth and an ageing population, as well as address risks such as corporate over-indebtedness, a looming real estate bubble and environmental degradation.

In The End of the Asian Century, Michael R. Auslin undertakes the ambitious task of displaying the potential for disruption in Asia by assessing the political, economic, demographic and defence risks of not just China, but also India, Japan, Korea (north and south), Indochina and the large archipelagic states of the eastern Pacific. This is an analytical carousel on the potential for armed conflict sparked by North Korea; the appalling poverty of India, where a third of the population still lacks electricity and literacy; gender inequality throughout southeast Asia, which leaves the talents of half the population outside the economy; the combination of reform gridlock and demographic decrepitude in Japan; and the general resistance to transparency, accountability, meritocracy and democracy through much of the region, values which in the West have underpinned sustained economic and social development for two centuries.

The End of the Asian Century brings a great deal of knowledge and two decades of experience to the layreader. For the non-expert on Asia it is equivalent to a concentration of lectures complete with references. For that alone, anyone interested in the geopolitical risks of the region and the global economy will find it worthy of their time.

Its quality of an Asian Panopticon is both its strength and weakness, however. The problems of Vietnam, the Philippines and Indonesia simply don’t measure up to the magnitude of the risks in China. This lack of focus means there is no over-arching conclusion (for what conclusion can one draw from so disparate a set of nations?) and means that the book amounts to no more than the sum of its parts.

More importantly, The End of the Asian Century does not prioritise its political preoccupations over the economic. The competitiveness of Asia, based as narrowly as it is on explosive population growth (followed by precipitous population drop), cheap labour and willing buyers abroad, might truly be at risk in purely economic terms, but that is not what makes such a book such as this important to a Western reader. The real cause for concern is that the Chinese Communist Party can apparently proceed unreformed, and in the process attempt to rewrite the rules of the global economy.  

The fact that despite the industry of its people China’s growth “remains driven by the state and private business sectors and not yet by consumers,” or that “since the Tiananmen Square massacre of 1989, the party has become ever more isolated from the citizenry and is seen as corrupt, inefficient and often brutal… distrusted and disliked by the vast majority of the population,” means that individual rights are set at naught for a large proportion of the world’s population. Other dictators in the region and as far away as Iran and Sudan receive material and diplomatic succour from China’s stance – people who “threaten their neighbours, oppress their people, or seek to destabilise the international order,” as Auslin puts it.

This means that China, more potently than Russia, challenges the American and European worldview and international order. Even in Europe, China has launched the “16+1” forum of former Warsaw Pact countries in a direct challenge to the EU. Not surprisingly, US influence in the Far East is now weighed against China’s, where “smaller nations feel pressured to pick sides, when their greatest desire is to antagonize neither.”

China’s direct challenge to American power in the Pacific, now taking the tangible form of military runways on once insignificant atolls, means that the US will be called upon to shore up its security mantle.

Auslin omits to mention that China is flexing its soft power, too. Under the One Belt One Road initiative launched in 2013, the Chinese government is to spend almost a trillion dollars building infrastructure around the world to extend the reach of its exports. It is perhaps the largest such spending programme ever conceived, dwarfing even the Marshall Plan after the Second World War. Like the Marshall Plan, it will have political ramifications, cultivating markets and fostering loyalties.

There is a further effect of China’s strident defiance of the Western order. The fall of communism in Europe was oversold as final victory for capitalism, which would in theory sow a middle class demanding democracy in former communist states. This has not yet happened, and social scientists are divided about whether it will. The open society and the international trade system America built after World War Two appear to be insufficient to overthrow what Ronald Reagan referred to as Evil Empires. Even worse, since the 2008 financial crisis they appear unable to provide quality of life to this generation and equal opportunity to the next. As a result, the US is transitioning from the land of greatest economic and social opportunity to a country of increasingly entrenched privilege, growing inequality and a falling labour force participation rate.

The sensible remedies Auslin suggests for building leverage over authoritarian regimes in Asia are precisely the ones America cannot enact because of its growing self-doubt: using the Trans-Pacific Partnership to create a swirling vortex of trade among democracies, eventually, perhaps, luring China and other illiberal regimes into greater accountability and rule of law; raising the cap on H1B visas for skilled workers to pre-9/11 levels and cultivating Western political values; and expanding exchanges run by the State Department’s Bureau of Educational and Cultural Affairs, targeting future business and political elites.

Unfortunately, these are precisely the extrovert, patient policies the Trump administration has declared void. TPP has gone by the board and State Department budgets are earmarked for slaughter. Many Americans seem to have forgotten that what made America great was its willingness to spend time and money building multilateral alliances that strengthened democracy and free trade.

Herein lies the far greater threat: not that the combined pressures of Russia, China and other illiberal regimes which find that US-EU hegemony has grown long in the tooth will overthrow it by force; but that American and European societies are losing confidence in the qualities that make them enviably different from China and Russia. Western societies are lured by the nationalist sirensong that their liberal systems will not stand up to state capitalism and its alleged ability to make up for their waning qualities. This loss of confidence is now evident in the fact that press freedom in the West has been falling for over a decade, while authoritarian leadership and nationalism are gaining currency, boosting partisanship and straining political systems to the point of distorting them. The economic threats to Western capitalism from lack of reform in Asia are indeed real; but the political problems are home grown.