The last couple of weeks would have had Aunt Cassandra reaching for her smelling salts, had she not given up the extreme sport of “reading the papers” long ago. If the reputable English-language media are to be believed, young Greek girls are selling favours for the price of a sandwich, before going to the cemetery to dig up their parents because they can’t afford the burial plot (according to the Greek press, the biggest domestic stories are the various shades of name-calling within the official opposition and between current and former ministers in the coalition government).
The foreign stories brought back memories of the heady days when the Greek crisis was at the top of the news cycle and every day served up dozens of column inches of crisis porn in the global media. Remember, before the refugees restored the phrase “humanitarian crisis” to its correct usage, before ISIS turned Europe into their sectarian backyard? On closer reading, one of these stories turned out to be hyperbole heaped upon a real problem (there has been an increase in Greek women entering the sex trade, but the main source for the story distanced himself from some the more sensationalist claims); the other was a perfectly good human interest story probably given an editorial crisis angle for “relevance” (exhumation has been the default solution to cemetery over-crowding going back decades before the crisis, but people are increasingly looking for alternative solutions because their priorities have changed.
The problem is that while we are distracted by this “news”, there is a whole herd of restless elephants in the room. The real issues are not terribly exotic, they are technical and boring. They simply wouldn’t sell as much copy, or attract enough clicks in our out of Greece, so they have received almost nil coverage. To illustrate my point, I have picked two vitally important stories about Greece that were sidelined, and one exception that proves the rule.
Story the First: The real “sale of the century” this week was not an anecdotal €2 hand-job from a possibly invented starving Greek student, but the recapitalisation of the Greek banks. I am not a banking insider so I have spent the last two weeks scouring both the Greek and foreign media to find a clear explanation of the story in layman’s terms. I thought I would share with you what I managed to find – hardly any of it from mainstream media sources, mostly published in Greek.
It has long been known that the Greek banks would need to raise new capital in order to come off life support and become at least part-functioning zombies that will (a) not threaten to appropriate depositors’ funds in order to survive, (b) allow customers to access their money and perform transactions without capital controls, and (c) possibly even return to performing their core function of lending again. In order to meet some of the capital requirements without relying wholly on Eurozone lenders, it was agreed that the banks could first seek to raise the money from the markets. Somehow in this process, the four systemic Greek banks, which are in poor shape but between them still hold assets in excess of €300 billion, were reduced to penny stocks (quite literally: €0.02 for National Bank of Greece, €0.0003 for Piraeus Bank, €0.04 for Alpha Bank and €0.01 for Eurobank). At these prices, Piraeus Bank, with €80 billion in assets, almost 20,000 employees in over 1,000 branches and 5.7 million customers could be acquired with €177 million (millions, not billions!). This deal effectively wiped out the banks’ existing shareholders who had paid much dearer for their shares: they effectively now hold a much thinner slice of a much smaller pie, with little chance of recouping their losses even if the banks bounce back to health.
While this process was unfolding, the political debate focussed narrowly on one term on the other side of the banking equation, namely the protection from foreclosure of homeowners who are in danger of defaulting on their mortgage payments to these very same banks. “Not a single home in a banker’s hands” had been an election promise of the governing parties, and indeed the 25% of mortgage holders deemed to be most vulnerable were fully protected by a compromise reached on the “red loans”.
“Hurrah!” you might exclaim. “A minor triumph for the little man, at the expense of the fat cat bankers and their capitalist masters!” Right? Wrong! Major and minor shareholders lost out from the recapitalisation deal, but the biggest loser by far is the Greek public who had bailed out the banks originally by taking majority stakes in them, TARP-style, in 2013. Those stakes, originally purchased for €25 billion (plus €19 billion in deferred taxes), reduced in value to between €12-18 billion by 2014, are now worth almost nothing (around €0.5 billion to be precise). This represents a loss to the public purse of tens of billions of Euros at a time when it has been frantically searching frantically behind the sofa cushions to find €0.4 billion a year from VAT (first schools, then wine, then gambling). What’s more, it is a loss that it is unlikely to recoup in the event of a recovery, because its ownership share has been drastically diluted (at 24% for NBG, 2.4% for Eurobank, 11% for Alpha and 22% for Piraeus, it is now a minority shareholder). The gains for bank customers (improved deposit protection, partial foreclosure protection) are in no way commensurate with the cost to Greek society.
How was this allowed to happen? Firstly , it is unclear whether any other options were seriously considered, other than to offer private investors first dibs; the bailout deal signed in July already provided for funds of up to €25 billion to refloat the banks if required. With markets being the chosen path, the share offering didn’t take place in the best of conditions; but even so, the prices resulting from the deal are way out of line with the market price for the banks’ shares. As an example, NBG shares were trading on the Athens Stock market at €0.32 on the eve of the recapitalisation deal (much lower than the €4.29 that the state paid for them in 2013, and also reflecting a near-halving in prices through November while the capital raising was being negotiated). Even so, the €0.02 price agreed represents a whopping 93% discount on the market valuation.
The new share price was agreed not on the open market, but using an opaque process called “book-building”, typically used in hard-to-value IPOs like Facebook, where investors are invited to bid privately for large blocks of shares. The precise terms of this process were agreed by the Greek government with the creditors, and passed into legislation by the Greek parliament. Critics point out that they were entirely one-sided and effectively gave all power to the bidders to determine the price: there was no minimum or back-stop; the Greek state agreed to accept the “book-building prices” even if they did not reflect market value; Greek investors were excluded from bidding, as was the Greek state (this by a “midnight amendment” to the governing legislation). The Greek state therefore not only had to stand by and watch the lowest bidder erase the value of its holdings, but was also unable to buy in at the low price to prevent the dilution of its ownership stake. Rewind to the last capital-raising exercise by the banks in April 2014, when the state was again excluded but banks were able to name their asking price at discounts of (only!) 15% and 35%. This deal was hailed at the time as a success, but there were critics on left and right, one branding it a “big fat Greek privatisation scandal” – it is clear from this latest development that no lessons were learned. The irony of this happening under a majority left-wing coalition who had spent their time in opposition railing against the selling-off of Greek assets to “vultures” and “speculators” is not lost.
The deal was further sweetened for potential buyers by government’s insistence on homeowner protection, as the state (i.e. the taxpayer) has agreed to part-guarantee the protected 25% of “red loans”, so that they wouldn’t have to be entirely written off at a loss to the banks and their new owners. Ultimately, it can only be described as a big transfer of wealth from the Greek state to foreign (as yet unnamed) private investors, in the course of which the creditors and the bankers were allowed to promote their own agendas, the Greek government proved woefully inadequate at negotiating for the public interest both as a borrower and as a majority shareholder, and parliament dropped the ball, too distracted by posturing not note the fine print.
Bottom line? Last week €2 could have bought you an expensive tyropita (a cheese pie, not a sandwich – the real measure of debasement used in the article), a few moments of miserable sexual relief – or it could have bought you 100 shares in the National Bank of Greece, if you knew the right people. On the other hand, if you’re one of those (possibly fictional) students who has gone on the game to pay your rent, you are also effectively subsidising someone’s mortgage so they don’t have to. The banks, meanwhile, are already running TV ads celebrating the “confidence” that foreign investors have shown in them.
Story the Second: The real intergenerational strife story is not exhumation, but pension reform. Pension reform is the next big bill that needs to pass through parliament to satisfy Greece’s commitments to the creditors, and it may yet be this government’s undoing. But the politically unpalatable truth that won’t get much of an airing is that the pension system needs to reform not just because of the crisis, or because our arm has been twisted by unscrupulous lenders in a moment of weakness, but because despite numerous piecemeal reforms over the years, it simply isn’t viable, and hasn’t been for decades. It is therefore tragic that once again it has been turned into a political football, as the government is belatedly asking for consensus, while the opposition parties smell blood in a paper-thin majority and are digging their heels in.
There will no doubt be a lot of hot air about plundering and mismanagement of reserves, and particularly the losses from PSI, the debt restructuring programme which imposed a 50% haircut on government bonds held by the state pension funds. A brief but very informative exercise published recently (unfortunately only in Greek) demonstrates why this populist blamestorming is completely bogus. Firstly, because most of the 90+ separate pension funds that comprise the state-run system have been operating a deficit since the 1980s: they not only lack reserves, but need to be propped up on an annual basis by substantial public funds in order to be able to pay out pensions. Where reserves exist, their returns on investment only contribute between 3-5% of inflows to the funds’ operating budget to supplement workers’ contributions (as is the norm) and state contributions. Therefore, even the 50% reduction brought about by PSI has had a negligible effect on current pension payments, and is definitely not the reason for any pension cuts that have or will come into effect. The same study also estimated that the last two decades of rollercoaster investment of reserves in risky assets – including the inflation and bursting of the Athens stock market bubble, the purchase of dodgy structured bonds and the effects of the infamous PSI “haircut” – have brought reserves to approximately the same level that they would have been had they been invested in safe but low-yielding German government bonds!
So, aside from the correcting the obvious distortions in the system (e.g. hairdressers retiring at 50) and flushing out the abuses (e.g. deceased claimants), the pension system is still far from self-supporting and needs substantial overhaul. This was the unequivocal conclusion of the “committee of wise men” which reported to the government last month, and whose recommendations are already being cherry-picked for political expediency. A brief critical unpicking of the larger structural issues behind the Greek pensions crisis can be read here (in English). This year the country counts 1.3 workers (pension contributors) for every one pensioner, because of a combination of high unemployment, increased emigration and a surge in voluntary pension applications driven by the anticipation of reform. Even if employment were to rebound to pre-crisis levels, Greece is brewing one of the more extreme versions of the “demographic time-bomb” which is forcing much healthier economies worldwide to rethink their pension system (by 2020, 20% of the total population of Greece will be over 65, rising to 30% in 2030 according a recent report by the European Commission). All of this means that workers will have to work longer and contribute more for less generous pensions. In the immediate future, despite political grandstanding to the contrary, some pensions will have to be cut to meet a reduction in state spending of 1% GDP that Greece has already committed to.
Bottom line? You may want to be mean to your parents after reading this, but please reserve your ire for the politicians for stalling and promising the stars once again, and the media for not holding them to account.
Story the Third: The Greek shipping myth may not be all it’s cracked up to be. Reuters deserves an honourable mention for getting the coals out of the fire once again, on at least the second occasion I have noted in my non-scientific survey (the first being its 2012 report on Greece’s “triangle of power” which licensed us all to use the pimping metaphor in public discourse). This latest report questions the statistics used to calculate the value of shipping to the Greek economy, and offers some support to voices calling for a rethink of the exceptional tax breaks given to the industry.
Maybe Aunt Cassandra is right, the coffee cup is your best counsel, and at least saves money on healthcare. But I hope this has been informative.