All posts by Konrad Banachewicz

A beautiful disaster

Recently,  an experienced CEO Nanne van’t Riet wrote a linkedin post entitled “5 Reasons Why Europe Must “Shoot the Ugly Sister” – Push for a “Grexit“. This post makes several points using remarkably emphatic language – and I thought it might be a good idea to address them in some detail.

In what follows, I am only quoting the bolded headers from the original – please read the full text under the link embedded above to get both sides of the argument.

Greece is not entitled to special treatment because of its history

First of all, nobody claims any entitlement to special treatment. If anything, Greece is getting a much harsher deal than Ukraine, which has regular neonazis among government supporters – and somehow that does not stop a flow of money that everybody knows will not be paid pack. Come to think about it, maybe Greece should get some neonazis of its own? Oh, wait – they already have Golden Dawn, which is likely to emerge once Syriza is wiped out at German request. Never mind – maybe that will be a better negotiating partner.

Second, last time I checked, Greece was a sovereign country. The only way to enforce something from a sovereign is either by tanks, or by banks. Germany has tried the tank-based approach, and now they are proceeding the other way. Of course, an experienced CEO must know what he is talking about (in particular: understand the legal definitions of sovereignty, obligation, debt etc), therefore the reason why he is so focused on attacking a straw man is not clear to me.

Finally, important and high-minded as law might be, there is mathematics: the debt can never be repaid under the current conditions of the “bailout” (which is a very misleading term: most of the money transferred to Greece immediately left the country in the form of repayments to the German and French banks). To stick with the mortgage analogy used in the original article, the German – Greece standoff is like your banker demanding that you sell your tools of work to make a payment towards your mortgage. If you do that, you will be unable to earn money in the future and therefore also unable to pay him.

But of course an experienced CEO understands that – I guess it is not possible to found and co-own several companies in the energy and health space without being capable of basic logic.

Greece has little tangible to offer Europe (and therefore no leverage to negotiate).

Indeed, Greece has little tangible to offer Europe, but the same
applies to so many other countries of the EU (strictly speaking, more than 20 of them, if you consider GDP a measure of economic importance). In particular, we are talking about places like Luxembourg, which is not exactly a hub of industrial activity or academic innovation – and what they do provide, does not exactly qualify as products.

An internationally experienced CEO is – one can reasonably assume – familiar with the history of the EU (and the EC, EEC and Steel and Coal Union before it), and is capable of distinguishing between means to an end and the final objective: shared economy was not the goal, but the means to achieve European stability after the carnage of World War II. I am a simple quant, so I had to look it up / ask around: what were the reasons different countries joined the EU? Below is a quick list:

  • Germany /  France / Italy: fear of yet another war between them
  • Portugal, Spain, Greece: recovering from dictatorship
  • practically entire former Soviet bloc (Poland, Czech Republic, Hungary, Estonia, Lithuania, Latvia, Slovakia, Romania): fear of Russia

Shoot the ugly sister? Sure, why not. Obviously, once cast out, Greece will just remain in limbo and not use its strategic location to become a Russian or Chinese launching pad into Europe. No, they would never do that – nor would they join the BRICS bank, get help from Russia seeking reparations from Germany, or assist Russia with the southern pipeline.

I mean, an experienced CEO from the oil and gas industry tells us Greece has no leverage, so it must be true: they cannot possibly do any of the things listed above.

Greece needs to stop pointing fingers at others and accept responsibility for its own predicament.

Spot on, quite correct: except for the minor detail that this noble sentiment (accepting responsibility for one’s actions) should apply to everyone, not just Greece. In particular, Troika should not be exempt: back in 2010 (and 2012), as a result of their decisions, eurozone taxpayers were saddled with huge liabilities. It was blatantly clear that the projections made no sense whatsoever: if Greece was unable to service a debt of €270bn in 2009, how on earth could anybody expect them to service €317bn in 2015?

Let us entertain the thought, for the sake of argument: Greece stops
pointing fingers at others and accepts (sole) responsibility for the current debacle. Great, but then what? The question obviously
still remains unanswered: who will pay, with what? Greek GDP
has gone from €230bn in 2009 to €179 in 2014, and the trend is downward. The debtor is insolvent. Even if you could punish him and put him in debtors’ jail (as the Greeks actually do with tax
debtors), even if you could flog him till he dies and beyond,
who will pay? With what?

The answer is clear to everyone who wants to see it: the
eurozone taxpayer will pay. Perhaps it’s about time we stop
pointing fingers at Greece for pointing fingers at others,
and actually point fingers at those responsible for this
mess.

For the common good: it may be time to “shoot the ugly sister”.

“Europe” is a continent, not a man-made union. As every experienced CEO knows – especially one with legal background – words are important. For the sake of argument, I will assume the likely meaning of those statements, namely that Greece should not
be allowed to remain in the eurozone or in the EU. Now, just how exactly could this be achieved? Which treaty provisions are applicable and can be used to throw Greece out of the eurozone and/or out of the EU? The answer is very simple: none. There is no mechanism to throw out a country against its will, so the suggestion to “shoot the ugly sister” does not have much basis in reality. Or law. Or common sense.

On a sideline note, there is an interesting quasi-religious undertone to those considerations: “If Greece is allowed to be part of Europe” – allowed by whom? God is dead as far as European constitutions are concerned, people are represented in the “institutions” by proxy (and a pretty distant one at that), there is no regulation allowing for an expulsion – so who exactly is supposed to allow Greece to be part of Europe? I am a simple quant, but if I can look at the map (and acknowledge the fact that technology allowing for relocation of Greece into e.g. Asia is not there), then so can others.

But let us continue the thought experiment: suppose that the Greek government got “persuaded” to “voluntarily” leave. Then what? Would Greece suffer? Well, yes, it would lose tariff-free access to its European export markets, but, to quote the original post, Greece has “no oil, natural gas or mineral resources to speak off, [its]
agricultural products can be sourced from other Mediterranean
countries and, frankly, Ouzo and Retsina are a nice novelty
but hardly a necessity in your average European household“.
If this description is factually correct, Greece has very little
to lose in terms of exports to the EU. However, the flip side
of this coin is huge. Greece imports a huge proportion of
what it consumes from the EU, so the ability to impose
tariffs on these imports would immediately boost Greek
domestic production and, as a direct result, Greek employment,
consumption, GDP and domestic investment. The loss of Greece
as an export market might be so small for the EU as to not
even register, but the riddance from EU competition might very well end up being a benefit for Greece itself. Not to mention the fact that Greece would be able to turn back to its traditional markets in the Middle East, where most of its exports of goods and services went
before Greece joined the EU.

This brings us right back to the argument that, if Greece
was allowed to be part of the EU while refusing to repay
its debts, this would send a terrible signal to a number
of other EU countries. Would it? Or would it encourage them
to also not pay their debts in the hope that they will also
be chucked out of the EU and then enjoy the same boost of
their economies as Greece? This is game theory 1.01 – not a familiar topic for experienced CEOs, but a relevant one regardless.

Populist rhetoric secures no workable outcome.

Of course it does not – neither can you print your way to prosperity. So how exactly is the Syriza rhetoric inferior to the Keynesian cargo cult that ECB is preaching on a regular basis? ECB openly says they want to decrease the real value of savings with a 2 pct inflation – and everyone accepts this as if it was some kind of divine truth. Keep in mind: most of Northern Europe is ruled by social democrats of different stripes (main difference whether they claim to believe in God or not – their economic policies are exactly alike) – and people living in glass houses could use some caution with casting stones.

PS. The postscript (comparison of ECB money printing – which involves taxing eurozone taxpayers by inflation – with the paycheque of Lionel Messi – paid by a private company hiring the brilliant Argentinian) probably tells you all you need to know about the intellectual landscape this particular experienced CEO inhabits. You decide whether this is an environment where you flourish or die.

 

Hinter den Spiegeln

Once upon a time there was a world where borrowers paid lenders, markets were allowed to fall, while debasing the currency was a punishable offence. Come to think of that, this was our world not that long ago – before the rise of the central banking system. These days we have negative interest rates, the Greenspan put and QE to infinity.

Most of those things would not have been possible without the intellectual legacy of John Maynard Keynes. He died in 1946, but his ideas – such as euthanasia of a rentier – live on. Let us be honest: in a world where stock markets have left fundamentals behind and fixed income instruments have a negative yield, it is not a huge leap to reach a conclusion that storing cash is actually a least bad choice.

Of course, the powers that be can not have that: after all, a person whose wealth is beyond their control is a potential subversive. Solution? Ban cash.

Yes, you read it correctly. In what can only be described a through-the-looking-glass moment, more and more economists are calling for a ban on cash. Their rationale? Twofold: it will help fight terrorism (“the innocent have nothing to fear” – now where have we heard that before) and it will make the central bank monetary policy more efficient:

This absurd trend seems to be spreading. Interesting times lie ahead.

Proactive model validation: course reading list

On May 7th and 8th this year I will be a trainer for the course in model validation, organised by Marcus Evans. There are some positions which might be worth reading – while the presentation of the material is designed to be self-sufficient, familiarising yourself with at least some of those might be beneficial.