Category: Markets

Yesterday’s agreement between the Greek government and its creditors includes a condition that requires Greece to sell €50 billion worth of community assets and establish a fund to oversee the proceeds.

Recapitalizing banks will take half, while paying back part of Greece’s debt will take €12.5 billion as well as investing internally to generate development will consume €12.5 billion.

While the privatization of inefficiently managed government assets could well serve the interests of the Greek people, it could well go very wrong.

Here’s how and what Greece could do to prevent that from happening.

Setting the right incentives

The fund is already off to a bad start by setting a target sales number (the €50 billion). Doing so in the outset can distort bonuses.

By that I mean the easiest way to hit that target is to sell property at whatever price you can get, thus well below their true worth, resulting in a lot of bad deals. Greece could effortlessly end up selling €60 billion to €80 billion associated with quality assets just to hit the €50 billion target.

I wrote a Harvard situation a while ago of a hotel organization that had a target of promoting €300 million of resorts per year. But they never specific how many hotels they would market. Not surprisingly, they ended up selling way too many hotels for way too low a price. They reached their sales target, but at the cost of selling far more of the assets than they needed to.

My point is the following: Greece should carefully design a overall performance measurement system that makes sure that assets are sold at the maximum cost that could be obtained in the marketplace. That ought to help get around the pitfalls of setting a target in advance.

Timing of sales and use associated with proceeds

The Greek economy is in wrecks and the government has a liquidity problem – that is, it is short on ready cash. These are exactly the wrong conditions in which to sell assets. Fire sales result in deep discounts.

Moreover, they lead to the sale of the easiest-to-sell assets. The easiest assets to sell are the ones that have the potential buyers. The reason that there are many buyers is that their own economics are attractive; these are high-quality assets.

It is very important that the arises from disposing of these high-quality assets end up being invested in the economy rather being used to repay loans that were made to recapitalize banks or prior loans. These loans have below-market rates of interest and very long maturities (perhaps even Six decades), so their repayment can wait. Indeed the present value of Greece’s debt is just a small percentage of its nominal value.

Investing the actual proceeds in the economy could create the conditions for economic development, raising the prices of the remaining government assets that are still in the portfolio.

Lesson: no need to rush the asset sales, and merely make sure to use proceeds with regard to something productive. That means there should be an effort to renegotiate to ensure that more of the fund goes towards investment.

Governance and transparency

The privatization fund ought to follow world-class standards in terms of government and transparency in the putting in a bid process.

The members of the fund’s board of directors should be carefully chosen to protect the actual interests of the Greek individuals. Directors should be chosen based on merit and be experts within matters of accounting, finance and valuation so they can successfully oversee the sales associated with assets.

Greece can follow best-practice government processes such as those used by the Norwegian pension fund which manages the wealth of the actual Norwegian people from the extraction of oil.

Choosing the right partners

Buyers have standing – good or bad – and the directors should consider them, along with bid cost, when choosing to whom they will market an asset.

Companies, investment funds or even sovereign investment partners who have developed a reputation for responsible business practices and the creation of value for all stakeholders can create more value for the Ancient greek people. Businesses that promote the development of skills, safe working problems, protection of the natural environment, as well as product safety and quality will create competitive advantages for the nation over time.

The right framework

The Greek government uses cash accounting, and for that reason does not prepare a balance linen and does not take inventory of its assets and liabilities.

“You manage what you measure,” and it is obvious when it comes to Greece that not measuring assets and liabilities using internationally accepted sales standards leads to mismanagement of both assets and liabilities.

We need a fresh start and the right framework under which to start creating value for the Greek people. This framework would be to measure, analyze, create and communicate value.

Measure the value of the actual assets and liabilities and the net worth therefore the measures can be analyzed. Analyze performance over time and in accordance with other countries in the Eurozone therefore the analysis can be used as an input on which needs to change to create worth. Create value by adopting policies that will increase the value of the assets. Communicate the value creation story to build trust and confidence in the economy and attract opportunities.

Following some of these guidelines will help ensure that the Greek people get the most out of this fund, and that in turn might bring their economy and livelihoods back to life more quickly.

Greece bailout includes a €Fifty billion asset fund. Here’utes how to avoid wasting it is republished with permission from The Conversation

Five years ago, few would have expected that China would create four of the top ten worldwide internet companies (by number of visitors) — Alibaba, Baidu, Tencent, and Sohu — as well as revolutionary multinationals like Huawei and Xiaomi. Nor would most have anticipated China’s increasing provision of global public items, including its One Belt, One Road strategy, which aims to provide the facilities needed to knit Eurasia into a single vast market.

More news that’s remarkable has just emerged in spite of slowing economic-growth rates, China, along with Hong Kong, has recorded US$29 billion in initial public offerings so far this year — almost twice the actual funds raised in All of us markets.

By any measure, the interest rate and scope of development in China has begun to improve. How has this occurred, and why is it happening right now?

The answer lies in the unprecedented challenges that China encounters, including corruption, pollution, unsustainable local debts, ghost towns, shadow banks, inefficient state-owned enterprises (SOEs), and excessive government control over the economy. Certainly, nobody would argue that these are good developments for China; nonetheless, they have arguably been a blessing in disguise. They’ve imbued reform efforts with a degree of urgency that has had a far-reaching impact. Indeed, conventional GDP data do not reflect the size of the transformation that they are traveling.

Of course, China has long been committed to market-driven structural reforms, at the national and municipal levels. It couldn’t have attained its position as the world’s second-largest economy or else. However, the key to China’s success has been constant testing, and the pursuit of that credo have intensified.

For example, the social networking of telecommunications, roads, rail, air, and maritime transport enabled China to become a global hub for the production of customer durables, and improve their distribution. More recently, China began to apply the exact same approach to building a more innovative, knowledge-based economy — one in which the providers sectors, together with domestic consumption, drive growth.

As a result, the nation has increasingly been concentrating on the so-called ‘killer apps’ that, based on the historian Niall Ferguson, drove the West’s rise to economic dominance: competition, science, property, modern medicine, consumerism, and an ethic of hard work. Particularly, China has worked to boost marketplace competition and foster technology and innovation, with improvement in these areas underpinned by efforts to improve governance, strengthen mechanisms of accountability, and increase investment in public goods.

Crucially, even while China’s specific goals possess shifted, its policymakers possess adhered to the experimental approach that has served the country very well thus far. It was the combination associated with broad-based education, openness to technology and innovation, investment in sophisticated telecommunications infrastructure, and ideas in manufacturing smartphones which fuelled China’s rapid development in the e-tail and internet industries. This openness to innovation — along with what some say is lax regulation — also allowed platforms like Alibaba to integrate payments and logistics prior to many Western players did.

China’s ‘learning by doing’ approach is likely to continue to yield revolutionary solutions to emerging problems. For example, faced with a shrinking labour force, the government has ramped upward investment in robotic automation along with other productivity-enhancing technologies. The impact on China’utes competitiveness of rising real wages —, which have been increasing through more than 15 percent annually because 2008 — will, the country’utes leaders expect, ultimately be offset by the benefits of productivity-led growth, not to mention the much-needed increase in household consumption.

Of course, China’s approach has brought significant stresses, setbacks and failures. China’s real estate, credit and stock market pockets —, which produced ghost cities, bad local debts as well as stock-price volatility — attest to that. But the policy decisions that offered rise to these problems — decentralising control over land and permitting markets to direct the movement of talents, trade, investment and capital — have also been critical to progress.

China’s leaders appreciate this well. Rather than avoiding danger, they remain prepared to reverse failing policies. In addition, if necessary, they’re willing to pay for mistakes. Given the savings the country has built up, reflected in bulging foreign-exchange reserves, the central government has got the fiscal room to afford this.

Today’s anti-corruption campaign should be considered an effort by China’s leaders to correct another negative consequence of past policies. The approach is two-pronged: the government is privatising a few SOEs, so that market competition may check the behaviour of corporate managers, while treating the actual managers of other (typically larger) SOEs as public servants, susceptible to the increasingly severe guidelines of public accountability, such as party discipline. Earlier this month, Leader Xi Jinping announced a new wave associated with measures.

China’s government is actually running real risks because it pushes through structural changes that are unprecedented in pace, scale and complexity. Fortunately, China has both the encounter and the wherewithal to experiment with the next stage of structural change.

China’s challenges drive experiment-driven reforms is republished with permission through East Asia Forum

Unlike many countries in Asia, and indeed in the world, Vietnam is for the moment blessed with a raft of positive economic news. However, beneath the surface, structural issues and a lack of industrial deepening continue.

Exports have been growing at Eighteen percent year-on-year and 10 percent year-to-date. Expenses in foreign direct expense rose by some 9.6 % year-on-year with Samsung, in particular, manufacturing not only its smartphones but also TV and computer displays in Vietnam.

The PMI (purchasing managers’ index) has been consistently above Fifty in the June quarter, indicating continuous expansion in the production sector. Furthermore, the leading indicator — new orders minus inventory — rose sharply, suggesting that there will be a pick-up in production in the second half of 2015.

Domestic demand — which has been stressed out for some years — has also picked up, as indicated by credit development of around 17 percent year-on-year. To top it all, Vietnam’s major export market, america, moved a step closer to the Trans-Pacific Partnership (TPP) agreement by giving The president the Trade Promotion Authority on 29 June 2015. This is a mandate to fast track industry deals that the US Congress cannot later amend, only approve or reject. In reaction, the Vietnamese government announced the abolition of the 49 percent foreign ownership cap on many industries — with the exception of some key sectors, including banking.

Ironically, the actual strong export growth is occurring against a background of admiring real effective exchange rates previously few months. There is a peg to the US dollar for the Vietnamese dong. So as the actual dollar appreciates against main world currencies (such as the pound and the euro), the dong has also appreciated against a trade-weighted basket of currencies, despite minimal devaluations against the US dollar associated with 1–2 percent in recent months.

The reduction in international tourism of a few 12.6 percent year-to-date, as well as by a sudden increase in imports, likely prompted the nominal devaluations — from equipment and equipment to vehicles — resulting in an estimated trade deficit of US$3.7 billion in May 2015. However, perhaps in order to maintain confidence in the dong as well as in macroeconomic stability generally, the State Bank of Vietnam governor has announced that the dong will not devalue against the buck by more than 2 %. Both the interbank and parallel rates are currently within the official trade rate band.

With the prospect of even stronger export data within the coming months, together with the Twelfth National Congress of the Communist Celebration of Vietnam in the first half of 2016, it is unlikely that the Two percent commitment will reverse.

In the short run, rather than trade rate adjustments, it is likely that attempts to arrest the fall-off within international tourism will take the form of cuts in visa fees or increased efficiency within visa processing. However, the actual surge in imports is more challenging. The import of luxury goods such as cars could see administrative measures. Yet a surge in imports of machinery, materials, and intermediate inputs coinciding with a improvement in manufacturing exports clearly indicates that Vietnamese production value-added depends very much on the country’utes cheap labour, with fairly little backward linkages in terms of commercial deepening.

For instance, until recently Vietnam’s textiles industry had been predominantly state-owned along with low productivity. So the surge in garments exports meant that garment manufacturers imported yarns, fabric as well as machinery from abroad (mainly China) in order to get the quantity and the quality they need to satisfy the changing rapidly fashion world. Likewise, with the improvement in the manufacture and export of mobile phones by foreign-invested businesses such as Nokia and Straight talk samsung, the screws and plastic covers for the cell phones are imports, as there are no Vietnamese firms creating these products locally.

The lack of industrial deepening is clearly a longer-term problem for which exchange rate changes cannot be an adequate solution. Certainly, the stance of the State Bank in maintaining its hard-won confidence in the dong and in macroeconomic stability could be warranted. However, this is if the implementation of banking and state-owned enterprise (SOE) reforms gets attention. It is here that the exemption of the banking sector from the abolition from the 49 percent foreign investment cap is a concern, as this could indicate a reluctance to drive ahead with reforms from the banking sector. It is also not known what other sectors are being excused from the abolition of this cap.

In brief, if the US dollar is constantly on the appreciate against major world currencies, and if the industry balance in Vietnam continues to deteriorate, there could well be pressure around the dong to devalue.

To a certain extent, the State Bank could do this and still maintain the 2 % commitment by changing the actual nominal peg from the dollar to some basket of trade-weighted currencies. However this may be only cosmetic. The actual problem lies in the inability of Vietnamese firms to support export booms through increased production of materials, advices and machinery locally in upstream industries — or simply a lack of commercial deepening.

For a sustainable solution to the problem of import surges leading to trade deficits in Vietnam, architectural reforms are needed to get state-owned companies out of domains that should be purely private and to improve the productivity of the remaining SOEs.

Strong export development in Vietnam masks underlying challenges is actually republished with permission from Eastern Asia Forum

German Finance Minister Schaeuble claims he raised the possibility of a Ancient greek exit to push to have an alternative, and he did so along with backing of the Merkel government.  He used the threat of the violating the "irreversible clause" from the EMU Treaty as a cudgel to beat Greek Prime Minister Tsipras into submission. 

It seemed to work.  Tsipras has not only decided to all the terms he previously called "blackmail", but he agreed to essentially implement all the earlier contracts since the crisis began and more.

There is a powerful argument that believes that Germany crossed an important line.  As Wolfgang Manchau authored in the Financial Times, "They’ve destroyed the Eurozone as we know this and demolished the idea of a monetary union as a step towards a democratic political union…They demoted the Eurozone into a toxic fixed exchange-rate system, with a shared solitary currency, run in the interests of Germany, held together by the threat of complete destitution for those who challenge the prevailing order."

The conclusion of this argument that, in its vindictiveness toward Greece, Germany has asphyxiated the future of the European Task.  It becomes a German world of interest, dictated by it’s narrow self-interest.  Rather than leading to greater integration over time, by intimidating a Greek exit in the irrevocable monetary union, it’s rendered EMU into a rigid type of the ERM.  It turns the actual union into an economic practical exercise. 

Manchau and others argue that upon these more narrow terms, a common currency does not work for many of its members.  He specifically cites Italy and Finland, however others could make the case for many other members as well. 

There are two power here.  First, many of the perma-euro doubters find in the Greek crisis confirmation of that they have been quarrelling for nearly a quarter of a hundred years.  Monetary union without fiscal union does not work, and there is no urge for food for fiscal union.  The 2nd current stems from the bias that exaggerates the significance of the latest information point as if it were the last. 

Many of the economic challenges that European countries face today were not born with the dinar but pre-date it.  Under the ERM, there have been frequent crises that were resolved by changing the pegs from the German mark.  This realignment path has been blocked, however without structural reforms, the adjustment occurs via debt accumulation.  In addition, in violation of EU rules about the magnitude associated with external imbalance that require a spinal manipulation, Germany's insistence on pursuing a sizable current account surplus requires by definition others to accumulate debt.  This is independent monetary marriage.

It seems true, judging through various press reports the recent European meetings happen to be particularly acrimonious.  However, this is not truly new.  The history of summits is actually replete with harsh words and all-night meetings.  Some argue that the demands put on the Greek government are unreasonable and therefore are designed to produce regime alter.  They claim this introduces the democratic deficit.  Yet the arguments were expressed when Greek Pm Papandreou was pushed out after proposing a referendum (which Tsipras opposed) in late 2011.  It has been recommended too that European officials forced Berlusconi out of Italy, which has had three prime ministers since and none directly chosen.

To reach the conclusion that the critics want, they chose to end their story now.  All of us argue that monetary union continues to be evolving and that the Ancient greek crisis does not end that process.  Instead, recognizing the actual strains that have been caused, Western officials will seek to heal the apparent fissures.  We think it is politically naive to expect Europe's elite to simply give up on the European Task.  There might have been a Plan B for Greece, but there is not just one for Europe.

The European Task dates back to efforts after WWII to avoid another ruinous battle in Europe.  The way to get it done is to form a community and integrate the economies for the first time.  While the timing of monetary union, and the form it required, was a result of specific historical conditions (e.g. nov the Berlin Wall), it had been consistent with, and extended Europe'utes evolutionary path.

Manchau and others dispute the acrimony, and Germany's pursuit of narrow nationalist self-interest, mark the end of the road.  More likely, it is not.  While it is not likely to happen immediately, we expect there a strong effort, led by Germany and Portugal, to push for greater integration.  Monetary union isn’t complete.  The banking marriage is incomplete.  The recent Five Presidents' Report offers an interesting blueprint and expression of the recognized need at the highest amounts to continue to deepen as well as broaden integration. 

It is obligatory on the critics to explain the future of a non-integrated Europe.  Is it the resumption of tribal warfare?  Is actually real per capita income going be higher or lower for most Europeans in they return to national currencies?  What is the future of a handful of fairly small countries, with aging populations, in a world covered with the likes of the United States, China, and India?  Integration, of course, has problems and challenges, however so does the opposite.  Ultimately, we find much wisdom in Ben Franklin's framing of the problem to the thirteen original colonies on the eastern seaboard of North America:  "Hang together or suspend separately."

Greece and the Future of Europe is republished with permission from Marc to Market

When Alexis Tsipras walked into the meeting with the remaining 18 Eurozone leaders at the weekend break, he may have had in mind, not a line from Greek antiquity, but perhaps one from the Italian middle ages. Dante Alighieri’s version of heck had a simple message at its gate: “Abandon all hope, ye who enter right here.” It was a very difficult, and very long, meeting for Tsipras, however my first impression is that he managed the best he could under extremely difficult conditions.

For a start, the Greek prime minister had to explain to Eurozone leaders why he was pressing for an economic agreement, which, at the end of the day, had been extremely rejected in a referendum by his own people. This raised a substantial issue of trust as well as credibility. Despite Tsipras having won Ancient greek parliamentary support (251 out of 300 Greek MP’s gave him the actual “green light” to strike a deal; perhaps any deal that will keep Greece in the euro) was he trustworthy to implement what was about to be agreed?

Staring into the abyss

In fact, Tsipras had very little room for manoeuvre. Greek banks have been closed because late June, capital regulates are firmly in place, and cash reserves available at Greek banking institutions are at an all-time low close to €500m (only 0.5% of the €120 billion deposits of Greek citizens “sitting” in Greek banking institutions, which, due to capital controls, Greeks cannot withdraw). Tsipras knew that, without a deal, Greek banks would definitely collapse. To make issues worse, Greece had already defaulted on an IMF debt repayment of €1.6 million.

To add further to the crisis, Greece needs to make a €455m financial debt repayment to the IMF today along with a further €3.5 billion debt repayment to the ECB within seven days. The implication of all this is that Tsipras desperately needed a contract to enable the ECB to inject additional Emergency Liquidity Help (ELA) to Greek banks to aid their cash buffer and conserve them from collapse. Also, he needed to secure a “link loan” from the institutions to pay back both ECB and the IMF.

Getting it done

Details of the arrangement are still emerging so I will discuss briefly some of these the way I comprehend them:

Firstly, Greece needs to pass, within the next 48 hours, through the Ancient greek parliament (possibly as one parliamentary bill) privatisations and a number of structural reforms to which the current government had thus far objected. This is supposed to be some type of “goodwill” gesture to Greece’s partners in order for “Troika” money to start flowing in to the country. This is a very big challenge for the SYRIZA-ANEL government and it is very likely to prove hugely damaging for which was always an unusual coalition. It is also a big challenge for a number of SYRIZA MPs (including energy minister Panagiotis Lafazanis) who prefer a return to the drachma rather than an austerity-oriented deal with the Institutions.

Tsipras will have to move the parliamentary bill with the help of the pro-European parties (ND, Pasok, Potami) at the same time while trying to reshuffle his government by depending (again) on pro-European parties. The bill may pass, but the government’utes days may be numbered.

Further – as well as contrary to the will of Tsipras –, it seems that the International Monetary Fund (IMF) will stay firmly into the picture as Greece’s lender. Tsipras (and the colleagues) have consistently compared IMF involvement because it is an outsider to European matters. The paradox of the matter, of course, is the fact that debt relief, which Tsipras has been requesting, has been repeatedly promoted through the IMF. After all, the IMF emphatically admitted (only three days prior to the referendum) which Greek debt is unsustainable.

Greece’s debt currently stands around 178% of its GDP. Eurozone leaders possess repeatedly rejected any concept of a haircut in the face worth of Greek debt. The current agreement opens the door, however, for debt relief by pushing (subject to Greece continuing with privatisations and structural changes) its average debt maturation, currently at 16.Five years further into the future.

This, on its own, will be a significant debt relief, which Tsipras can sell to his individuals. In math, the Euclidean formula has been used for reducing fragments to their simplest form. Tsipras – with the instrumental help of his courteous and down-to-earth finance minister Euclid Tsakalotos – can claim that, subject to passing the actual parliamentary bill through the Greek parliament as well as reshuffling his government into a practical and operational group, he’s actually pulled off a trick, which will reduce the Greek debt-to-GDP ratio to its simplest sustainable form.

With hopes low, Tsipras may have just done the best deal possible for Greece is republished with permission in the Conversation