PETROS G.

DOUKAS
EUROPE IS SINKING: WHAT IS TO BE DONE 11/08/11 (updated
12/09/11 and 26/09/11)

The article is partially based on my lecture , ON THE OUTLOOK FOR THE GREEK FINANCIAL CRISIS: can we pull through and how? delivered in WASHINGTON DC, WILSON CENTER, FRIDAY, MARCH 11, 9am
PETROS DOUKAS (PH.D, NYU, ECONOMICS, MBA, COLUMBIA UNIV., BA, GEORGE WASHINGTON UNIV., ECON & INTL AFFAIRS), IS HEAD OF CAPITAL PARTNERS S.A., AN ATHENS-BASED INVESTMENT BANKING AND M&A ADVISORY FIRM FROM MARCH 2004 TO OCTOBER 2009 HE WAS A MEMBER OF THE GREEK PARLIAMENT, ATTICA REGION. FROM 2004 TO 2009 HE ALSO SERVED AS DEPUTY MINISTER OF FINANCE AND DEPUTY MINISTER OF FOREIGN AFFAIRS. PRIOR TO 2004 HE WAS CHAIRMAN OF THE BOARD OF AGETHERACLES CEMENT (THE LARGEST CEMENT PRODUCER IN THE REGION), CHAIRMAN OF THE BOARD OF ERICSSON HELLAS, CHAIRMAN OF MULTICHOICE/NETMED/ FILMNET (THE SOLE SUBSCRIPTION TV PROVIDER IN GREECE), AND C-CHAIRMAN OF THE BOARD OF IVIPEPSICO GREECE. IN 1979 HE JOINED CITIBAN NEW YORK AS MANAGEMENT TRAINEE IN THE FOREIGN EXCHANGE DEPARTMENT AND IN 1985 WAS PROMOTED TO VICE-PRESIDENT RESPONSAIBLE FOR MANAGING CITIBANKS MONEY-MARKET POSITIONS IN FOREIGN CURRENCIES (AT 399 PARK AVE.) HE RETURNED TO GREECE IN JAN.1986 AS COUNTRY HEAD AND TREASURER OF CITIBANK IN GREECE. IN 1992 HE JOINED THE NEW DEMOCRACY GOVERNMENT AS DEPUTY FINANCE MINISTER, AND IN 1996 HE FORMED CAPITAL PARTNERS SA, THE INVESTMENT AND M&A ADVISORY FIRM. HE HAS ALSO SERVED AS SENIOR ADVISOR FOR GREECE TO MERRILL LYNCH, SANWA BANK AND EUROBANK. HE IS THE AUTHOR OF A 1000-PAGE BOOK ON MODERN ECONOMIC AND MANAGEMENT THEORIES AND CLASSICAL GREEK THOUGHT. HE IS ALSO PRESIDENT OF THE HELLENIC GOLF FEDERATION.

Europe is sinking and European leaders still need to get their act together. What started as a debt-financing problem for Greece, has now reached Italy through Ireland and Portugal- and will reach Spain, Belgium and even the USA. European leaders clearly failed to see that Greece cannot possibly service its huge debt, no matter the harshness of the measures and the economic depression forced upon the Greek people. Greek debt levels 1. Central Government 2. Govt Guarantees 3. Other unpaid obligations 4. Social Security System 375 billion euros 40 billion 7 billion

200 billion (actuarial deficit approx. It means that the Greek Government would have to contribute around 13 bio euros p.a. to finance social security organizations) 220 billion

5. Private Sector debt

ACTION PLAN / What needs to be done

1. Greece needs to cut further its Central and General Government spending.
Every euro spend should be reconsidered, based on the value it adds to the economy and the well-being of its citizens. For example: The Central Government still subsidizes the private pension funds of PPC and OTE by over 1.5 billion euros p.a. That is, over the last four years by over 6 billion euros! (-, - and -). Furthermore, abusive early retirement legislation and municipal hiring practices need to be reversed.

2. Greece should do its utmost to realize sustainable primary surpluses. The cash deficit for the first 8 months of 2011 rose to
18 billion euros, without including any debt repayments!

3. All parties should realize that Greece cannot raise further its tax revenues in a depressed economy. There is no conceivable tax that has not been levied on us Greeks. In fact, if real-estate transfer taxes and inheritance taxes were reduced, more revenues could be collected. Furthermore the (the requirement to provide income justification for any assets you hold) and the (the requirement to obtain from the tax authorities a certificate that you are up-to-date with your tax obligations) should be abolished. They have proven ineffective, beauracratic, and they delay any business transaction initiatives. 4. Emphasis should be placed not only on cutting-down the size of the State and its expenditures, but on enacting promarket and pro-competitiveness legislation. For example, companies in Greece still cannot adjust salary levels without union consent, which, typically, is never provided. Even recent legislation is ineffective as it allows for union and judicial meddling and intervention and should be liberalized. 5. Furthermore, Greece should embark immediately on a fullscale privatization program, even at the current depressed market prices. For the past 24 months there has not been even a single meaningful privatization! Even the four A-340s of Olympic Airways have not been sold, and their price (value) has plummeted by 50% over this period!. 6. The European Central Bank should state clearly that ALL existing deposits held in European branches of banks as of 15/09/11 are FULLY INSURED irrespective of size. This will prevent any deposit withdrawals induced by panic. Deposits are still being rapidly withdrawn, as depositors are very uncertain as to whether there is any effective safety net in place. 7. THE EUROPEAN UNION SHOULD ACQUIRE AND RETIRE GREEK DEBT: European leaders should endow the EFSF with a 1

trillion open liquidity line with the ECB (in addition to any current and other planned funding). EFSF should acquire Government bonds in the open market, AT THEIR CURRENT DEEPLY DISCOUNTED LEVELS with the purpose of retiring them! For Greece the amount to be retired should be at least 150 billion Euros. This means that ECB will be effectively printing some money, something the Germans are against. But the amounts will end-up being relatively small compared to the total European Union money supply and GDP. Grave and extraordinary circumstances call for extraordinary measures. Greeks cannot assume such great pains in their salaries and pensions and health and hospital care levels, just to repay debt. They need to be able to work hard also for their own private future. As Herodotus put it,
when the Athenians regained their (political and economic) freedom from tyranny, they started working wholeheartedly for their own benefit, and their city became great. [V 78]

8. G7 leaders should take a closer look at imposing margin requirements of the order of 20% for any forward-dated transactions for a period of two years, to reduce excessive speculation. 9. G7 leaders should realize that the current global economic crisis is a

crisis of overindebtedness* and should do their utmost to convince the markets that they will vigorously pursue fiscal surplus policies. The crisis is the direct result of people's "animal spirits" and spontaneous optimism, to use Keynes analysis.... The feeling that 'nothing can stop us'. What Pythagoras, Aristotle, Democritus and Marx termed the human proclivity to accumulate ad infinitum..... This has resulted in an excessive demand for loans by Governments and the private sector, and an over-extension of credit to both Governments and the private sector, excessive and unsustainable consumer spending, excessive investment, excessive production (crisis of overproduction as Marx termed it), resulting in crises of confidence due to the realization that such huge debts are probably not serviceable. This is what we are facing today! ... About 300 AD, the Greek philosopher
Iamblichus, wrote, quoting even more ancient wisdom, that "without confidence, even if there is money around, it will be hoarded and not circulated, to the detriment of transactions and economic activity". It was the first description of what, 17 centuries later, JM Keynes described as a "liquidity trap". It is for

this reason G7 have to convince the markets that they will undertake every effort to generate primary surpluses.
10. However, current European and global leadership is very fragmented, and it

has become increasingly difficult to impose policies that will eventually stabilize the markets and achieve greater prosperity for all. Finland is a case in point. Very introvert in its approach. It will be a pity for a great Europe not to be able to resolve the problems of a country which is hardly 1,5% of PanEuropean GDP!
[* This is a crisis of over-indebtedness, not of liquidity shortage The credits (loans) to the private sector were used to finance consumer expenditures, or investments in real estate or in businesses, assuming there would be no end to growth, or in good times, and that there would be no overcrowding of businesses offering similar products and services....

The credits to Governments were used to finance salaries, pensions, health-care costs and defense expenditures.... That is, payments that cannot create net revenues from which to repay the interest costs AND the debt itself.... All repayments of sovereign debt were financed by the issuance of new bonds. In the case of Greece, of the 370 billion of Government debt, 220 billion was debt assumed to pay for interest on the outstanding debt! The credits extended to the private sector (partially the result of competition between financial institutions not to lose market share and to 'not miss a deal'), would have been more manageable, had the problem not been compounded by the huge sovereign debt levels.... Government borrowings have been crowding-out private sector borrowings. The markets had assumed that there would always be 'somebody' to refinance maturing sovereign debts ad infinitum. The problem is one of solvency, not illiquidity. It is the fears of insolvency and inability to repay loans that is causing liquidity to be withdrawn... Governments need to undertake every effort to generate credible and sustainable budget surpluses and reduce entitlements that reward 'not working'. That is the key to getting out of the current mess. Spending more and adding more to global debt levels is like pouring more gasoline over a stalled engine.... It won't work because the markets realize that if current debt levels cannot be serviced, certainly higher debt levels will simply prolong the problem. As for those who feel that the current crisis signals the end of capitalism, two things: 1. The markets are learning from their mistakes, even though over time they tend to repeat them, and 2. Have a look at the fate of those economies that were actively hostile to free enterprise and private property: North Korea, Bellarus, Zimbabwe, Albania, Cuba, Soviet Union.... They condemned their citizens to poverty and misery...]

I understand that these are painful measures. But the alternative is a total collapse of the system. The real problems of the debt levels are now excessively magnified by the fear factor and the collapse in confidence in the system and in Europes leadership.
Petros G. Doukas Capital Partners S.A. 26 Filellinon Street Athens GR 105 58 Tel. 0030.210.33.15.210 Fax 0030.210.33.15.218

Cel. 0030.69.44.34.78.65