The transcript of Dialogos Radio’s interview with economist Dimitris Karousos. This interview aired on our broadcasts for the week of November 19-25, 2015. Find the podcast of this interview here.
MN: Joining us today on Dialogos Radio and the Dialogos Interview Series for the first interview of the new year is Greek economist Dimitris Karousos, who has worked for years as a foreign exchange trader in major financial firms in the United Kingdom and who is an expert on issues pertaining to foreign exchange and the financial markets. In addition, Karousos was also a candidate in last September’s parliamentary elections with Greece’s United Popular Front. Dimitri, thank you for joining us today.
DK: Thank you very much for this invitation.
MN: Let’s begin our interview today with a discussion of the recent recapitalization of the four major Greek banks. In what condition is the Greek banking system today and what will be the consequences of this latest recapitalization?
DK: The consequences of the most recent recapitalization in particular is, in my view and in the opinion of most economists, are nightmarish, both for Greek taxpayers and for the banking system as a whole. I believe that this is a major scandal, quite possibly the biggest scandal of the past several years in Greece. The recapitalization took place at humiliatingly low prices. There had been rumors in the markets, amongst those who are heavily involved in the market, that the recapitalization would take place at very low prices, but none of us could have imagined that the recapitalization would in fact take place at prices very close to zero.
Of course, our worst fears were confirmed that the recapitalization would occur with prices close to zero, when the government amended a law which had been in force which regulated the manner in which bank recapitalizations were to take place. I am talking about law 4310 of 2015, and more specifically, article 7, paragraph 5 of this law. Previously, the law stated that the cutoff price of a bank’s stocks was set as the price that would be determined from the bids that each financial institution would receive. With a decision issued by the Hellenic Financial Stability Fund, the option—pay attention to the word option—is given to accept this bid that would emerge out of the book building process. In other words, what was important about this law is that it merely provided the option of accepting a bid. The Hellenic Financial Stability Fund, in other words the Greek public sector, in other words the fund which represents the interests of taxpayers, had the right, if the prices which emerged out of the book building process were too low, to reject those bids. That is what was foreseen by law 4310. The current government came in, however, and introduced a new law, law 4346 of 2015 if I am not mistaken, which states that in the second subparagraph of paragraph 5 of article 7 of the previous law, the phrase “the fund has the right to accept,” is replaced by the phrase “the fund accepts.” In other words, what did this new law do? This new law required the Hellenic Financial Stability Fund to accept whatever bid emerged out of the book building process. “Any” means exactly that: “any,” even bids close to zero.
In this way, our worst fears and the previous rumors were realized, and indeed, when the book building process was completed, the bids which emerged were, for the National Bank of Greece 0.02 cents, for Piraeus Bank 0.03 cents, for Eurobank 0.01 cent, and for Alpha Bank 0.04 cents.
In essence, we see that the prices were as close as possible to zero. What does this mean? It means that at this point in time, the foreign investors valued the Greek banks at less than 800 million euro. To be more exact, they valued these banks at 746-747 million euro. If we take the most recent balance sheets of the banks, from the first three quarters of 2015, we will see that while the banks did indeed require recapitalization in order to continue operating normally, this did not mean that the banks did not possess capital. The capital which the Greek banks possessed during the first three quarters of 2015, according to their own balance sheets, totaled 24.6 billion euros. In simple terms, what this means is the banks theoretically possessed capital totaling 24.6 billion euros. In addition to the 6 billion that they had received from us from the previous recapitalization, we have a total of 30 billion euros in capital. And yet, the foreign investors came in and said that they would be purchasing this capital for a total of 747 million euros, for less than a billion euros. In other words, they wanted to buy out our banks and our 30 billion euros in capital, which by the way excludes an additional 40 billion which had been given to the banks in the first two recapitalizations.
When all was said and done, the foreign investors paid around 5 billion euros, and with that they bought out the Greek banks, the four banks which together control 95% of assets in the Greek banking system. Essentially, these foreign investors purchased, with 5 billion euros, the entire Greek banking system and 350 billion euros’ worth of assets. This is unheard of, it has never before happened anywhere else in the world. There has never before been such a recapitalization that has taken place. In this way, essentially all of the assets of the people of Greece, essentially the entire banking system, passed to distress funds for only 5 billion euros. The 350 billion euros’ worth of assets includes all of our loans, including consumer and business loans and mortgages.
Just from this alone, we understand that any debate regarding the fate of so-called “toxic assets” is over and finished. There is no question that these assets will be foreclosed upon. And the issue is not whether there will be foreclosures or not, but how many will take place each year. The troika and the distress funds are calling for between 60,000 and 70,000 foreclosures per year. All of these assets will, of course, pass into the hands of distress funds, all for a total of 5 billion euros. That is why I believe that the manner in which this recapitalization took place and the valuations provided by the foreign investors are scandalous. I should also add that I do not believe this is the last recapitalization that we will see. The Greek people will be called upon yet again to dig their hands deep into their pockets and I believe that we will see a fourth recapitalization very soon.
MN: Prior to the referendum of this past July in Greece, capital controls were imposed which remain in place today. What has been the impact of these capital controls on Greek businesses and the average Greek citizen, and is there any hope that these capital controls could be lifted under the current set of policies being followed by the Greek government and the European Union?
DK: The capital controls had major and adverse impacts on the Greek economy. The exact extent of the damage is difficult to determine exactly. There are studies which estimate the damage at between 4.5 and 10 billion euros, but it is hard to say for certain an exact number. I can say this, however: according to a recent analysis by the Panhellenic Federation of Exporters and the Center of Export Research and Analysis, which was based upon figures available in the balance sheets of the Bank of Greece, they showed that the damage to the Greek economy from the capital controls totals approximately 4.5 billion euros.
Of course, this is not the only damage. We have to take into account how many businesses and small industries shut down or suspended their operations temporarily. One statistic that I will share with you and which I believe is very notable shows that prior to the capital controls, there were about 3,500 containers passing through customs each day. After the capital controls were imposed, this number dropped to 1,700. In other words, we saw a decline of 50%. Therefore, we understand that the entire supply chain stopped operating effectively. As a result, numerous light industries shut down or suspended temporarily their operations.
But what does this actually mean, when a business or a light industry halts its operations temporarily? It means that these businesses were forced to place their employees on leave, even if it is temporary. This means a reduction in wages. This reduction in wages adversely impacts our economy and our consumption. And this does not even begin to take into account the businesses and light industries which shut down permanently, where we are not merely talking about a reduction in wages and employees being placed on leave, but instead, unemployment and elimination of wages. The capital controls have unfortunately left a huge scar upon our economy.
MN: We are on the air with economist Dimitris Karousos here on Dialogos Radio and the Dialogos Interview Series, and Dimitri, there is major opposition in Greece to the new pension bill that has been proposed by the Greek government. What does this bill contain and what would the consequences of this proposed law be for the citizens and households of Greece and for the country’s businesses?
DK: What this new law may or may not contain is still hard to say because even the members of the government do not quite know yet. They continuously change the contents of the bill, and there will continue to be changes up until the last minute. They are attempting to present this bill as a mere reform of Greece’s pension system, but in reality this is not the case. What the government is doing is looking at its financial shortfall for this year and next year, and then simply achieving the equivalent amount through the reduction of pensions and the increase in pension contributions. They are not doing anything further than that.
The draft law that I have seen is socially unjust, as I feel it shifts the burden onto newer pensioners while also harshly impacting those who are currently receiving the lowest pensions. At this point I would like to say that this draft law does nothing to improve the performance of the pension system. In fact, there are certain provisions within the draft law which essentially promote uninsured and black market employment. For example, someone in the high income tier has every reason, knowing the low percentage of his wages that he will get back with his pension, to resort to uninsured and black market employment. This law does nothing to make our pension system more sustainable because it does not examine it from top to bottom. We cannot talk about a sustainable pension system when we have not taken any measures to combat black market and uninsured labor. We cannot talk about a sustainable pension system when unemployment continues to surpass 25%. We cannot talk about a sustainable pension system when the tax system is structured in such a way that it essentially forces businesses to leave the country.
The most important aspect though which I believe requires our attention and which has to do with senior citizens, is that the government is not showing any willingness to allow those who have not completed 15 years of pension withholding to receive even a minimum pension. For such pensioners who have only 5 or 10 years of withholding to show, they will lose their basic pension and they will instead receive a so-called “social support” stipend, which will begin at 20 euros per month. This is absolutely absurd and it disproportionally impacts those receiving the lowest pensions and the lowest income brackets.
MN: Discuss for us the difficulties that small businesses, free-lancers and the self-employed are facing in Greece as a result of the heavy taxation that they have faced over the past several years of austerity, and potentially from the new laws and new austerity measures that the government wishes to impose.
DK: I don’t even know where to begin or what to say first about this topic. Should I mention the bureaucracy? Should I mention about the regressive and chaotic tax system with over 1,300 different ordinances which are constantly changing? Should I mention the income tax? Should I mention the special solidarity tax that has been imposed? Should I mention the tax on businesses or the trade tax? Should I mention the pre-payment of the following years’ taxes? Where should I start first? How can a small or medium-sized business or someone who is self-employed survive this onslaught of taxes?
I will share with you an analysis by the Economic Chamber of Greece, which estimated that every self-employed individual is forced to pay 7 euros out of every 10 euros that he earns. This is absurd, to pay 7 euros in taxes and in pension contributions for every 10 euros that you earn. You are left with 3 euros in other words with which you are somehow supposed to provide for your family or to reinvest in your business, in order to improve your competitiveness.
To give you yet another important example, according to the Greek Federation of Commerce, there have already been 60,000 businesses that have submitted an application to move their headquarters to Bulgaria, while the Bulgarian Chamber of Commerce, according to its own estimates and a recent announcement it released, states that the number of Greek employees active in Bulgaria is expected to increase from 70,000 to 90,000. What is the end result of all of this? We are seeing businesses shutting down, businesses moving out of the country. And to make a connection here with your previous question about the pension system, how can we have a sustainable pension system when we will not have any employers or employees to contribute to it?
MN: Let’s now discuss the issue of Greece’s public debt. What does Greece’s public debt include, what percentage of the debt that is being repaid is comprised of interest payments, and what does international law have to say about this debt?
DK: Yes. I would like to mention something here which I always include in all of my interviews and which I will never tire of pointing out. When we talk about the debt, we have to make it clear to the audience that we are talking about an unsustainable debt. This is very important. We are not merely talking about a debt that is simply difficult or very difficult to repay but which eventually could be serviced, with a lot of difficulty and sacrifice. We are talking about a debt that is unsustainable. What does unsustainable mean? An unsustainable debt is a debt which, no matter what actions are taken, cannot ever be repaid. Whatever measures are enacted and enforced, no matter how strict they are, will never be enough to reduce this debt. Instead, this debt will continuously grow, as it has now reached a point beyond which the annual increase just in the interest that is owed is more than any possible increase in income to repay it. This can also be proven mathematically. But to keep things simple we will leave the mathematics aside and examine what is happening in reality, what we are all experiencing. And what we will see is that when Greece was thrust into the first memorandum or so-called bailout, its public debt as a percentage of GDP was around 125 to 129 percent. After enforcing all of these harsh measures, the following year, the percentage of our public debt compared to GDP increased, rising to 148% of GDP. Further harsh austerity measures were implemented, the measures that the IMF and the troika told Greece to enforce, and yet the following year, our debt increased yet again instead of decreasing, reaching 178% of GDP. And this has been happening continuously, with our debt now totaling 188% of GDP. So what do we see here? We see that Greece’s debt is the epitome of an unsustainable debt, a debt that cannot be repaid no matter how many measures are enacted and which indeed will continue to increase. And as I mentioned earlier, this can be proven mathematically as well.
So what happens next? Greece is forced to sell off everything and to provide the income from these privatizations directly for the repayment of a debt which is mathematically impossible to repay. And while this is happening, we are not being informed about the fact that our country, as a sovereign nation, has the right to refuse the repayment of its debt, according to international law. For example, Greece could declare a “state of necessity,” which has already been recognized by the committee on international law at the United Nations and by the international court in The Hague. Greece could also claim its right to protect its national sovereignty and national interest, which has been recognized in international law beginning in 1962.
Another weapon in Greece’s arsenal is to declare the public debt as odious debt. What does odious debt mean? Odious debt consists of loans which violate the basic tenets and principles foreseen by international law. For instance, when it has been proven that a debt as a result of loansharking, fraud, usurious interest rates, or under duress or the threat of duress, then we are talking about an odious debt. And indeed, we here in Greece meet all the criteria that exist for classifying a debt as odious. Our debt is usurious, it was incurred as a result of loansharking, and it was incurred under duress. You may remember what was being told to Greece, that if it did not sign the memorandum agreements it would be booted out of the European Union.
To give you just one example, at the end of the year 2000, Greece’s public debt totaled 143 billion euros. From 2000 to 2011, Greece paid 119 billion euros in interest payments. So Greece owed 143 billion and within a decade paid 119 billion. If this question was posed to any ordinary person, what would they say that I now owed? They would imagine that I owe the difference, approximately 23 billion euros and maybe a bit more on top of that, perhaps a total of 30 billion euros. And yet, during this time period, Greece’s debt reached 356 billion euros. It is absurd to owe 143 billion, to have paid 119 billion, and yet to see your debt, instead of going down, increase to 360 billion. And it should be noted here that this was not the result of the mismanagement of funds or the need to pay high salaries or pensions. The primary deficit during this period of time, which includes payments for salaries and pensions, totaled 35 billion euros. So we had a total deficit of 35 billion euros, and yet our debt grew from 143 billion euros to 356 billion euros, despite having made 119 billion euros in interest payments. This occurred because the loans were usurious. We are talking about loansharking that was imposed on Greece as the result of swaps, and as a result of complex financial instruments such as future options and other derivatives.
MN: We are on the air with economist Dimitris Karousos here on Dialogos Radio and the Dialogos Interview Series, and Dimitri, the Greek government recently went ahead with the privatization of 14 profitable regional Greek airports, while the major port of Piraeus and the resort peninsula of Vouliagmeni are now in line to be privatized. Will these privatizations provide any financial benefit at all to Greece? And what have been the results of similar privatization regimes that have been imposed in other countries?
DK: These privatizations will provide nothing positive for Greece, and this is borne out by the facts. They provide no benefit whatsoever and they will be catastrophic for Greece. It should first be mentioned that the income from the privatizations are not available to any Greek government to use. The income earned from the privatizations is instead earmarked for the repayment of interest and the public debt. This is indeed required by law 3896 of 2011, which says that the income earned by the Greek privatizations fund is to be transferred, within 10 days, to a special account which is used exclusively for the repayment of the national debt. In other words, none of the income that is earned from the privatizations enters the economy.
Now, with regard to the two biggest privatizations, it is useful to examine them more closely. We can begin with the port of Piraeus, which was sold very recently for a total of 360 million euros. What is absolutely tragic about this is that this 360 million equals two weeks’ worth of debt interest repayments for Greece. The money earned from the privatization of Greece’s largest port equals two weeks’ worth of interest payments. If we consider that Greece is obliged to repay 6 billion euros this year and we divide up the amount, we will see that the money earned from the privatization of the port of Piraeus totals two weeks’ worth of interest payments. In order to make this agreement more acceptable to the public, what the government has tried to do is to tell us that the company that purchased the port, Cosco, will proceed with 350 million euros worth of mandatory upgrades and improvements to the port within the next decade.
To give an example, the government referenced the expansion of the cruise dock, which is supposedly a binding part of the agreement with Cosco. What we have not been told, however, is that this particular investment is valued at 120 million euros, and that 95% of this amount will come from European Union sources, from grants which Greece and its taxpayers are already entitled to. So what investments are we talking about exactly, when 95% of this particular investment will be funded with European grants which Greece was already entitled to? We were indeed told that out of the total purchase price of 360 million euros, only 160 million will actually be paid by Cosco, while the remaining 200 million will come from various European Union programs. It is evident that any talk of these privatizations being investments is a myth.
It should also be noted that Cosco, which purchased the port of Piraeus, was paying approximately 35 million euros per year to lease a portion of the port. Now that it is purchasing 67% of the port, it will essentially be paying this rent to itself. This amounts to 24 million euros per year in savings, and until the year 2052, Cosco is slated to save approximately 860 million euros. By way of comparison, this past September, 65% of Turkey’s Kumport Terminal, which is not even an actual port, it is a terminal, and which is three times smaller than the port of Piraeus, was sold to Cosco for a total of 813 million euros, while it purchased the port of Piraeus for a total of 368 million euros. This is something that I believe should be examined closely by the people of Greece and it is time that the people of Greece finally take an interest, because all of these so-called privatizations are, in fact, a sell-off.
And it should also be noted here that all of the annual income that was up until now earned by the Greek state from all of these airports and harbors that have been privatized, will no longer be there. This will create yet another major gap in Greece’s public finances which will have to somehow be closed. How will this gap be closed? With even more cuts in salaries and pensions and increases in taxation. There are no other options. We can also look at the Greek government’s agreement with Fraport for the privatization of the airports. The 295 page agreement contains numerous absurdities. For example, on page 279, paragraph 43, it is stated that Fraport is excluded from the requirement to pay the unified property tax. This is happening while all of us, all the taxpayers, are required, out of our own earnings, to pay this tax. In addition, on page 92, paragraph 5 of the agreement, it is stated that Fraport is also exempted from paying municipal taxes, for such things as public lighting and trash collection, at the same time that Greece’s citizens pay very high municipal taxes for such services. Furthermore, on page 18 of the agreement, we read that Fraport will be reimbursed by the Greek state for any strikes or work stoppages which the airport employees may undertake. We also see that Fraport will be reimbursed for assets which have now been transferred to its ownership For instance, if in the next 40 years any equipment requires upgrades or to be replaced, it will not be Fraport paying for this, but the Greek public sector. In addition, as we see on page 9 of the agreement, if new environmental studies or permits are required at any of the 14 airports which have been privatized, in order for the airports to remain in compliance with international best practices or with new environmental policies, the costs for this will once again be borne by the Greek state. All of this is absolutely absurd. These things do not happen anywhere else, in any civilized European country.
MN: Having discussed all of these important issues, let’s discuss the issue of the so-called “grexit,” or a return of Greece to a domestic currency. You are a member of the United Popular Front and a former candidate of theirs in the previous parliamentary elections in September. The United Popular Front has presented a detailed plan for how Greece could exit the Eurozone and return to its own currency. What is the United Popular Front proposing and how could Greece exit the Eurozone in an orderly fashion.
DK: The United Popular Front presents a detailed set of proposals, and I invite our listeners to visit its website, www.epamhellas.gr, where they will see that the United Popular Front is the only political movement in Greece which has remained true to its beliefs all these years and has not changed its rhetoric in the slightest.
In terms of how Greece could emerge from the crisis, the first step would be a unilateral stoppage of payments and write-off of the public debt which has already been repaid twice and three times over with all of the interest that has been levied. Second, we will proceed with a return to a domestic currency. Because this is the only way in which our economy can recover, as a domestic currency is the only tool that a country can use in order to improve its economy and generate growth. You cannot have economic growth if you are utilizing a foreign currency, and one that, should be noted, is not a wealth instrument but instead is a debt instrument. We need to finally understand this difference. And as you mentioned, the issue of departing from the Eurozone and returning to a national currency is considered taboo. I’ve heard various things, that if we return to the drachma our country will be destroyed and there will be millions of people unemployed. And yet now, within the euro, we already have millions of people unemployed, and thousands of businesses that have shuttered or which have moved out of the country at a rapid rate.
They say that the banks will shut down if Greece returns to the drachma. And yet now, within the euro, capital controls are being enforced and there is no chance whatsoever that they will be lifted. They are here to stay. There are those who say that Greece will no longer be using a hard currency. But which hard currency are we talking about here? They are saying that there will be continuous devaluations of the new currency. And yet we are seeing internal devaluations today, with the euro. We have such internal devaluations when we see within just one year, according to figures from Greece’s Statistical Authority, that the price of basic food items increased by 18%. The price of coffee alone increased by 16% in one year, while the price of vegetables went up by 13%. And in the meantime, we have over one million people unemployed and a 23% average decrease in wages. Is this not an internal devaluation?
MN: There are many who fear that if Greece was to return to its own currency, that not only would there be a catastrophic devaluation, but that hyperinflation will follow as well. Are these fears valid?
DK: As I just mentioned, we are currently experiencing a quite severe internal devaluation. The cost of this over the course of the past five or six years of the economic crisis totals approximately 1 trillion euros. Just take into account the 200,000 to 300,000 small shareholders who lost their savings as a result of the three bank recapitalizations. It is estimated that a small shareholder with a 30,000 euro savings account at the start of the economic crisis is worth only 15 euros today. If this is not an internal devaluation, if this is not a catastrophic collapse, then what is it? When Greece’s small bondholders lost their investments as a result of the bond haircut (PSI of 2011-2012), was this not an internal devaluation?
Let’s look at the 18% increase in the cost of basic food items. Add to that the average decline in wages and pensions of 23%, with figures from Greece’s Statistical Authority, and add to that 18% and 23% the increase in taxes. Is this not a tragic example of an internal devaluation? And we can add to that the sharp decline in property values, which have bottomed out. People are unable to sell their properties and if they do so, it is for ridiculously low prices. Is this not an internal devaluation? So what are we afraid of? We’re afraid of going back to a domestic currency, the drachma, afraid that it will devalue by 15 or 18%, a devaluation which will be brief even if it happens, and with no guarantee that it will even occur. Who says with any certainty that the new currency would devalue? Why don’t we consider the alternative possibility, that as soon as we announce our departure from the Eurozone, that it will be the euro which will devalue sharply? The euro will lose its value, and I believe that it will be the euro that devalues and not the drachma. Why don’t we think of it in these terms? Think about it. The euro is the number two reserve currency in the world at this moment. Think about all those investors holding on to euros in their portfolios and how they will react when Greece or any other country announces its departure from the Eurozone. What will happen to the euro? Will it not depreciate rapidly? Won’t all those investors who have euros want to sell it? And who will want to buy it? Nobody. So wouldn’t it perhaps be the euro that ends up devaluing in the end, not the drachma?
MN: We are on the air with economist Dimitris Karousos here on Dialogos Radio and the Dialogos Interview Series, and Dimitri, in your opinion, is there any chance that the current austerity regime could be overthrown from within the Eurozone and the European Union, as Yanis Varoufakis, for example, is saying?
DK: No, there is no chance of this happening, no chance of growth if Greece remains within the European Union. What does growth mean, even using their own definition? It means an increase in GDP. GDP consists of four components. These four main components together comprise GDP. They include net exports, or exports minus imports. For Greece, this number is negative, so we can’t count on growth from this component. The next component is government spending. By definition though, the memorandum agreements are meant to curtail government spending, and when the government doesn’t spend and indeed proceeds with spending cuts, how can there be any public investment, how can the economy move, how can there be growth? The next component is investments. But Greece is in the very last places worldwide in investment. Which investor will want to come to Greece under current conditions? So it is clear that there is no ability for Greece to ever attain growth within the EU mechanism. And yet, each year we are told that growth is coming, that there will be economic growth the following year. Well, where is this growth? How can GDP increase when we have one million people unemployed? According to a study by the Athens Polytechnic University, each unemployed person reduces the national GDP by 11,000 euros and this is evident by the dramatic decline in our GDP.
MN: In closing, you have lived for many years in the United Kingdom but you nevertheless chose to return to Greece despite the fact that in recent years, young and educated Greeks have been migrating in large numbers out of the country. What is the message that you would like to share with the Greek people and how do you believe their fears about grexit and the continued inferiority complex towards the European Union could be overcome?
DK: I would like to share the message that the Greek people need to take the fate of their country into their own hands. They need to take an interest at last in what is happening and in their future and that of their families. We need to look at reality today and we need to expel fear from inside of us. I understand that fear is a very strong emotion, but fear can be overcome with knowledge, and it can be overcome when we sit down and think with a clear mind about what is happening and when we take steps to acquire knowledge in order to see what we can do to get out of this situation. Within the European Union and the European framework there is absolutely no chance that Greece will be able to overcome the crisis. The past six years are evidence of this, as we have endured catastrophic policies which are making the situation in Greece go from bad to worse. Not only is there no chance of us ever experiencing economic growth within the European framework, there is also no chance of ever overcoming this death spiral of economic depression which we are experiencing.
My message therefore is this: we all need to care about what is happening. We need to care about the sell-off of our country. We need to care because the sell-off of public assets is not only criminal, but it is economically irresponsible. The income that we will be losing each year as the result of the selling off of these public assets will be replaced by more taxes and by further cuts to wages and salaries. We have to think carefully about what is happening, and we have to show an interest in saving our country.
MN: Well Mr. Karousos, thank you very much for taking the time to speak with us today here on Dialogos Radio and the Dialogos Interview Series.
DK: Thank you very much for having me.
Please excuse any typos or errors which may exist within this transcript.