WHY WHAT HOW OF GREECE - ETHMOS PERSPECTIVE - PART I

Greece - the epicenter of present world problems as every one might be thinking! We at Ethmos thought about giving our readers a series of articles on Greece as to the present situation and the reasons as to why it has happened, the lessons we can learn from it, and most importantly, what can be done to improve the situation.  

First of all please recall these things from your history lessons - The mighty Greece had once propounded the theories of republic and freedom; it is the cradle of heroes like Alexander the Great.

However before we begin our article we would like to quote Winston Churchill

"Hence we will not say Greeks fight like heroes, heroes fight like Greeks"

Greece is currently fighting one of the worst financial crisis faced by a country in the past decade. a referendum has been passed by the people of the Greece against any help in the form of restoration package from the European union.

Analysis

What went wrong ?

Here is a layman's perspective: Just think, if you make a man sit and eat for say 10 to 15 years totally FREE without any work and suddenly after 15 years, you tell him that if you want further food, you need to work - what will happen? Even though the man wants to work, he will not be able to since he would be very busy in his own inertia of getting free food, his skills would have rusted during all these years of inaction, and what not. And second question - What happens if you lend a huge amount (huge means more than double his repaying capacity, which is anyways zero!) to this same man and tell him to repay the same after 15 years? He will literally use the funds to enjoy more luxurious food and at the end of 15 years, instead of working to repay the debt, will ask for more debt to pay the earlier debt! This, in nutshell, is what has happened to Greece. Here is the more technical aspect of the story for our "thinking" audience.

Greece is considered to be an advanced high income  economy - developed economy with a GDP ( gross domestic product ) at $238 billions. At the same time country is enjoying a rank of 29th  on human development index. If we compare both the figures on paper, the Greece is supposed to be a nation where citizens are happy and at the same time country is doing well financially and economically. Greece became the part of European union in 1981. The European Union nations proposed the new currency for development of the business and easy access of markets for member nations. In 2001 Greece adopted Euro as its currency in place of Drachma. All the existing Drachma (currency) have been replaced by the Euro. In year 2009 majority of the nations faced the worst economic crisis of the millennium. This resulted in the global melt down of 2009 and many developing as well as developed nations are still struggling to make the ends meet because of this. This crisis created havoc among investors and employees as job cuts were frequent and inflation was high.  

The merchant navy [maritime shipping industry] is one of the major exports of the country. Global slowdown had drastic effect on this service industry. This results in lower exports of Greece.

Healthcare, education and pensions are the most important expenses for the Government of Greece .In the current economic scenario, high inflation, reduced exports and frequent job cuts resulted in large amount of unemployment which is a burden on the government exchequer.

All these issue resulted in very high govt debt positions. As the pension and healthcare payments have been made generously at the cost of government exchequer. This resulted in high govt debt.  As the pension and healthcare payments have been made generously at the cost of government exchequer. This resulted in further worsening of the situation resulting in higher government debt.

Since 2009 there has been a declining trend in GDP of Greece.

Year	GDP growth
2009	-3.1 %
2010	-4.9%
2011	-7.1%
2012	-7.0%
2013	-3.9%

Rating outlook of various Agencies on Greece

Agency	Outlook
FITCH	CC
Moody	Caa3   Negative
Standard & Poor	CCC-AAA  Negative

Furthermore, Greece invested heavily in the infrastructure for Athens Olympics calculating unreasonable future gains, which did not materialize and the invested money ultimately became "dead money." And since 2009 there has been a declining trend in the GDP of Greece.

As the government debt is high investors were willing to grant loan only on higher rate of interest because the chances of bankruptcy were high. At the same time, majority of the rating agencies reduced the rating of Greece to junk due to which the Greece was unable to generate cash as investors were skeptical about their investment in government debt instruments / treasury bonds. In order to have fresh investments, Greece offered higher returns on the treasury bonds and other government-backed securities to generate enough cash. The efforts of Greece again went in vain as the country was unable to find suitable investors.

A country requires the cash for two reasons. Firstly cash required to run the show because major facilities like pension and healthcare is on the house (i.e. on the government exchequer). Secondly the money of the investors needs to be repaid as rating of country is already junk and if the country is unable to pay its investors, they will further reduce the investment in the country which will result in major out flow of FDI [Foreign Direct Investment, which is nothing but the money invested by foreigners in the form of the much needed foreign currency like dollars and euros).

  

In order avoid this catch 22 situation Greece approached two financial powerhouses - IMF (International Monetary Fund) and European Union. These two agencies after analyzing the issue came up with the bailout package to help Greece. European union is primarily dominated by Germany and France. IMF and EU sanctioned the bailout package for Greece but they came up with strict austerity measures to check the government spending.  (For our layman readers, austerity is nothing but reduction in unnecessary expenses and spending).

  

Greece failed to meet the repayment of their financial assistance sanctioned by EU and IMF. Even though Greece showed some growth in year 2014 but again went in recession in year 2015.  In order to avoid bankruptcy, IMF and EU were planning for a restructuring package which could have come with its share of austerity and restrictions.

People of Greece passed a referendum against this government debt restricting – i.e., the bail out package [or the B Package as we would like to call it].  Now the major issue is, who will finance this huge govt debt>  European union is keenly following all the developments.  They very well know that if Greece falls, then other economies of the Europe such as Italy, Spain, and Balkan countries will also fall.

Repayment issue

Major hurdle in the path of the Greece was that interest rates are governed by the European Central Bank and the rates were high. This bailout came up with a number of terms and conditions, especially austerity that was expected from the people and the government of Greece, which Greece was not able to comply with and resulted in the default of the loan.  However due to global meltdown in shipping industry they were unable to generate enough cash to finance the government debt and repayment of the B package.

Now citizens of Greece are actually thinking that if they pass this referendum and change the currency back to Drachma then they will be able to control rising interest rate to be paid on loan / investments. The Central Bank of Greece will have say in the policy formation and interest rate structure.  But the European markets are inter linked and it is highly unlikely that it will not affect Greece. Even if the investors want to invest they will probably expect higher rate of interest as Greece is already fighting bankruptcy and the risk & cost of investment is pretty high.

Ray of hope is the perseverance and dexterity of the People of Greece - the Greeks. They have to think about their glorious past and try to preserve the same in modern times.

In next series of article we will be discussing the about how to implement this B-package effectively.

Happy Ethmos!

Farmer suicides, loans, bankers, and the government - An Ethmos perspective

Slow transition from farming to non-farming?

After a short hiatus of around one month, we are back.  This time we would be highlighting something that has been comfortably missed by our "regular medias."  So, here goes:

Recently there have been report of  a farmer committing suicide in Amravati for being denied a loan from a nationalized bank and subsequent action against the errant branch manager for refusal of the "birth right" of the farmer.  To make matters more interesting, the Amravati District Collector in a rare and extremely proactive, heroic, and brave act ordered criminal proceedings to be initiated against 24 branch managers for failing to achieve the agricultural loan targets.  Here is the story for you to read.  This act of bravery worth a medal is being repeated by the Amravati DC's counterparts in other districts also, probably at the behest of the Maharashtra government who thinks that bankers are the root cause of all the problems that farmers are facing.  And unfortunately our regular media is too silent about these vexed issues that our country is facing and instead is more interested in the future ratings & earnings of Salman Khan's new flick, Bajrangi Bhaijaan.

So, here is the what, where, why, and how of the problem - an Ethmos perspective

It is not an open secret that Bharat has predominantly been an agrarian economy - if not in the size of production, then at least in the sheer number of people working in this sector, even though the returns are very erratic (99.99% dependent on weather conditions rather than systematic planning) - and that, friends, is the root cause of all the problems - unlike the poor bankers (who are public servants serving over there, many a times more than 1000 km away from their family) as what the Maharashtra government thinks.  Even after nearly 68 years of independence, we are still dependent on the rain for the agricultural production.  There had been many irrigation schemes, power schemes, etc. for the rural sector but none of them really took off primarily because of bureaucratic red tapism and mass corruption in government departments (We hope our beloved Amravati Collector shows the same pro-activism and bring to book all the accountable officials in the myriad of government departments for "not doing their duty.").  What ultimately happens is that the poor Bharatiya farmer incurs loss due to multiplicity of environmental factors including but not limited to global warming, hail storms, untimely and unwanted rains, excess or shortage of rains, water level dipping in borewells, and not to mention, the corruption in government departments from procuring an electric connection for borewell pumpset, selling of their agricultural produce in public markets (APMCs) wherein nothing moves without the middlemen, and last but not the least, NONPAYMENT OF SUGARCANE PAYMENTS BY SUGAR FACTORIES (which are owned by our "poor politicians")...whew..that's a hell lot of trouble for our poor farmers.  Now all these problems lead to huge losses to the farmers who are always running in a deficit vis a vis their profits to expenses.  So, what is the solution left? - Simple, to pump in more capital into their agricultural business.  And from where does this capital comes??  Banks???  Ultra wrong !!!  THE MONEY LENDERS of course.  And who are these money lenders?  They are the local village big wigs, normally local leaders or big farmers and sometimes even local goons, who are having acres and acres of land in a multitude of names and virtually rule the village like their private fiefdoms.  And they come to the "rescue" of these distressed farmers by lending them the crucial capital at a "marginal" interest rate of only 36% to 48% per annum compounded monthly!  This turns out to be 3% to 4% monthly rate of interest - nearly 4 to 5 times what the banks charge.  And how do they lend?  Simple - they do the agreement to mortgage of the poor farmers' lands at a price of hardly 30% of the market value.  In reality, this lending is nothing but a slow and dirty process of gradually annexing the land of the poor farmer and converting the "owner farmer" to a "landless farm laborer" farmer.  This process is slow because the lending cycle continues for around 2 years by which time, the debt on the farmer would have increased to nearly 2 to 3 times of the principal borrowed.  Now the hapless farmer has no other way than to approach the banks (he should have done so at the onset but many a times due to the documentation & paperwork process involved, they think it easier to approach the money lender to get "easy & hassle-free" credit not knowing the consequences of falling into the deadly debt trap).  When he approaches the bank, another set of problems are faced.

The nationalized bank's banker is already a pressurized individual having to make a fine balance between achievement of targets (including but not limited to deposits, advances, insurance, "n" number of Prime Minister Yojanas, & various social welfare schemes) and following of the crucial "systems and procedures" set out by the bank/government themselves - which include a "critical appraisal of the loan application" and wherein there are hundreds of columns to fill in asking details about the water availability, the profitability of the agriculture loan, the repayment capacity of the borrower, etc. etc. and if any wrong information is fed and if the loan is somehow not repaid & becomes an NPA, then the banker will be banged and hanged to death by the bank and government alike.  When a distressed farmer approaches another distressed banker, a majority of the times, the farmer does get the loan but the loan amount is so small that he could hardly pay the interest of his money lender's debt. The reason for the lesser loan amount is again government apathy because the rates of loans, especially Kisan Credit Card (KCC), are fixed by the government only on an annual basis and the rates fixed are, most of the times, hardly 50%-70% of the actual cost of running the business. All this ultimately leads to the "annexation of his land via sale" at a price hardly 30% of the market value by the "helping" moneylender.  The poor and hapless farmer has no other option left than to end his life rather than live a life as a farm labourer for the rest of his life.

So, my dear friends, we have tried to shorten the story as much as possible but the complete story also includes the huge corruption that the poor farmer faces in various government departments and the APMCs wherein the commodity prices fluctuate like basketball, totally controlled by the middlemen.

Finally, we at Ethmos, totally and unconditionally support the stand of the Maharashtra government and all the district collectors in disciplining the "dirty bankers" and would like to give them more creative ideas to spread this league of morality to other departments also so as to cleanse our society of all its ills.  So, here are a few suggestions from our part:-
1.  Don't just read but IMPLEMENT the Money Lenders' Control Act in all the states (the act DOES EXIST in each and every state) but guess how many have so far been booked for the death of a farmer??  If all the collectors do some field work or let their "hard-working Talati/Patwaris" do the field work, it is a matter of just a week to know the local moneylender in your district and initiate the action.  But let us just warn you - it will not be as easy as booking the poor banker because the moneylender will be a big shot of his own district and collecting evidence against him/her will be a difficult task.  But then we have full faith in our ultra-strong, fearless, and morally upright bureaucrats.
2.  Initiate action against all the sugar factories in your district who have not paid the sugarcane arrears to the farmers.  Do the forensic audit of their financials and know the cash accruals.  Regardless of whether they earn a profit or not, they are morally bound to pay the farmer their correct dues and that too, ON TIME.  If they were not going to pay them, why did they procure the cane from them?  And what did they do with the cane for 1 to 2 years?  Sat on it to incubate and create more "canelings"?
3.  Initiate action against every electricity board/company official who makes a delay in installing electricity connection for pumpsets to farmers.  Make the system online and outsource it to some agency so that the corruption is completely finished.  Make the Junior Engineer (Electric Supply) accountable for not supplying the electricity on time.
4.  Direct the income-tax department to implement Section 269SS (no person is suppose to pay/take more than Rs. 20,000/- to another person by any manner other than an account payee cheque).  If implemented, all the moneylenders can be nailed because they all transact in HARD CASH.
5. Direct the RBI and the Board of the Banks - to issue clear guidelines regarding loan recovery policy for agriculture, government-sponsored, and priority sector lending so that the appraising official of the bank is held indemnified against non-repayment by the borrower under normal conditions (i.e. except in fraud cases).  This will instill the confidence in the lending officials of the bank to fearlessly sanction credit to needy persons.
6.  And last but not the least - DO UNDERSTAND that the money that the banks are lending does not belong to the bank but the PUBLIC.  Bankers are nothing but guardians of this public money and when any banker initiates any recovery proceedings, s/he is doing the same to safeguard the public money only and not to take the money to his home and buy new jewelry  for his wife or girlfriend.  If the public money taken as loan is not repaid, then how will the banks repay the depositors' money which they have taken for safekeeping?

If corrective steps are not taken immediately, the day will not be far when we will be faced with financial irregularities and the ultimate collapse of our financial institutions and the faith of the public in these institutions as caretakers of their money is completely lost.  We apologize for any hurt caused to anyone or any institution by this article but our aim is to bring in the harsh realities and the bitter truths in front of the government as well as the public.

Happy Ethmos to all.