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Paul Gambles
Co-founder of MBMG Group


Update July 25, 2015

Could a Greek euro-exit actually help Europe? Part 2

Democracy is when the indigent, and not the men of property, are the rulers.
- Aristotle
Austerity is not
the answer

Despite its co-operative rhetoric,1 the IMF and its Troika partners appear not to be giving ground and thus enforcing austerity measures in place since 2010.2 Five years on, it has long since been clear that these measures are, as the IDEA Economics article phrased it, “attempting to shrink your way to growth.”3 Even appointing a former vice-president of the ECB as Prime Minister4 under close watch of the French and German premiers5 did not work.

Graph 1 - Source: IMF World Economic Outlook

Even if 25 years of debt-deflation in Japan isn’t proof enough, evidence from Greece, Spain and Italy is clear that austerity is not the answer. During austerity, employment figures have become even worse and GDP has not improved in three of the five countries.6
Not only that, austerity does nothing to improve people’s levels of disposable income. In most of the PIIGS countries there has been very little change.7
In Greece, the situation has become catastrophic; taxes have risen8, salaries have decreased – Greece is the only EU country where the minimum wage has actually gone down since 20089. With the number of people employed 20% lower than the 2006 mark (see charts), there is less income tax and fewer social contributions entering the government’s coffers as well.
All this leads me to pose two questions:
What exactly is the Troika trying to achieve?
The short answer to this is probably that the Troika wants its money back and doesn’t want to set a precedent. After all, if institutions like the IMF and the ECB give Greece a debt jubilee, I’d imagine the likes of Spain, Portugal and Italy would clamour for the same treatment.

Graph 2 - Source: IMF World Economic Outlook

Yet, with daily cash withdrawal limits of €60,10 it’s getting to the point now where there is a distinct possibility of cash shortages in Greece, making it difficult – almost impossible – for a cash economy to function. The reality is that if a population overall has a reduced income and is required to pay more in tax, it has little motivation to consume and thus get the economy flowing again.
This cannot be beneficial for the IMF or the ECB: the chances of receiving loan repayments would get even smaller and the institutions’ credibility would suffer a huge blow.
What should
Greece do?
As we saw in Thailand after the 1997 financial crisis,11 the best policy is often to devalue the currency. This makes loan repayments cheaper, exports cheaper and even holidays in Greece cheaper. The latter is not to be ignored: the average number of visitors to Greece between 2009 and 2013 was around 16 million a year. At the last census in 2011, the country’s population was just under 11 million.12

Graph 3 - Source: Eurostat

Of course, the not insignificant obstacle to this is that Greece’s currency is the Euro. To achieve devaluation, it would have to pull out of the single European currency; a move that has not been legislated for in the Treaty on European Union.13
In January 2001, the Euro was officially fixed at 340.75 Greek Drachma.14 Logically, this would be the starting point at which a re-introduced drachma would enter the currency markets; allowing those markets to decide its true value. This move, combined with the ceasing of austerity measures, should give the Greek economy shoots of recovery and, most importantly, ease the squeeze on its people. Those factors, combined with a restructuring of the tax collection system,15 would put the government in a better position to pay its debts to the IMF.
If Greece were to pull out of the Euro, this would set a precedent for Spain, Portugal and Italy to follow. That may be disastrous for the ECB and the Eurozone, but it may be better for the European Union in the long run. After all, the Treaty on European Union states that the EU, “Shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress.”16 Shouldn’t that be what Europe’s governments should be working towards, instead of making cheap headlines in their home countries?
If that were not enough, the German government should remember that it was able to become a competitive economy again after World War Two thanks to a debt cancellation granted by several countries including the US, UK, France, Spain and Greece.17

6 IMF World Economic Outlook
7 Ibid
12 World Bank data
13 Treaty on European Union, last revised 13 December 2007 (Consolidated version:
14 Official Journal of the European Communities OJ C 177E, 27 June 2000
16 Article 3, Treaty on European Union

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

Update July 18, 2015

Could a Greek euro-exit actually help Europe? Part 1

Democracy is when the indigent, and not the men of property, are the rulers.
- Aristotle
After five years of negotiation, Greece has defaulted on its payment to the IMF and asked for another bailout. Funding from the international lenders has now ceased, as well as financial assistance from the European Central Bank.1 This may be a turn for the better.

Graphs 1 & 2 - Source: Danske Bank via

On reading the press over the last few weeks, some commentators appeared to be alarmed at how far the brinkmanship has been going between the Greek government and its three creditors.2 However, once Syriza won the Greek elections in January, it was clear that this would be a war of attrition that would go down to the wire – and perhaps beyond.
This is because Syriza’s main thrust is to achieve debt relief and to halt austerity measures: two policies which the European Commission, ECB and IMF have refused to accept throughout the Eurozone crisis.3 Even if the Troika were to grant Syriza’s wishes, I imagine they wouldn’t wish to make a public declaration about it, as it would cause some red faces in Brussels, Frankfurt, Washington and – let’s be honest – in Berlin too.

Graph 3 - Extracted from Dallas Federal Reserve.

My colleagues at IDEA Economics questioned on Saturday what the Troika was actually trying to achieve by taking the hard line against the Greek government.4 The simple answer to that came from German Chancellor Angela Merkel at the end of January: make them pay. She told the Hamburger Abendblatt newspaper, “There has already been voluntary debt forgiveness by private creditors, banks have already slashed billions from Greece’s debt. […] I do not envisage fresh debt cancellation.”5
Not like defaulting a personal loan
Such rhetoric, however, misses the point. As IDEA Chief Economist Steve Keen puts it, pro-austerity politicians are “naïve and childish” in equating an economy to a personal budget.6 If an individual has a string of mounting credit card debts, creditors sometimes come to a point where they deem it time to cut the credit line and start banging on the door for payment.
In fact, less than 10% of the funds given to Greece in the 2010 and 2012 bailouts actually went to the government for reforming the economy and helping the vulnerable. The rest largely went to private creditors, such as banks.7
Here we are dealing with a national economy which trades with other countries. Not only that, it uses a currency in common with 18 others. Thus the negative effects of a total financial collapse of the Greek banking system could also have dire repercussions for other Eurozone members and the global economy.
Much of Greece’s creditors are public institutions; the private sector has, according to a J.P. Morgan analyst “almost no direct exposure” to Greek sovereign debt.8 In fact, as of March this year, the Hellenic Republic’s had reached €312.7 billion. According to Danske Bank, €231.2 billion was in the form of loans, with €205 billion belonging to the institutions including the IMF, the Eurozone’s European Financial Stability Facility and bilateral loans from Eurozone countries.9
Private sector banks within the Eurozone have cut their exposure hugely since late 2010, when austerity policies were first mooted, and possible contagion to other markets has also reduced.10
Should the crisis spread, however, private banks across Europe are worryingly exposed to sovereign debt; particularly that of Italy and Spain.
Continued next week.

9 ibid
10 ibid

Update July 11, 2015

China flatters to deceive… and it’s a worrying deception

As the summer holiday season approaches, the Chinese economy looks in rude health - the IMF measures it as the world’s second largest and predicts it will remain so at least until 2020.1 However, slowing growth and moves by the central bank to increase liquidity reveal a weak underbelly and an addiction to debt.2

Imagine August in Paris. A sunny day, with a pleasant breeze on a walk down the wide pavement of the Champs-Élysées. As you look around you see a long single-file queue outside the flagship store of Louis Vuitton and a mêlée for macaroons at the door of the famous patisserie, La Durée.

Graph 1 - Source: IMF World Economic Outlook, April 2015.

These people aren’t Parisians, they’re tourists and invariably Chinese: 1.4 million Chinese people visited France in 2012.3 They spend money there too: latest figures reveal that the average Chinese tourist spends €5,400 (c. THB 205,000, USD 6,100) during their stay.4 Nearly half of that goes on shopping, despite the price of coffee near the French capital’s tourist spots.

Coach-loads of tourists are dropped off at the side entrance of Galeries Lafayette, where there are Chinese-speaking staff on hand in a dedicated tax-free section of the famous department store. At Louis Vuitton, Chinese tourists are said to be limited to two purchases each to ensure there’s enough stock for those at the back of the queue - even then many items are sold out in the afternoon.5

So what’s the problem?

Chinese economic growth over the last quarter-century has been huge. At first, this huge economic growth did not go hand-in-hand with debt: between 2000 and 2007 total debt grew only slightly faster than GDP. By 2007 overall debt was at 158% of GDP; by mid-2014, however, this figure had reached 282%.6

This is a concern - there are many examples throughout history where rapid growth has led to financial crisis: the Great Depression7 and the 2008 Global Financial Crisis being just two. As year-on-year economic growth slows and industrial production drops in a similar pattern (see graph 2), that threat becomes more apparent.

Graph 2 - Sources: IMF World Economic Outlook, April 2015 & St. Louis Federal Reserve.

The reasons for the slowdown are manifold: 1930s America showed an economy cannot grow so quickly forever.8 Growth comprises of changes in labour, capital and productivity which, after years of upturn, these tend to slow - as is happening in China now;9 investment seems to have reached its peak; and the country’s technological advantage with the world’s wealthier countries appears to have narrowed.10

This rapid growth also included increased supply in housing; though not necessarily demand - vacancy rates for homes constructed between 2009 and 2015 were at 15% and expected to be at 20% in 2016-2017.11 This point is emphasized in the phenomenon of Ghost Cities - places such as Kangbashi and Yujiapu, new towns constructed yet barely inhabited.12

During the global financial crisis, China had huge demand for commodities and industrial inputs. To obtain these, it borrowed its way to meet the demand.13 Private debt is now substantially higher than America’s and, at 125% of GDP, it has one of the highest levels of corporate debt in the world.14 This debt has been positively encouraged by the Chinese government. Each time it has looked like tailing off, the government has pushed it to start again. The latest in a line of examples was in April, when the central bank (PBOC) reduced the reserve-requirement ratio to encourage banks to lend more and reduce their interest rates.15

The PBOC to date has followed the same flawed policies which Western governments implemented in 2008, setting them on the path to a deflation crisis similar to that experienced by Japan over the last 25 years.16 At the current rate of private debt growth, China will reach Japan’s peak level in 2017. It’s worth noting that Japan’s economic slowdown began four years before its private debt peaked.17

Graph 3

If China follows the same pattern as Japan, it would mean a credit crunch within the next two years. If that does start to happen, China’s trade surplus, its huge foreign exchange reserves and the government’s political dominance over banks would enable greater control of the economy than the US government had during the GFC.18

That said, if the Chinese government’s reaction once again is to maintain the line of private-debt-financed growth, then it could well lead to another Japanese-style debt deflation. This would mean that there would be less money in corporate and individual pockets and thus less demand.

Graph 4 - Source: IMF World Economic Outlook, April 2015.

Much is at stake: such a scenario would have negative implications for the global economy. China is not only the largest importer to the US and the EU; it also represents the second largest export market for both.19 The country dominates Australia’s trade - especially its export market, due to its sale of iron ore, coal and gold.20 Locally, it is both largest exporter and importer with the combined ASEAN countries.21 It also by far the largest trade partner with Thailand.22

All we can do is prepare ourselves for the worst-case scenario, so we can react quickly.

Graph 5 - Sources: US Dept. of Commerce, European Commission DG Trade, ASEAN, Bank of Thailand, Australian Department of Foreign Affairs and Trade.

1 IMF World Economic Outlook, April 2015
2 China’s RRR Cut: What does it achieve?, MBMG IA Update, April 2015
3 530ARTFIG00294-les-touristes-chinois-de-plus-en-plus-nombreux-et-fortunes.php
4 ARTFIG00132-les-touristes-chinois-depensent-plus-en-france-qu-a-singapour-ou-aux-etats-unis.php
5 26448064.htm
6 Debt and (not much) Deleveraging, McKinsey Global Institute, February 2015
7 See Investment Markets: is there anything to learn from 1929? Parts 1 & 2, MBMG IA Update May 2015
8 ibid
10 ibid
13 Steve Keen, Outlook 2015, IDEA Economics
14 Debt and (not much) Deleveraging, McKinsey Global Institute, February 2015
16 Steve Keen, Outlook 2015, IDEA Economics
17 ibid
18 ibid
19 Statistics from US Department of Commerce and European Commission DG Trade (2014)
20 Australian Government: Department of Foreign Affairs and Trade
21 ASEAN (2014)
22 Bank of Thailand (2014)

Update July 4, 2015

Can Thailand really be an Asian hub?

According to the Thai Board of Investment, Thailand is a Gateway to Asia. Yet can Thailand really compete with low-tax countries, strong neighbours and the economic might of southern China?
The idea of a business hub has long since been used by government FDI and development organizations to tempt cash-rich foreign businesses to invest in their catchment area over someone else’s. In some ways this scrap for riches is comparable with Italian city states during the Renaissance.
In these times of digital economy, it could be argued that location doesn’t count for much. However, that would be to ignore that services and industry have to be strategically placed to benefit from skilled labour forces, physical infrastructure and to understand the culture, dynamics and practices of the region.
Thailand has a great geographical location: it is centrally located in the ASEAN region and benefits from being neighbour to the rapidly emerging economies of Laos, Vietnam, Myanmar and Cambodia (LVMC). It appears to be taking advantage of this: in 2014, 9.1% of its exports went to LVMC (the figure was just 5.3% in 2008) and direct investment to these countries has increased massively (see graphs 1 & 2).1

Graph 1 Source: Bank of Thailand

Graph 2 Source: Bank of Thailand

To make full use of its geography, Thailand of course needs the infrastructure to go with it. In 2014, the Thai government approved an amended investment programme, at an overall cost of USD 75 billion. The main objective of this investment is to make Thailand-based business more competitive and less reliable on road freight by expanding and improving the railways.2
This project may reduce the heavy goods traffic on Thailand’s roads but one expert has found that a competitive minimum distance for rail freight is 1,000 km. Distribution centres in Thailand, however, tend to be only 300-400km from production centres.3
FDI Assistance
The Thai government’s Board of Investment offers four kinds of incentive for foreign businesses to come to Thailand: tax, non-tax; guarantees; and protection.4
Tax incentives include reduction in corporate tax and exemption or reduction on import duty; non-tax incentives centre on permits for employees, to own land and to transfer money abroad. In January of this year, the BoI implemented important changes to its acceptance criteria, with businesses no longer qualifying for incentives purely based on the sector in which they work. Companies operating in favoured sectors will receive lower basic tax rates; but those who also meet criteria in areas such as R&D, advanced technology, design and development of local suppliers, will enjoy additional incentives.5
All of the above may attract potential foreign investors on paper; however, the country’s competitiveness is crucial. The latest WEF Global Competitiveness Report6 ranked Thailand 31st in the world overall. Regionally it lies behind Malaysia (20th) and Australia (22nd). Thailand was particularly strong is in inflation stability (joint 1st), strength of investor protection (12th) and macroeconomic environment (13th). These rankings are a direct result of the 1997 financial crisis, when Thailand (ironically, with the help of the IMF) was able to modernize the structure of its financial sector and regulate its inflation rate.
Nevertheless, it is unclear how the future will pan out. The aftermath of 1997 meant that Thailand recovered quicker than most from the global financial crisis; yet recent GDP performance has been below par.7 These figures may not have a direct effect on foreign investors; however, it is naturally more reassuring when a country’s economic performance is going steadily upwards.
One element that will likely be of concern to potential foreign investors, particularly those in manufacturing, is the recent trend of a strong baht in relation to the US Dollar. Exports from Thailand are now more expensive to global markets than they were a couple of years back. The Bank of Thailand attempted to weaken its currency by lowering base interest rates from 2% to 1.75% in March of this year8 and again to 1.5% in late April9 which has had some effect so far.
However, historic evidence shows a significant positive correlation between baht strength and export performance (see graph 3). In other words, Thai exports are more reliant on the performance of the global economy than by foreign exchange rates; at least since the baht was floated in 1997.

Graph 3 Data: Bank of Thailand, Graph: author

AEC and all that
Like its ASEAN partners, Thailand will theoretically benefit from membership of the AEC, which opens its doors at the end of 2015. Some observers expect great changes,10 that the single market will allow easier movement of labour, goods and capital in the region. However, the absence of any combined legal structure to ensure such freedoms are granted in practice, means that these potential benefits are very much for the long term.
The verdict?
Whether Thailand is the best choice for an Asian hub depends on each business’s specific objectives and priorities. Whilst it will never be able to compete on tax with the likes of Singapore and Hong Kong, it does provide a stable economic environment with competitive skilled labour costs. However, for it to really stand out from the rest, promised improvements certainly need to come good in physical and digital infrastructure.

1 Bank of Thailand figures
5 idem
7 IMF World Economic Outlook, April 2015

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


HEADLINES [click on headline to view story]

Could a Greek euro-exit actually help Europe? Part 2

Could a Greek euro-exit actually help Europe? Part 1

China flatters to deceive… and it’s a worrying deception

Can Thailand really be an Asian hub?