IF EVER there was a sordid morality tale about the sanctity of government statistics, it is modern-day Greece. How this relates to South Africa, I will reveal in a while. For the moment, allow me to summarise the tragic tale of Andreas Georgiou — the man who outrageously presumed to add.
We have to travel back in time to the start of the global financial crisis in 2009. European debt, overall, had always been considered high, but manageable. The financial crisis exposed the weakness of that theory. The most vulnerable countries were obviously those with the highest deficits — mostly the countries of southern Europe.
Of these, Greece’s position had always been worst. It barely gained entry into the eurozone in 2001. Hence, Greece suddenly found itself the centre of a fiscal storm.
In the middle of this story, the new government of George Papandreou was elected in 2009, and he announced something of a bombshell: the deficit — the amount by which a government’s spending is ahead of its tax revenue — which was previously estimated at 5% of gross domestic product (GDP) had increased alarmingly to 12.9% of GDP. It was revised up again in April the next year to 13.6% of GDP.
Eurostat, the European agency ultimately responsible for the accuracy of these numbers, decided to get involved. When debt relief discussions with the European Union (EU) began, the European Commission insisted on a thorough revision of these numbers.
Enter Andreas Georgiou, a Greek national who had worked for the International Monetary Fund (IMF), and who took over the Greek statistical agency Elstat.
Georgiou, a calm and numerically minded bureaucrat, walked into an office cat fight of great political moment. The old guard presumably sensed they were vulnerable for having provided bad information for so long. There were fractious board meetings, strikes, lockouts and computer hacking — the usual stuff that happens in a disaster zone.
But, critically, at this point Georgiou revised the deficit upwards yet again. The negotiations for a bail-out were now under way, and Georgiou had managed to get his hostile board removed. He was himself was under investigation in late 2011, and there was talk of his facing life in prison for a kind of statistical treason.
This past week, charges were laid against Georgiou. He is accused of undermining Greece’s "national interests" by inflating the 2009 deficit figure, and weakening Greece’s negotiating position during austerity discussions, as this figure was used as a benchmark.
This is despite the fact that Eurostat accepted the figure, and his principal accuser was one of those sacked from Elstat’s board.
It’s easy to suspect that a lynch-mob mentality is at work here, and that the old guard is presenting Georgiou as a sacrificial lamb on the altar of public anger — particularly as they are the alternative. But it is worth noting that Greeks do feel their country is being stolen from them; the new EU regime is harsh; taxes on everybody will increase; and swathes of Greek public utilities will be sold to foreigners.
The question that intrigues me, however, is this: how was the Greek deficit actually disguised?
This is not yet entirely clear.
Arriving at a deficit figure is enormously complicated. Imagine: this is a balance sheet perhaps 50 times larger than the largest corporations. What gets included as an asset and what is a liability is an artistry that depends heavily on the ethics of those in charge.
For a government with no scruples, it’s pretty easy to cheat. We know Greece cheated, along with Italy, at the start of the euro adventure in 2001. For example, the New York Times reported in 2010 that, on the advice of US bank JPMorgan, Italy managed to cut its deficit figure with the help of interest rate derivatives in order to squeeze into requirements to join the euro.
But Greece went further, and on the advice of another US bank, Goldman Sachs, in effect exchanged immediate cash benefits for future debts, in the same way home owners might take out a second mortgage on their homes. Banks provided cash up front in return for government payments in future, with those liabilities then left off the books because, amazingly, they weren’t recorded as "loans". Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come, the newspaper reported.
But there is also another side to this problem. To reduce the deficit, and therefore the national debt, the other trick is just to leave out institutions from the concept of "government". Georgiou reportedly found no less than 17 large institutions that were regarded by his predecessors as not part of government. They included a national railway company, a national TV company, an electric bus company and an agricultural insurance company.
Whatever Greece’s travails, charging Georgiou is outrageous. The bulk of the increase to the deficit took place before he even arrived. Presumably Greek courts will see through the blame-game antics pretty quickly, as they did with the Lagarde list saga.
But it does demonstrate how important ethics are in finance.
They are not a nicety, they are a contributor to — or detractor from — credibility. If governments are going to spend more than they take in, credibility becomes a crucial asset.
So how does this relate to South Africa?
It comes down to the question of what is considered part of government and what is not.
In many ways, "parastatal" organisations are separate from government precisely to create a kind of fiction that they are not actually part of government. Often, the reasons for doing this are to shift liabilities off a government’s balance sheet and onto that of the organisation itself.
But if the board is appointed by a government, and if the organisation is reliant on state debt guarantees to function, and if it is constantly being supported with state cash, then surely it — and all its debts — should move back onto government books?
In South Africa, the big number is pretty scary. In the Zuma era, the sums drawn on government debt guarantees by state agencies have increased from R63bn in 2008-09 to R170bn in 2011-12. Eskom is responsible for about half that, but organisations as diverse as Telkom, the South African National Roads Agency and the Trans-Caledon Tunnel Authority have dipped into this pool also.
Take, for example, South African Airways (SAA). The most recent financial statements available are (incredibly) almost two years old. In any event, at the end of March 2011, SAA’s total debt was R11bn, according to its annual report. This is an organisation worth, according to its own estimate, R3bn at that stage. Its debt-to-equity ratio is about 3:1, which is pretty shocking, but in fact the number is better than the year before because of a government grant in that year. Another R5bn was granted to SAA in October last year, which did not stop SAA needing a quick R500m cash injection at the start of this year.
This government support may be good or may be bad, depending on your politics, but my question is: in these circumstances, would Georgiou, for example, not have regarded SAA as part of the "government"? And, therefore, should not all its debt, and that of many other parastatals in the same position, be considered national debt rather than a sort of vague contingent liability?
IT SEEMS quite possible that some time this week the S&P 500, the most significant index of the world’s most significant market, will surpass its previous record, reached in 2007. You can sense Wall Street shouting to the world: "We’re back!"
Do index values reflect, or perhaps even lead, broader economic growth? Do they reflect economic confidence? Do they tell us anything about the nation, the world, or even the state of capitalism generally?
During the financial meltdown, many left-wing politic ians claimed that the end was nigh. Yet here we are, as so often before, on the verge of yet another rebound. Wall Street has been forgiven its misdemeanours, as it often has before.
If you were to take a poll while any of these crises are in full swing, most people would say: "Things will never be the same again." The investing public seems more afraid of missing out than of misreading Wall Street again, The New York Times reports.
Capitalism is a turbulent but resilient thing.
But before we get too smug, consider the South African situation. The JSE all share index broke records last year. Yet business confidence picked up only marginally.
If you compare how the JSE has performed over the past decade with the S&P, it’s shocking how little progress the US market has made. The S&P is up about 50% over the past decade, compared to the all share, which is up a cool 350%. The all share returned 20% last year alone. Clearly something more interesting than an economic rebound is happening here.
The index does one thing very effectively: it reflects investor sentiment. Why investors are investing, however, is a different question. The international dimension plays a role, as do currency changes. SA’s big stocks are global companies, and as the rand slips, local stocks are worth more in rand terms.
In the long run, it’s reasonable to expect index changes to be aligned with company profits, and generally they are. Most companies trade somewhere between 12 and 18 times annual earnings all over the world. So, take out the volatility (if you can) and the market index ultimately reflects not only expectations of earnings but the actual earnings themselves. They are in other words, a somewhat selective reflection of profit. They are the present value of future earnings of the companies included in the index.
So what happens, if you frame things this way, to inflation? In other words, should market indices adjust for inflation? The higher inflation is, the higher profits will be, even if the company is actually standing still.
Market indices by their nature don’t adjust for inflation, and if they did, market returns would seem much lower. The S&P, for example, has returned a compound annual rate of about 10% since 1988. Include inflation and the return would come down by almost half. The index number is also inflated by bad companies being dropped from, and good companies added to, the list.
All in all, it’s safer to see market indices as advertisements for investing in the stock market rather than as significant economic indicators.
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