Will you find out the name of this top global organisation?


Last week, the star-filled roadshow of the CEO of this global corporation has driven me to write a bit more about this enterprise. It is a business that is been turned around by the current management team (appointed in 2013).


Adapt or die?

Before giving you the name of this global enterprise, let me describe it to you in numbers and facts.

This business is a conglomerate, with 3 main activities.
The first is a tourism business, where they own and operate world-class, high footfall touristic facilities in Western Europe.
The second can be characterised as producing and selling intellectual content, and we could classify it as a publishing company.
The third is a financial services division, supporting the activities of the main two divisions and managing a very diversified portfolio of assets (cash but also equity, property and precious metals).

Today, this conglomerate has around 2,880 direct employees, another 2,000 indirect ones and has established franchises globally with around 420,000 sales representatives.
These representatives are in direct contact with the client base while the head office takes care of global marketing. This is like many retail or food franchises.
This corporation has a current addressable market of around 1.3bn consumers (around 18% of the total world population, probably similar to the number of Facebook users) across all continents, although it lacks operations in many countries.

'I can dream, can't I?'

I like three unique characteristics about the business which makes it very resilient and defend it against competitors.
The first, concerning the publishing division,  is that the cost of expansion is fully funded by the client base or by local governments. Growth is free!
This saves capital which can be used to upgrade the tourism facilities and/or reinvest into publishing content, which will in turn generate both higher revenues and larger client base.

The second attractive quality, again in the publishing division is that the content cost is very low. If you own a cable TV company, you need to spend a fortune acquiring content such as football or movie rights. For instance, in the UK, BT and Sky, two companies vyying for UK TV subscribers, will disburse £5.1bn over 2016-18 to broadcast the English Football Premier League. At the other extremity, Facebook has also no content cost since it is created by its users, which enables very high margins.

Another key characteristic of this organisation which has always amazed me is the incredibly flat structure: from the bottom-rung worker/sales rep, there are exactly 5 hierarchy levels.
Said otherwise, 4 promotions are enough to get you to the top job.
Academic background is less useful than what you deliver as a sales rep and manager of sales rep. For instance, the current CEO was briefly a nightclub bouncer before entering the organisation! However, anyone starting at the firm will commence employment at the bottom-rung of the ladder. Management positions are not given to outsiders.

promotion dilbertThe downside of internal promotion systems

Now, all is not rosy. Challenges for the organisation include replenishing the sales rep contingent, keeping costs under control at the head office level and increasing the size of the addressable client base despite heavy competition from a very commercially aggressive competitor (their clients often like to display the brand as part of their personal appearance, akin the Harley Davidson clients!).

Also, over the last few decades, the organisation suffered from unethical and illegal practices at many levels of the organisation, which were left unchecked and culminating in lost sales and loss of trust for the brand. This worsened the profitability of the conglomerate, which was not addressed by an aging management team.

In early 2013, the new CEO brought in top-levels consultants. KPMG helped implement International Financial Reporting Standards (IFRS) accounting standards to upgrade antediluvian systems. Ernst & Young helped review the tourism operations, with an emphasis of securing better conditions from suppliers.
Deloitte audited the financial services division, helping identify around €1bn of unaccounted for assets and €222m of liabilities! Moreover, McKinsey advised on the publishing operations.
Key hands-on managers were appointed to deliver a financial turnaround. The East-Australia division manager was appointed chief financial officer and has led to a return to profits in 2013 and 2014.
The client base is increasing again and more and more hopefuls sign up as sales representative, in particular in a number of countries where the corporation was previously barred from operating.
The current CEO is coming back from a roadshow in the US where he was a guest of honour of Barack Obama.

The Art of the Consultant: 'It's nine thirty.'

While I am not advocating the products of this corporation, I believe that any wannabe manager should study its corporate structure to gain some insight.

If you know the name of this global company and are the first to send it to me, I will be delighted to have breakfast with you. Next week, I will give you the answer. The last clue is this one: the current CEO is Argentine.

Are addicts paying their fair share of taxes?


Last week, we saw an overview of the calculation methods for the value of one life and some applications.

This week, we can see another type of application, this time in the intersection of social sciences, politics and economics.

I am sure that you have ever heard or read a conversation about the true cost and benefits of addiction for the budget of a country. In the case of tobacco or alcohol, this cartoon below may sum up the dilemma.

quit ciggiesThe dilemma

So are the addicts paying their fair share of not?

It is surprisingly easy to be imprecise about this question. Indeed, while we can easily find the taxes collected and the healthcare and public order spending, a simple subtraction of these numbers is actually missing the biggest part of the equation, what economists call “externalities”.

An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. An example of a negative externality is air pollution from a power plant in your village. Positive externalities also exist, for instance if your neighbours keep their houses in good check, this would improve not only the value of their houses but also yours.

smoking-and-cockroachesAnother negative externality

A recent study by French economist Pierre Kopp is looking at the true social cost of the addictions in France.

Social cost is composed of the external cost and the cost for the public finances.

The cost for the public finances is straightforward and often what is used in the public debate. It opposes prevention spending, policing costs, healthcare spending to revenues represented by taxes and all the pensions and other benefits you would not get because you were dead earlier than expected.

The external cost is more complicated to assess. It is composed of the value of lost human lives, the cost of the lower quality of life, the productivity losses from addicted people. This cost will have wildly varying outputs given the difficulty to calculate precisely the value of one human life (see last week).

Once both costs are combined to form the social cost, the research shows that 95% of the social cost comes from the external factor for alcohol, 85% for tobacco and 67% for drugs.

Therefore, when you listen to a basic conversation about cost and benefits of addictions, it is likely that it is omitting more than 80% of the problem!

missing obviousYou need to look at all facets of an issue!

The findings!

Alcohol and tobacco have the same social cost, the study find, at around €120bn each in the case of France, or nearly 5% of GDP for each problem. Out of these €120bn, more than 50% are represented by the value of all the lives lost. These lives were worth €113,000pa according to the new French calculation (which has a value of around €3m for a total life). Moreover, it is interesting to notice that the social cost is in sharp increase. Mr Kopp cites better knowledge of addiction impacts, higher estimate of the value of one life but also the inclusion of the “loss of life quality” factor, which can count for up to ⅓ of the external cost estimate.

Both alcohol and tobacco have roughly the same social cost despite tobacco addiction being 4x more prevalent than alcohol. This is because alcohol has a larger impact on one’s life than tobacco. For instance, the life expectancy of alcoholics is shortened an average by 18 years (9 years for tobacco but still 18 years for drugs, including softer drugs like marijuana).

Interestingly, all 3 addictions are said to represent ⅓ of the current French budget deficit! Put this in perspective with most governments cutting sometimes vital entitlements to reduce their deficits while there is an obvious cost saving in front of their eyes.

avoiding problemTo conclude, addicts are allowed to free-ride the society at large, according to this study. Now, if you have suggestions on how to get my money back, I am listening.

Ever wondered how much your life was worth?


This is apparently an absurd question: for instance, slavery has thankfully long been illegal. Human lives are meant to be priceless. This week, however, I am going to wear an economist hat and reveal to you that the value of a human life is actually widely calculated and is essential to the functioning of many industries, not least the financial services but also healthcare, legal, workers safety and government accounts.

First, I want to reassure my readers – I have neither concluded a pact with some evil creature nor accepted an indecent proposal (although you may send me creative suggestions both on the evil and indecent sides).

indecent proposal

She knows her worth.

Second, let’s get down to some methodology: what are we taking into account?

In many studies the value of life includes the marginal cost of death prevention in a certain class of circumstances but also the quality of life, the expected life time remaining, as well as the earning potential of a given person especially for an after the fact payment in lawsuits for wrongful death.

Basically, how much does it cost to avoid you dying plus how much you are going to earn, on average, over your life, should you stay alive as long as expected.

The calculation can give wild outcome ranges.

The income you will generate over a life time is the sum of an annual income generated. This annual income is often taken from the average national disposable income (all your income after taxes which is available to spend or save freely) of your country. It is then multiplied by the life expectancy. However, one euro in 10 years may have a lower value than one euro today if there is inflation. Therefore, we need to make sure that the purchasing power of the years in the future corresponds to the current purchasing power. We therefore need to apply a discounting rate.

What rate would this be? This is open to interpretation and can generate large changes.

In France, until 2013, the discount rate was set at 6% annually. From 2013, it was dropped to 4%, enabling the value of one life to double. Nice!

In the US, the value of a life is calculated differently by different government agencies. The EPA (environment agency) sets the bar at $9.1m, the Food and Drug Administration at $7.9m. The French government has raised the value from €1.5m to €3m in 2013, thanks to a lower discount rate. You can see that the Americans have a higher estimate of their life, in particular because the national average disposable income is higher and because avoiding deaths costs so much more there due to enhanced health and safety regulations.

chainsaw warningThis piece of advice may enhance the value of your life

Why does this matter?

You can find many applications to the calculation of the value of life.

First, you may get better terms in a pact with the Devil by questioning his discount rate assumption.

More seriously, there are many areas where this calculation is useful – I quote a few quickly:

  • Risk management: if you were a coldly rational health and safety manager, you could calculate whether it is economically sensible to invest X amount of money for a piece of safety equipment which will have a Y probability to save Z lives in the future.
  • Legal claims: imagine a relative dies because of an addiction (tobacco), a bad healthcare procedure or even an accident. A court will use such estimate of a value of life to compensate you plaintiff. This cost the tobacco industry a fortune in the 1990’s as they had to compensate victims of tobacco related deaths.
  • Illegal claims: if you are a kidnapped French national and a ransom of more than €3m is demanded, you could start feeling anxious. The UK Foreign Office noted that the average ransom by Islamic terror group ISIL was $2.7-2.9m in 2014 (see here), amazingly close to the French value of life estimate. Fact not to forget though: the US and the UK do not pay ransoms.

devil discount rateCan I come back to you on the discount rate?

Next week, we will see a controversial application of this concept.

Are refugees a burden for our economies?


This week, not an easy topic. You have most probably seen in the press, on TV, on the Internet, the flows of refugees from Africa and the Middle-East.

When we talk about refugees and their impact on a country’s economy, it is very soon associated with the word “burden”, which would be defined here as something that is exacting, oppressive, or difficult to bear.

burden too heavy

That was too difficult to bear

This burden can take several forms such as a drain on welfare, expenses to cover degradation, higher unemployment, etc.

However, there is often a gap in the thinking about what positives the refugees can bring to an economy.

Many papers have been written on the theme:  “Are refugees an economic burden or benefit?”

They argue, that under the right conditions, refugees make contributions to the economy by filling vacant jobs, increasing domestic consumption, creating new markets and bringing new skills.

One key aspect is probably behavioural. As refugees arrive mostly without resources or contacts, they need to establish themselves in a field and therefore exhibit entrepreneurial skills. If they have been supported by community projects, they will also exhibit a willingness to “give back to society”. It is therefore not surprising to see many refugees or children of refugees among the top rich lists.

One other aspect of refugee flows is demography. Refugees are on average a young group and may help rejuvenate an aging population. This could be one pillar of the decision taken recently by Germany to welcome many migrants. Germany has a rapidly aging population and refugees could help to this regard.

Moreover, as refugees often have no option to return to the country they originated from, they have a stronger likelihood to invest in country-specific human capital, i.e. training or acquiring the citizenship.

However, research shows that refugees need more time than pure economic migrants to settle in and start contributing decisively. A key paper by Kalena Cortes in 2004 showed that it took more than 10 years for refugees to outperform the performance (measured in English skills and income) of economic migrants in the USA. You can read the details here.

The lag between entry in a country and decisive contribution is probably what is drawing attention from refugee critics.

Finally, to convince you that refugees can contribute greatly to a country, I will quote a few famous refugees:

    • Aristotle Onassis, an Asia Minor refugee, a Greek shipping magnate, once the wealthiest man on Earth.
    • Andy Grove, a Hungarian refugee, legendary CEO of Intel
    • Michael Marks, a Russian refugee who then co-founded Marks & Spencer
    • Rashmi Thakrar, founder of the Tilda rice food company (you know, the expensive Basmati rice in supermarkets), a Ugandan refugee
    • Sigmund Freud, fled the Nazis and set up in Austria his psychanalysis cabinet
    • Albert Einstein, a German refugee, who contributed to physics
    • Madeleine Albright, a Czech Republic refugee, former Secretary of State in the USA.

One interesting case is George Soros, financier extraordinaire, who famously broke the Bank of England in 1992, making a successful £1bn in a bet against the pound. He was not technically a refugee but emigrated from Hungary after WWII to England as an impoverished young man. He may be classified as a burden on this occasion.

Famous artists (maybe their struggle inspired them) include:

    • Marlene Dietrich, a German refugee, an actress
    • Freddie Mercury, who fled massacres of Indians in Zanzibar (now a sought-after holiday destination), lead singer of Queen
    • Wyclef Jean, a refugee from Haiti, lead of band the Fugees, whose name is derived from refugees…
    • Rita Ora – born in Pristina during the Yugoslavia war – I put her here because I quite like her songs.

Picture2A few refugees who contributed to our societies

To sum up, given time, refugees will contribute more than economic migrants. It is therefore a national interest to welcome many and put in place policies to support them, such as, but not limited to: language courses, training classes, quick work permits.

Sadly, the subject of refugees is crystallising fears and is being re-used by politicians. Let’s hope that the “invisible hand” of capitalism can triumph once more.

Could Chinese trees really grow to the sky?


This week, we are coming back with the hotly debated topic of the Chinese economy, about to lurch into the jaws of death.

jawsMaybe too late in this case!

Let’s not be too dramatic and try to understand what is happening.

After decades of fast paced growth, the Chinese economy is seeing its growth rate slowing.

Is this something bad?

Well it may looks that way. After all, anything which is lower, slower is worse as per the dictionary.

However, the stock markets did not need to plunge more than 10% in the Western World and 40% in China if the stock market operators applied carefully some arithmetic.

The mathematics lesson is simple: high growth rates will generate higher and higher sums. Therefore, maintaining a high growth rate throughout times is tricky.

china speculator

Let’s take a look at Chinese numbers.

In 2014, its Growth Domestic Product, a measure of economic output was USD10.4bn. This represented roughly 13% of the world’s total or the second largest economy, not too far from the weight of the Chinese population in the globe (around 18%).

The increase in GDP from 2013 to 2014 was USD867bn, which is the same as the entire GDP of 1996 or the entire economic output in 2014 of the Netherlands or Indonesia.

The increase from 2012 to 2014 was USD1.9trn, which is the Chinese entire GDP for 2004 (just 11 years ago) or an economic output delivered in 2014 by India!

Let’s imagine that China can keep its growth rate at 8% per annum until 2050.

If the world economy grows at 4% in the meantime, by 2030, China would represent 24% of the world economy. By 2040, a massive 35% and by 2050, a whopping 51%. Let’s remember that the US economy peaked at 23% of the world economy. This simple suggestion would tell us that the Chinese economy would be twice the weight of the US’s at the peak of the latter’s economic domination.

It could happen but the probability is very low and would suggest that the Chinese economy would be the only major economy really growing.

Therefore, the simple maths suggest that economic growth will moderate in the future in China.

And yet, countless CEOs of mining or energy companies have been neglecting this simple exercise, building capacity when it was not required.


Not sure these CEOs could solve this one!

Timing is everything – the Cornucopian Bet


A bit more history. This time, we will talk about the Cornucopian bet.

Cornuwhat you will say.

Let us set the context.

In the 1970’s, the Club de Rome was being very active. This is a circle of economists who were convinced that the world resources were finite and that growth will revert to 0% very soon. One of the argument was that raw material prices would soon increase so much that they would stifle activity.

One such economist, Paul Ehrlich became famous with his book: The Population Bomb, where he predicted that hundreds of millions would experience famine regularly. While he was right on this point, he failed to predict the large rise in global population and waistlines.

On the other side were the Cornucopians. They thought that human genius would prevail and that the more population and strain on resources, the more ingenious innovation would come. You could say that fracking is one result of ingenuity in the energy space. A few years back, we could not have accessed these oil and gas reserves.

One representative was Julian Simon, also a key member of the Cato Institute, a staunch defender of free economics and human-led growth.

The Cato Institute versus Club de Rome.

This is the kind of rivalry was akin to a Mohamed Ali vs Joe Frazier but the punches thrown were mostly under the form of academic papers and conferences.

Now this rivalry was famous for the bet: the Simon-Ehrlich wager.

Ehrlich bet Smith that the real price of 5 metals would rise over the next decade while Simon took the opposite stance.

The five metals were chromium, copper, nickel, tin and tungsten.

The outcome

Guess what: Simon won, as metal prices fell in real terms the following decade.

In this decade, the world population grew by 800m people and yet metal prices went  lower.

3 out of 5 metals saw nominal price falls while all 5 metals saw real price falls.

The outcome today would be far different!

If the bet would have been conducted until 2011, 4 out of 5 metals would have seen both nominal and real price gains. Only tin, a relatively minor metal, would have seen a real price fall.

If the bet had included other commodities such as oil, uranium, aluminium or gold, Simon would have lost by a lot!

So it all depends on the timeframe! Take your profits when needed I say.

About proportions


Sometimes, I struggle to understand the relative size of assets.

Consider the following:

–          In 1997, the market capitalisation of Microsoft was larger than that of Emerging Markets!

–          In 2012, the market cap of Nestlé was briefly equivalent to that of the Italian Index!

–          Today, if you owned the entire Apple Inc., and sold it, you could purchase the entire stock market of Russia, and still have enough change to buy every Russian an iPhone 6 Plus! Or you could buy yourself a billion Iphones!

Russian mobile phoneA Russian mobile phone in 1980. As for the first Iphones, only one colour was available.

A little pub quizz on financial markets


If you are ever going to a pub quiz on financial markets, here are a few facts that may be helpful to you:

  1. The oldest stock exchange in the world started in Antwerp, Belgium, in 1460.
  1. The oldest stock exchange in the United States, opened in Philadelphia, in 1790.
  1. Wall Street was laid out behind a 12-foot-high wood stockade across lower Manhattan in 1685. The stockade was built to protect the Dutch settlers from British and Native American attacks.
  1. The first company listed on the New York Stock Exchange was, the Bank of New York, in 1792. It still exists today under the ticker BK!
  1. The Dow Jones Industrial Average first closed over 100 in 1906. It first closed over 1,000 in 1972. It first closed over 10,000 in 1999. Today it is above 18,000!
  1. The stock, First Midwest Federal, has CASH, as its symbol. The stock, Lacrosse Footwear, has BOOT, as its symbol. If you do some searching on your own, you can find some really interesting symbols in the various exchanges.

I suggest you look for the tickers of Telecom Italia, the Caisse Régionale du Crédit Agricole Mutuel Alpes Provence, the Market Vectors Agribusiness ETF, the Asia Tiger Fund, specialty chemicals Dynamic Materials or the veterinary provider VCA.

  1. The American Stock Exchange was originally called, “The Curb”. This is because traders first started out on the streets of New York City, standing by the curb.
  1. The NYSE was originally organized at the Tontine Coffee House, located at the northwest corner of Wall and Water Streets, at 82 Wall Street. Business was transacted there until 1817.

The Tontine Coffee House was located across from the Meal Market, where enslaved workers could be hired or bought. No change from today!

  1. There are thirty companies on the DJIA, with the list constantly being revised. For example, Kraft Foods recently replaced AIG on the index (September 22, 2008). The oldest DJIA component is General Electric, added in November 7th, 1907. The newest DJIA component is Kraft Foods, added September 22nd, 2008.
  1. The stock market is named after former Boston Bruin enforcer P.J. Stock’s great, great, great grandfather, when he started selling chunks of a company that didn’t actually exist. The company was named Stocks.
  1. Finally, because we are all keen linguists. In China they call the stock market 股市, which translates to “the stock market.” Phew.

I must say there is one fact which I find dubious.

If you find which one, then I draw my hat to you.

A little biography of Henry Singleton and Teledyne


I wanted to tell you the story of one legendary stock of the 60’s, 70’s and 80’s: Teledyne.

I was not born then, or as my father likes to say, not even in the most audacious plans.

Let’s go back to Teledyne.

Through the leadership of its CEO: Henry Singleton, Teledyne started in 1960 as a start-up centred on the emerging field of micro-electronics and control systems.

They grew the business by acquisitions. At the end of their first year, they already had 400 employees!

Business expanded into aerospace (an emerging industry then).

An IPO followed in 1961 when sales were around $4.5m and net income $60k.

Over the next few years, aided by the growth of this industry and new acquisitions, Teledyne grew rapidly, entering the new fields of micro-waves and electrical products. At the end of 1964, the stock price had reached $15.

In 1965, the firm won its first defence contract and the shares jumped to $40. It moved into the field of optics, building the glass of the Apollo spaceships for instance.

Over the next years, Teledyne expanded into foreign countries such as Europe and new fields such as consumer products, high-fidelity speakers or oil drilling equipment… At the end of the decade, the group had acquired more than 150 firms and operated in 120 locations.

In 1969, sales were $2.7bn (remember, these are 1969 dollars), a massive number for those times.

2 stock splits followed and as Teledyne entered the 1970’s, its stock price was then a healthy $40. New sectors were entered such as consumer finance or insurance businesses.

The conglomerate structure was formally created, with different groups being allocated capital when returns where deemed attractive and other groups sold or deprived of fresh funds when returns were thought too low.

Hang on, it gets better…

In the bear market of the 1970’s – which was not a bear market because price dropped but rather because inflation was so high and prices of equities stagnated (you would have lost money in real terms), their share price went from $40 to $8.

The management of Teledyne did not bail: they kept investing and bought back shares massively, from $8 to $40.  Buying back shares was unprecedented at the time, people thought Singleton was crazy!

At the end of the 70’s, the share price rose to $175, a more than 4x growth. Nice!

The peak for Teledyne was reached in the 80’s when the share price reached an all-time-high for the stock market of $388.

Singleton then retired in 1986 from his CEO position and 1991 as chairman. The 80’s signalled the end of conglomerates as investors chose to favour companies focusing on their “core business”.

From more than 150 companies in the portfolio at the peak, Teledyne reduced this number to around 18 by the start of the 1990’s. Several operational mishaps in defence contracts led to costly settlements with the US government and contributed to Teledyne not being able to reinvest as much as before into profitable ventures. The company sold businesses and broke itself in several parts to fend off predators.

A Teledyne Technologies company still exists but the biggest portion of the old Teledyne still lives within Allegheny Technologies. Its spirit survives: Allegheny share price rose 50x from the depth of the 2000-2003 bear market towards the peak of the 2003-7 bull market.

Still there? 🙂

Why this long story?

Have you noticed the factors of success for Teledyne?

– Proven manager allocating capital to various parts of the conglomerate

– Allocating capital where returns are attractive

– Diversification of the portfolio all along the history: from new industries to new geographies, never being hostage to one bet

– No panic in the bear market: they stayed invested, did not sell businesses at a low price AND they even doubled up by buying back shares.

And some reasons of the demise:

– Just one decision maker (he also bore a name which matched, didn’t you notice?)

– Concentrating the portfolio resulting in a few bets that turned awry

– Ignoring the old factors of success for the new shiny fashion of the day

The Teledyne corporation was run following some basic principle of sound fund management. It stopped being successful when it became reckless.

Bonus: the very (choose your own adjective) Mr Singleton

pic singleton

A quick Look at Greece


We need obviously to take a look at our Greek friends since their new government is vowing to not pay the debts.

Alexis Tsipras, leader of Siriza, is getting some love from his European counterparts and we need to look at why.

The first measures of his government have had a populist angle, such as rehiring teachers or trying to nationalise the main country’s harbour.

Obviously, his insistence that Greece will stop austerity is attracting some nervous comments from his European counterparts.

Some market pundits seem to rejoice to the idea that something bad may happen and therefore increase their audience.

While the new Greek government insist they will stay in the Eurozone, a lot of pundits are not agreeing: below is the google search analysis for “Grexit”.

grexit google trend

Greece is important to the history of economics.

The Greeks have given us the word itself: οἰκονομία, ikonomía, the management of the house.

So when we talk about economics, no wonder we employ expressions such as “putting one’s house in order”.

Before you think that the Greeks made no effort to put their house in order, take a look below at the government spending as planned by the Troika in 2010 versus what was achieved.

greek austerity vs plan

Cutting public spending is notoriously difficult and yet they did it by nearly 25% in 4 years.

However, as growth collapsed, this has prevented Greece from returning to growth and better budget balance.

This helped Siriza win the elections on a platform of no-austerity.

Greek bondholders are now scared.

Does it matter? Will it derail everything? Will they keep for themselves their delicious olive oil as retaliation? 

Greek debts are currently of €423bn (see here to know more http://www.nationaldebtclocks.org/debtclock/greece).

This is around €39,000 per inhabitant or $44,000.

The US by comparison is $56,000 per inhabitant (http://www.usdebtclock.org/) so beaten by Greece (hey hey).

But the Greeks have an uncanny history of defaults while the US have not (actually the US and Switzerland are the only countries to have never defaulted).

The first recorded default in Greek history occurred in the fourth century B.C., when 13 Greek city states borrowed funds from the Temple of Delos. Most of the borrowers never made good on the loans and the temple took an 80% loss on its principal.

Greece then defaulted regularly in the 19th century as the young nation was fighting for its independence.

In 1932, due to the Great Depression, Greece also defaulted and stayed in default until 1964.

After 1932, we have to come to 2012, with a €172bn restructuring, to this day the largest ever sovereign default.

Since its independence in the 19th century, Greece has spend half these years in default.

In an empirical study by Michael Tomz from Standford University, we learn by a country in default remains there for 9.9 years on average, and that a haircut of 38-40% is the average loss faced by investors.

Therefore, in the current Greek case, if creditors lost 40% of their €423bn, they would lose nearly €170bn or a bit more than $190bn.

Since global GDP is nearly €78trn, it means a loss of 0.24% of global GDP.

Actually, if we look at recent history, we find several large defaults which did not derail the global economy:

  • Mexico has a default in 1994, which affected US banks but they were given the time to recover and boy did they do this.
  • Argentina chose to stop paying more than $80bn of debt in 2001, ruining a lot of Italian savers, but this was not a starting factor to the then bear-market.

On the other side, some small defaults had large impacts: in 1998, Russia defaulted on $5bn of domestic debt, triggering the LTCM crisis and a sharp stock market correction.

However, by the end of 1998, equities had already rallied back above their pre-correction level.

So it seems fair to say that what matters is more how interconnected the economy is rather than just the size of the default.

Bond investors are currently fleeing Greek bonds but not other Eurozone countries’. That means that there is little expectation of contagion.

greek yields vs rest of Europe

Part of the reason could be that Greek banks have neither foreign shareholders nor major foreign operations: they will sink on their own.

To finish, a few random facts about Greece and its economy for this elusive pub-quizz:

  • Greece’s currency, the drachma, was 2,650 years old and Europe’s oldest currency. The drachma was replaced with the Euro in 2002.
  • Some scholars say that the Greek civilization has been around for so long that it has had a chance to try nearly every from of government.
  • Approximately 16.5 million tourists visit Greece each year, more than the country’s entire population. Tourism constitutes nearly 16% of the Gross Domestic Product (GDP).
  • About 7% of all the marble produced in the world comes from Greece. – Think about it when you shower in a posh hotel.
  • Greece is the leading producer of sea sponges. Think about it when you gently wash your partner’s back in the bath
  • Greece has zero navigable rivers because of the mountainous terrain. Nearly 80% of Greece is mountainous. But they have one of the largest merchant shipping fleet in the world!
  • Spartan warriors were known for their long, flowing hair. Before a battle, they would carefully comb it. Cowardly soldiers would have half their hair and half their beards shaved off – Don’t mess with the dress code.

Special bonus: the Greek finance minister Yanis Varoufakis – Professor of Economics at the University of Athens.

  yanis 1

Also here:

yanis 2

Looking better here:

yanis 3

And as younger man:

Young yanis

Years pass, hair falls but the dress style remains 🙂