Wednesday 17 February 2010

Is the Greek debt media wave over?

Bloomberg’s Breaking News starts this morning with yet another article on the Goldman interest rate swap, dating back to 2002. I can’t help thinking this is a bit overdone. Is historical forensic accounting now a service offered by the financial media? If so, why don’t they examine the major current issues in Greek debt, such as:

· The massive financial liabilities incurred by semi-governmental organisations such as Hellenic Railways (OSE), or the estimated EUR 700 mln early retirement package rejected by the government for Olympic Airways, and OA’s state aid issue? None of these are on the Central Government's balance sheet, and all are more important financially than this interest rate swap.

· The fact that the government’s numbers in the Stability and Growth Agreement do not add up, even before the recent GDP growth downgrade to -2% in 2009?

· The fact that the freeze in public sector incomes is a limited measure, not a permanent measure, and that no redundancies or productivity improvements are foreseen?

This is not to discount the importance of the Goldman deal. But there have been many other similar deals done, including ones which were more recent.

It seems to me that, judging from market reaction to the Eurogroup/Eurofin’s meetings Monday and Tuesday, and by the quality of the reporting in Bloomberg, Reuters and other sources, that the international media is moving on to other news. On the one hand, this is good, since the quality of their reporting is often very superficial and sensationalist. On the other hand, without the spotlight of international media coverage, and whatever limited investigative journalism it can deploy, will the Greek government take any substantive steps to solve the problem? Can we really rely on European Union monitoring to solve the myriad issues of Greek debt and their underlying causes?

My feeling is that we cannot. The EU has issued plenty of warnings to Greece before: it seems that George Papandreou only really got his act in gear after the WEF meeting in Davos.

Yet the danger in the proposed measures of the government is their temporary nature. The freeze, or reduction on public payroll, is a temporary measure. There are no provisions for an essential reform of the public sector, investments in productivity (including pay), or streamlining the bureaucracy. Indirect taxes have been marginally increased, but it remains to be seen if they can be collected. Some taxes, such as the revised ETAK (which goes by the marvelous acronym of FMAP), remain generous: properties with an “objective value” of EUR 400,000 or under are entirely tax-free.

The total spending impact of the freeze/reduction on public sector payroll has been variously estimated by different sources. According to my own estimate, it will not yield savings of more than EUR 1-1.5 bln, which as a temporary measure is hardly sufficient. Let’s not forget that, however much we dislike the public sector, most official salaries are not that high, and barely constitute a living wage. And what reaction will these worthies take to supplement their income? Probably the same actions they are taking now.

Besides spending cuts, the government needs to improve tax collection. Here, despite initiatives such as audits of doctors and lawyers, the forecast does not appear very positive. What are the taxable results of these audits? How will the government audit over 1 million “freelancers” or independent workers? How will it audit the hundreds of thousands of small shops, hotels and restaurants which depend on tax evasion to round out a fundamentally uncompetitive business model?

These are unanswered questions, and ones of generational importance, and for which real solutions have yet to be found.

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