Sunday 29 May 2011

Proposal for a Solution to the Greek Debt Crisis

This past Monday, the Greek government announced one of the most politically courageous additions to the structural adjustment programme ever contemplated in Greece. If it can be implemented, it will represent—for the first time since this crisis began—a real chance at escaping from the debt spiral in which Greece finds itself.

The measures include the following:

a. An further EUR 6 bln in expenditure cuts and revenue additions in 2011;
b. An further EUR 22 bln in expenditure cuts and revenue additions between 2012-2015
c. A privatisation programme at EUR 50 bln, of which approximately EUR 35 bln represents real estate holdings.

As has already been stated, a main challenge in implementing this programme will be the low market values and the perceived political risk of Greece. Political resistance will also play a role.

Nevertheless, this is the first time that numbers of the correct order of magnitude have entered the debate since the debt crisis began in late 2009. The Troika’s insistence that a separate agency, partially staffed by foreign experts similar to Germany’s Treuhand, is also a good idea and should be pursued.

We should also note that even an implementation of 100% of this programme by 2015 will not be sufficient to handle the debt payments expected from 2013 onwards.

It is therefore suggested that:

a. Any future bail-out to Greece should be linked to a voluntary debt roll-over of public sector debt. This would require existing creditors to roll-over current bonds at the same interest rate and maturity. In exchange they should have the opportunity to exchange approximately 25% of the current debt at nominal levels. (EUR 230 bln debt @ 25% = EUR 57.5 bln). This will gain Greece an average of 10 years on its existing debt load, which will be enough time for the structural reform efforts to take effect.

b. Any future privatisation revenues should be used to purchase debt on the open market. Taking into account the average 30-40% discount on most debt, this would enable Greece to retire approximately EUR 66 bln in debt (in 2011 present value—this does not include future interest, and it assumes 100% of the privatisation target is attained).

c. Greece should immediate launch a private sector investment programme, targeting specific sectors for development. We believe that an FDI programme of EUR 80 billion in the next 5 years is possible, providing the adequate tax and investment incentives were in place. Among the immediate investment programmes which should be launched include:

• The creation of an International Shipping Centre and an International Company Centre, enabling companies registered in Greece with activities abroad to benefit from a low corporate tax rate. This would be similar to the incentives Cyprus and the UK offer, and is feasible, given the existing Law 89 framework.

• The launch of hydrocarbon exploration in the Aegean, Ionian and Mediterranean Seas, targeting fields similar to Leviathan discovered in Cyprus and Israel.

• The replacement of Greece’s lignite-fired power plants with natural gas CHP plants.

• The loosening of restrictions on housing development (particularly targetting vacation houses), including a reduction of the minimum land area for building from 4,000 m2 to 2,000 m2, and the reduction/streamlining of bureaucratic requirements thereof. We believe it is feasible to attract investment for 10,000 houses per year with a nominal value for EUR 2.5 bln per year if this were done correctly.

d. Greece should immediate launch a tourism promotion campaign, with a spend of at least EUR 250 mln per year, aimed at increasing incoming tourism from 15 mln tourists in 2010 to 20 mln in 2015 and 25 mln in 2025. This should be accompanied by a progressive fall in VAT on tourism and construction employment and services to 10%.

I believe that, despite the negative reactions in press and media, that the larger middle class has remained broadly unaffected by the current austerity programme, and that the country as a whole is prepared to accept additional measures. The demonstrations which apparently count for so much in the international media have not, until now, managed to halt any significant reforms.

I therefore believe that the government should accelerate the pace of reforms. The main barrier to this is clearly the internal political limitations of the PASOK party and its individual ministers and supporters. However, this barrier is not insurmountable, and much more can be done.


  1. Intriguing propositions. I must disagree to an extent with the belief that the middle class has remain unscathed. Anecdotal evidence in my social circle has revealed unemployment, pay cuts, and lifestyle changes that are far reaching.

  2. Dwain, thanks for your post. Permit me to generalise:

    The average middle class family with two children in Greece will have an income of about EUR 3,500-4,000 per month, at least 30% of which is undeclared. Anything below this net income level is not middle class: it’s lower class.

    This family will have at least two houses, a main residence and a vacation home, that are probably declared at less than half their value, meaning that they pay no property tax, and that they didn’t have to explain where they received the income to buy the property in the first place.

    They will have received abundant support from their parents, usually in the form of property transfers or inheritance.

    They will send their children to private lessons, athletic lessons and private healthcare, on which they do not pay VAT because they prefer to receive these services at a lower price.

    They receive an income tax deduction on their first EUR 12,000 of income.

    If one of them is an entrepreneur or business owner, you can be certain that at least 30-40% of their real turnover is undeclared, and therefore untaxed. You can be sure that if this profession involves the sale of goods, it is done without declaring their fair purchase value, again to avoid VAT (and for their suppliers to avoid income tax).

    If one of them is a lawyer, doctor, or dentist, you can count on them having an annual income of at least EUR 200,000, of which they probably declare EUR 35,000 – 40,000. Or even lower.

    If one of them is an accountant or notary public or architect or civil engineer, you can almost be certain that they are fully aware that their clients are breaking various laws, and are assisting in the process.

    So, yes, they may be affected by the austerity programme in some ways (the most visible one is the fuel tax, but this was offset by the rise in the income tax-free threshold from EUR 9,000 to 12,000 that this government passed last year).

    I could go on, but the reality is what I describe. I am certain there are exceptions, but the fact of the matter is, I don’t know many honest people in Greece when it comes to tax reporting. Perhaps I should improve the company I keep.

  3. Construction is a very viable stimulus for Greece. This will improve public infrastructure leading to better services and generate jobs.