Some Progress; Major Problems Ahead

The latest monthly report on Greece’s budget implementation, which covers January – August 2010, shows that despite a small acceleration of revenue collection and an important reduction of expenditure, the government has a deficit of just over EUR 14 bln year to date.

This is a 33% reduction over 2009, and excellent progress, but it reveals two major weaknesses:

a.       Income has only risen by 2.8%, despite major increases in excise taxes on cigarettes, alcoholic drinks, fuel and certain VAT categories and more intensive tax auditing. This either indicates increased tax evasion and/or decreased expenditure on a massive scale.

b.      Total government debt continues to rise faster than the public deficit, due to transfers of debt from semi-governmental organisations such as OSE.

There are also a number of questions to ask regarding this budget statement:

a.       There are indications in the market that the government has not fully paid pack value-added tax (VAT) in arrears. Does the “tax returns” line represent full and fair value of the taxes which should be returned?

b.      There are press reports of further massive unpaid debts to the construction sector for public investment works, as well as a range of other unpaid bills. Have these been fully booked to the budget?

To the end of 2010, the Memorandum foresees a total deficit of EUR 18.69 bln. This looks like it will be difficult to reach: I would expect it to be closer to EUR 20 bln. This is higher than my original estimate of EUR 15 bln, but probably still lower than what may actually materialise. I'm using EUR 18 bln for forecasting purposes.

As of 31.03.2010, Greece’s public debt was EUR 310.4 bln, according to the Public Debt Management Agency. I forecast a real GDP fall of 5% in 2010, for a GDP of EUR 225 bln. Assuming additions to Central Government debt of EUR 31.8 bln, then debt-to-GDP will have reached 152% by year end.

This forecast may be wrong, but I’ve done everything possible to reduce total debt additions.  I’ve eliminated healthcare and other public organisations debt assumption for 2010, and included a “conservative” central government deficit of EUR 18 bln.

Many people maintain that the GDP decline may actually only be -4%. Unfortunately, all signs point to a worsening micro and macroeconomic situation. Industrial production has fallen by over 9% in QI-II 2010; retail sales have fallen by over 20%; tourism revenues are down by 10%. Over EUR 17 bln in cash deposits have apparently left Greece since the start of the year. Unemployment has reportedly risen to near 12%.

Even taking an annualised 5% inflation into account, it is hard to see how GDP will not fall by at least 5% in real terms, particularly given the 12% fall in primary government expenditure. I believe 5% in real terms may in itself be an optimistic forecast.

In this climate, the Prime Minister is set to deliver his “speech to the Productive Classes” (!) at the Thessaloniki Exhibition tomorrow evening. I sincerely hope he will announce plans to accelerate the implementation of what has been promised, but somehow I’m not convinced he and many of his ministers understand the gravity of the situation. As local elections approach in November, it seems to me that PASOK has moved from governance to electioneering, and we will lose yet more valuable time in implementing the needed reforms.

Dial 210-GET-CASH

In case you have been wondering why decision-making is slow at the Ministry of Economics, Competitiveness and Shipping…I found the reason in Florida this summer:

  Dial 210-GET-CASH

Taxes as Solidarity

«Ο φόρος για αυτή την κυβέρνηση δεν είναι χαράτσι, είναι αλληλεγγύη, γιατί οι φόροι με αυτή την κυβέρνησησημαίνουν ότι αυτά τα λεφτά θα πάνε εκεί όπου πρέπει. Θα πάνε για να στηρίξουν περισσότερο εκείνα τα κοινωνικά στρώματα που το έχουν ανάγκη,όπως βεβαίως και μια αναπτυξιακή διαδικασία». 

The tax for this Government is not a hike, it is solidarity, because the taxes [raised by] this government means that this money will go where it should. It will go to support those social strata  which need it, as well of course to a development process. "

George Papandreou, quoted in To Vima, 3 September 2010

No matter how hard Prime Minister Papandreou may be trying, he is failing. It is impossible to describe the rage, the cynicism and the disgust the average citizen or resident of Greece feels when she or he reads this kind of statement.

For years, our taxes will go to pay off a gargantuan public debt. For years, we have been receiving sub-standard public services in every domain, from education to security and from healthcare to telecommunications.

For years, taxes are being taken from those who pay them, to those who do not: farmers, teachers, civil servants and other special interest groups who enjoy full pensions, subsidies, easy work conditions and long holidays, which they have not paid for.

For years, the political parties have raided public procurement, amassed bribes and kickbacks, which they have never been forced to return or account for. After years of investigations of the “structured bond” scandal, the Siemens scandal, the Vatopedi scandal, no one is in jail, no money has been regained. The number of “hidden” scandals which are not being investigated can be counted in the hundreds.

The corporate sector and the middle class in Greece are being destroyed by direct and indirect taxes on the one hand, and higher costs of living on the other. The average middle-class professional pays over 50% of his or her total wage in direct and indirect taxation, providing of course they declare it.

The lower income groups face the prospect of hunger, rising unemployment and declining social mobility. Greece, with all its talk about social solidarity, has the least effective spending on social policy, according to European Commission studies. Which means the money is wasted, or ill-spent.

Kathimerini’s editorial comment today describes my sentiments exactly.

State needs to change, not taxes

Prime Minister George Papandreou said yesterday that citizens should not view the imposition of more taxes as another slap in the face but, rather, as an act of solidarity.


Had he been talking about some other country, one in Northern Europe perhaps, where the revenues from taxes go toward helping the more needy members of society, he would have been right. As things stand, however, taxes in Greece go toward propping up a wasteful and corrupt state apparatus.


Citizens would surely have no problem paying higher taxes if they could see the benefits, if they saw a crackdown on tax evasion and an improvement in state services. Right now all they see are their contributions getting bigger as the state continues to waste and fails to make the changes necessary in crucial areas.


Under these circumstances, of course Greeks see taxes as a slap in the face and they will continue to do so until things change and they feel that the state is on their side and their money is being well spent.

ELGA: The Latest Addition to Greek Public Debt

The news announced on September 1^st 2010 that the government is assuming responsibility for the Hellenic Agricultural Insurance Organisation’s (ELGA) debt of EUR 3.8 bln was yet another indication that Greece’s public debt will swell far higher than its deficit this year.

As part of its fiscal restructuring plan, the government is either choosing to or being forced to take on the debt of a number of semi-governmental organisations (DEKO), such as the Hellenic Railroad Organisation. By my count, which is certainly incomplete, Greece will have “added” the following debt in 2010:

·         EUR 3.8 bln ELGA      

   

·         EUR 6 bln healthcare settlement

·         EUR 10 bln OSE debt assumption

·         EUR 2 bln other public organisations, guaranteed by the government

·         EUR 15 bln government deficit (this is my assumption: the government needs EUR 25-26 bln in revenue to make up the Memorandum targets this year, but has delayed payments to a number of beneficiaries, so the net revenue estimates probably do not portray the true situation).

Total Debt Assumption: EUR 36.8 bln in 2010

I am not certain if the EUR 6 bln in the healthcare settlement is already on the debt books or not. By the same token, it is impossible to know if the ELGA debt was already counted on Greece’s central government debt balance, or within its wider public sector debt. Judging by the language used

The most recent estimate available for central government debt is provided by the Greek public debt management agency, which provides a 31.03.10 figure for central government debt of EUR 310.4 bln.

It is difficult to understand whether the healthcare settlement is included in this or not: the healthcare announcement was made on 16.06.2010, so presumably it is not. Similarly, the OSE announcement (26.06.10) and the ELGA announcement (01.09.10) would also not be included in the EUR 310.4 bln estimate.

There is currently another EUR 1.2 bln in unpaid healthcare debt this year, while certain payments due for military procurement, public sector construction, public sector staff salaries, and certain pension funds are also rising and have apparently not been made.

If Greece’s debt on 31.03.2010 was EUR 310 bln, by the end of 2010, we can assume that total debt will have risen to EUR 347.2 bln.  

Taking into account a forecast GDP decline of 5% (my estimate), Greece’s GDP will be EUR 225 bln, and its debt:GDP ratio will be 154%.

Of course, tax collection may improve, expenditure may fall further, absorption of EU funds, and privatisations may occur, reducing the overall debt load. But this is difficult to imagine given the current economic conditions. Exacerbating the situation is the fact that much ministerial activity appears to have stalled over the issue of impending regional and local election, while the prospect of rapid absorption of EU funds has been tossed about for months now, but has not occurred.   

It is impossible to know how much other “hidden public debt” is in the system. The IMF recently announced that a Greek default was “unnecessary, undesirably, and unlikely”.  While I hope they are right, I can’t help but question the data and assumptions they are using, since we are being treated to constantly changing numbers and lack the basic composition of Greece’s public debt.  

Living la Vida Loca

One of the nicest things about Greece is leaving it. If this sounds like a back-handed compliment, it is. Summers in Greece are usually crowded with loutish tourists and unwashed “entrepreneurs” driving suicide taxis or serving roadkill souvlaki. Unfortunately, this is what 20% of Greek GDP is based on, and the main reason I try to leave Greece for at least 2 months every summer.*

If it’s any consolation, there used to be one price for tourists and one price for Greeks. Now, there’s just one equally bad price, and equally bad quality, for everyone. I no longer have to explain to my international friends visiting Greece to be careful of atrocious food in Plaka or crooked taxi drivers at the airport: now everyone eats the same crap and pays the same high price.

I was lucky enough to spend a month in the United States in July, and nearly a month in France in August. I  returned to Greece two days ago and made the mistake to turning on the TV. What's happened since then? 

·         The Prefecture of Piraeus is suing the owner of a vacant lot in Spetses because this guy had the temerity to set up a metal stage for the wedding of Nikolaos and Tatiana. Apparently, he didn’t have permission from the town planning authority (although he did receive some other kind of permission), and because of that is being sued for EUR 296,000. This is from a prefecture based in a city which is congested, polluted, full of illegal cafes and restaurants and illegally-build apartments, and where drug dealing and prostitution occur openly every day and every night. But it was apparently a major violation to set up a metal stage – on someone’s own property – for 24 hours and the price of this “crime” is EUR 296,000.

·         ERT aired a hagiography of George Papandreou’s “Symi Symposium”. This features a group of largely like-minded caviar socialists and other beneficiaries of public money who gather every year to discuss issues like “Democracy and Globalisation”. This year, the leader of Germany’s Greens insisted that Greece invest more in trains, “because this is the future”, while our Prime Minister concluded with the statement to the effect that “people and solidarity are more important than Euros.” They certainly are, especially when it’s Other People’s Money. Our creditors will be laughing all the way to the bank with that one.  

·         I visited our local branch of the National Bank of Greece – the “steam engine of Greece’s development”, as it were. One teller was unhappily and unwillingly working, one teller was scratching his ass, and four other people were sitting behind desks, talking to their friends on the company phone or eating tyropittes. Welcome to Greece’s largest company.

·         A total ban on smoking in public spaces was introduced. Don’t even get me started on that one. Just because I’m a masochist, I’m going to start calling the police every time I see someone smoking in a restaurant. Since they no longer bother to show up for traffic accidents or burglaries, it will be a relief to see Minister Mariana Xenogiannakopoulou forcing them to fine smokers. I will also be sure to tell the tellers at the Halandri Commercial Bank branch that they can no longer smoke behind the counter.

Yes, I am in dark mood. It was a great summer, and it was great being in countries where customer service and professionalism count for something. In New York, for instance, I had to get a new Citibank ATM card issued: I was led into a spotless office by a smiling, clean service manager in a suit and tie who went over my file, looked at my ID, and issued a card on the spot, in less than 10 minutes.** Try doing this at Eurobank.

We sent a box of books from the Port St. Lucie Post Office in Florida to Athens. The facility was spotless. The line took less than 5 minutes, there were four people working, and the average processing time per customer took about 2-3 minutes. The staff were ultra professional.** In the Geraka Post Office, there will be 30 people in line, one person “working” (while two people scratch themselves), and it will take an average of 8-10 minutes per person processing time.

We drove over 2,000 km this summer, in Florida, Colorado, Arizona, Utah and Nevada. In all this time, not a single car beeped, tried to cut us off, burned a red light, or otherwise gave us a feeling that our lives were in danger. Drivers were actually friendly, everyone from the Celebration Wal Mart parking lot to the Florida Turnpike. Try driving 4 km from Geraka to the Atlantis sports club in Pallini (conveniently located next to the local cemetery) and see how that goes.

I start September one year older and a little bit wiser*** and with some new plans:

a.       I will not watch any more Greek TV.

b.      I will resolutely reflexively distrust or disbelieve any press release or announcement put out by the Greek government, or at the very least suspect that the true state of affairs is the opposite of what is being announced.

c.       I will keep my head down, focus on work, and delocate my company out of this country so when it (the country) finally does go bankrupt and collapses, I will still be able to provide for my family.

d.      I will eventually, perhaps in mid-September, creep out of my suburban bubble to a nice island like Naxos and, with the tourism madness abated, remember Greece as it used to be.

e.       I can’t wait until next summer.

But wait… weren’t these last September’s plans?

* At this point, I’m sure lots of people will try to convince me to the contrary: “But I know this great island called Astipalaia with really friendly people etc.” Don’t bother. I grew up here before mass tourism, Albanian waiters and lamb-chops-and-peas main courses in Corfu tourist traps, and I can assure you that since 2000 or so, travel in Greece is inevitably disappointing, or very, very expensive.  

** Let no one say the US government does not know how to provide considerate, professional service. Yes, Citibank may have nearly bankrupted the world; yes Post Office employees do occasionally rampage; yes, we may have invaded Iraq in the name of democracy. But hey, great customer service, guys. Honestly.  

*** Readers of this and other posts may question this assumption. 

A Financial Look Forward

Back in January, I forecast that the end of central bank quantitative easing would cause a contagion in sovereign debt in smaller, riskier markets (Greece, Ireland, Spain), and that the sale of public debt would be impossible to finance from purely market resources. (See my post The Coming Crash of 2010, January 19^th, 2010).

Unfortunately, my forecast on the sovereign debt crisis has been amply borne out by the events in Greece and other Eurozone countries. Yesterday’s announcement by the US Federal Reserve that that mortgage bond proceeds would be used to purchase about $ 10 bln/month in US government bonds, confirm that QE will have to continue into the future. 

Obviously, there is no choice. The US government needs liquidity, whether in the form of a vast public deficit, or in the form of additional balance sheet adjustments, e.g. by treating the Fed as a special purpose vehicle to off-load mortgage-backed securities. Most European governments face exactly the same dilemma. In the next months to the end of 2010, we will see the Bank of England extend its Asset Purchase Facility spending on UK government bonds, and the ECB continue to refinance banks and governments through various active measures.

The portents, however, are far more serious than we may understand by looking at isolated events:

a.       US GDP growth is ostensibly in positive territory, although I have yet to see a quantitative analysis of how much of this is due to government stimulus spending at various levels of the economy. For instance, while recent annualised GDP growth rates have reached 3%, we should not forget that the government has disbursed at least $ 400 bln in various stimulous packages per year over the past two years, or about 2.7% of GDP each year. Indirect indicators, such as inventory stocking and unemployment, seem to show that the recovery may be far more fragile than anticipated. Federal, state and local public finances are in a parlous state, and unfunded pension liabilities are rising.

b.      With the Euro in its expected rebound against the US dollar, I expect exports and general economic growth in Germany to slow. Although manufacturing orders and confidence have been surging, a quick look at the destinations of exports does not portend well for the future. Despite all the positive press about Germany’s successful economic model, we should not lose sight of the fact that this depends on healthy international demand for Germany’s high-cost exports. With the Euro rising, and with corporate and consumer spending endangered in most export markets, I do not count on the German export boom to last long at its current rates. Factoring in increasing incoherence in the German governing coalition, and the prospects of a change in government in the next years which would resume a labour-friendly policy, makes me “short” on Germany.

c.       In Japan, public debt has hit 200% of GDP. The first, small-scale measures to raise bond yields have been taken to somehow convince domestic investors to continue investing in public debt, but how long can this continue? Any crisis involving Japan, for instance a major earthquake, a problem with China or a spike in oil prices to over $ 100/bbl, will create a major problem for Japan’s exports and its public debt. Unless serious measures are taken, we cannot discount the possibility of a Japanese default in the next 2-5 years. Such an event would be less serious for Western banks, given that most Japanese government debt is held by domestic investors, but the shock-waves this would send through the system will be critical.

d.      In China, the government has started the process of cooling domestic growth through regulatory adjustments to the real estate sector and tighter credit limits. As Chinese imports slow, and overcapacity in most manufacturing segments reaches record heights, the risk is that China’s export-led growth miracle will no longer sustain high GDP growth. While this is a boon for Western consumers (overcapacity will result in lower prices or higher price competition by Chinese manufacturers), it diminishes the capital-intensive exports from the US, Japan or Europe to that country. China’s 2008-2009 response to the economic crisis of vast loan disbursals to national businesses have created the conditions for deflation in most manufacturing segments, which will also inevitably lead to great price pressure for European, American and Japanese manufacturers.

e.       The ECB’s policy on a range of issues, from the European banking stress tests, to quantitative easing, to repo window financing of European banks, is increasingly calling the regulatory framework of this institution into question. The problem is compounded by very real fears that three of Europe’s five largest economies—Italy, Spain and the UK—are facing a double dip recession, either due to retrenchment in public spending (UK), or due to adverse conditions in key sectors (e.g. Italian exports; Spanish tourism & construction).

f.        We are long overdue for an inflationary correction in certain segments. I anticipate energy prices to increase. This is a factor of growing population growth and adoption of the automobile (particularly in Asia), rather than due to any economic recovery. I anticipate an oil price spike within the next 6 months due to unforeseen factors: turbulence in Iran and the Straights of Hormuz, supply disruptions elsewhere. I also anticipate the resumption of food price inflation. The recent decision by Russia to ban wheat exports is but one sign of this.

So we are in something of a bind: the only way to get a modicum of economic growth in 2010 appears to be further QE and government funding. Yet apart from China and India, nearly every major world economy is reaching historically unprecedented public debt levels (in peacetime conditions). Most world leaders (Barack Obama, Angela Merkel, Nicholas Sarkozy, etc.) have decided to take cosmetic measures in deficit reduction, while hoping that the resumption of economic growth will lead to the recovery of public finances. Yet apart from the 8 years of debt reduction under Bill Clinton in the 1990s (a time which was arguably unique in US history), there have not been too many cases of fiscal responsibility in periods of economic growth.

All this occurs against the backdrop of major demographic change and a paradigm shift in the availability of fossil fuels and the location of global manufacturing capacity. These forces will magnify the deteriorating fiscal conditions of most countries in the years to come.

Unless real, structural reforms are undertaken to (a) fundamentally reform the public sector and its relationship with citizens in most countries, and (b) create objective conditions for growth and employment, most countries are in for a very difficult time. So far, I don’t see many signs that such reforms are being considered on the necessary level in Greece, the United States, or elsewhere. Instead, we appear to be dealing with symptoms of problems, rather than their root causes, and sowing the seeds of future crises.

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