Greek Government reforms Pick up Speed

The reforms undertaken by the PASOK government some 9 months into its first term under Prime Minister George Papandreou are impressive. Although the government got off to a late start, and although it took a massive funding crisis to start the process, we should not underestimate the magnitude of the changes already passed, or under consideration.

Some indicative points I take with me as I leave for the United States tomorrow:

a. Greece is undertaking its first systematic inventory of employees in the public sector. Although this is difficult to believe, the exact number is unknown. In a next step, the conditions of employment in the public sector will gradually be harmonised.

b. Greece is undertaking its first comprehensive reform of the public and private sector pension systems, using actuarial forecasts and modern accounting principles. In contrast with previous efforts, this effort is being done with a full(er) accounting of liabilities and life expectancies than at any time previously. The principle of equal work and retirement conditions for male and female workers, and for workers in the public and private sectors, is at the heart of the pension reform effort. This is attracting major opposition from special interests which may bring about the downfall of the government. For the sake of Greece’s financial survival, the government must succeed. (The alternative to this reform would be to raise pension contributions and link these to incomes, which few taxpayers understand).

c. Greece is making a first serious attempt to measure and reduce its vast public sector debt. Initiatives underway, such as the resolution of medical sector debts (EUR 7 bln), construction debts (EUR 9.5 bln) and efforts to reduce the unrestricted expenditure of public sector organisations such as OSE (apparently EUR 11 bln debt) are gradually taking effect.

d. Greece is taking steps to reduce its operating costs and public investment budget. This includes a permanent component, which will come through the merger of local administrations and public sector units and a hiring freeze, as well as a temporary component, which includes salary cuts, cuts in overtime and extra compensation, and other reductions.

e. Tax reform has been announced and to a large extent implemented. Large numbers of independent, self-employed professionals such as accountants, lawyers and architects no longer pay a lump-sum annual tax irrespective of annual earnings. These professions are also being drawn into the VAT regime for the first time.

f. Greece is starting to cut down on tax evasion. Audits among doctors, public officials, offshore companies, and domestic companies are increasing and important cases of income tax evasion are being referred to the courts.

The government still needs to make progress in a number of important areas:

Public Sector Corruption
To date, there have been no substantial penalties for any public figures implicated in corruption scandals. A few cases such as former Defence Minister Akis Tsochatzopoulos, or former Transport Minister Tassos Mantelis, are under investigation. It remains to be seen whether these individuals will actually pay financial restitution for their crimes, or whether these incidents too will be somehow written off.

Public Sector Inefficiency & Corruption
The government needs to move to replace and prosecute members of the Hellenic Tax Authority, the Hellenic Customs Service, the Ministry of Health and the various hospitals which report to it, and a wide range of other organisations for continuing corruption and dereliction of duty. This will be difficult given the current conjuncture of events, but it is necessary.

Private Sector Tax Evasion
More needs to be done to combat tax evasion in the private sector. Initiatives which should be undertaken include a full inventory of Greek owners (nominal or nominee) of Cypriot offshore companies as well as a full investigation into asset ownership in Greece.

Public Sector Crisis Management and ROI
The government needs to develop a formal crisis management plan designed to restore the country to solvency and growth. This should be modelled on a private sector turn-around plan. Any and all government projects, whether in terms of investments or operating costs or policies, should be evaluated in terms of cost-benefit analysis and return-on-investment. Any non-essential expenditure should be cut.

Real Privatisation and Deregulation
Public sector monopolies in energy production and distribution, renewable energy, fixed-line telecommunications, transport, education, healthcare and nearly every other business sector continue to exist. A determined effort should be made to liberalise these sectors while regulating all players within each sector in a meaningful way. Some companies, such as OSE, should be broken up and liquidated or privatised, or a mix of both. The government has already started this process, and I was pleased to learn that loss-making rail lines are being discontinued or scaled back.

Development of Business Clusters and Vertical Policies
Rather than relying on growth through subsidies, the government should, in conjunction with the private sector, select a number of business sectors to develop vertical, export-oriented clusters. As surprising as it sounds, Greece does not have an industrial, export or investment promotion policy which is oriented on specific products or clusters. There is also no link between its policies for investment in education and infrastructure, with income-generating sectors or projects.

Examples of such clusters include agriculture, where too many products are exported in a whole fresh or IQF form, or the automotive sector, where Greece has almost no domestic production of any significant components or parts. Instead of scattering subsidies among thousands of small businesses, the government should address the needs of a vertical value chain expressed as primary production – processing – retail/export – supply chain. Greece needs to change the state-led mentality of “subsidies for the people”, which has resulted in far too many uncompetitive and under-capitalised micro-enterprises which are not commercially viable, and also in far too much corruption. Greece needs to invest in future industries (e.g. ICT and energy) rather than sunset industries (e.g. cotton cultivation).

Administrative Reform
Greece remains a country dominated by redundant administrative procedures which detract from efficiency and turn away foreign and domestic investment. The e-government initiatives started should be accelerated, and certain functions, such as investment approval, housing approvals, etc. should be placed online in the form of a “one-stop shop”, which includes licensing and regulation. This should be an urgent priority.

Investment Promotion
“Real” investment promotion must occur, driven not by subsidies, but by the reduction of administration and pointless procedures, tax incentives and credit guarantees. This should not be oriented solely on mega-projects which take years to materialise, but on small-scale projects as well.

My main concerns at this point in the process are the following:

a. Opaque Statistics
There is still too much uncertainty regarding the true magnitude of Greek debt, the true scale of public sector income and expenditure, and the debt payment schedule. Greece needs to publish, on a single A4 sheet of paper, its total liabilities, the impact of the various reforms being undertaken, and how this relates to its debt repayment schedule, e.g. from 2008 – 2020. Only then will investors have any degree of visibility over Greece’s fiscal position.

b. Ministerial Competence
Some ministers, such as Finance Minister George Papaconstantinou, are doing a stellar job. Others are practically non-existent, or sabotaging the wider government reform efforts. The Prime Minister should, after the passage of the pension reform bill next week, restructure his cabinet. This could include bringing in high-level ministers from outside the PASOK party environment. There are a whole suite of Deputy Ministers who have been selected on the basis of popularity and are doing practically nothing in their appointed jobs. Certain Ministries should be split and decentralised.

c. Propaganda
Related to this, the current practice of trying to “talk up” the economy should be ended. Recent statements by Minister of Tourism Pavlos Geroulanou on the decline of incoming tourist arrivals, or Alpha Bank President Yannis Costopoulos on the size of the 2010 GDP fall, are transparent boosterism, and give the impression that these officials do not understand what is happening in Greece today. It would be better to accept that Greece’s recession will be much more painful than predicted and that this will last into 2011. Greece will need to practice austerity for at least 10 years to work out even 15% of its actual debt burden.

d. Public Opinion
Unfortunately, the wider public understands neither the necessity of the reforms, nor their real impact. Acceptance of reform measures is minimal, and a feedback cycle is exerting itself in Parliament among members of PASOK. This endangers the party majority, and thus the government of Greece. It is hard to blame the public for its fury: the large majority of citizens have been minding their own business while a political and business elite have plundered the country. PASOK needs to explain what it is doing, and why. It should do this with numbers and information, not shouting matches on television windows. The level of misinformation is incredible; the quality of communication abysmal.

e. Punishment
If reforms are to be accepted and implemented, the government needs to actually punish the thousands of individuals and companies in the public and private sectors who have looted the country. This has to be done in a meaningful way, including asset seizure and imprisonment. To expel Akis Tsochatzopoulos from PASOK pending his investigation is not a sufficient act (although the legal investigation is theoretically underway). If dockworkers block a commercial port in contravention of the law, they should be arrested and prosecuted. The Siemens and Skaramanga and Vatopedi corruption cases should be investigated by the courts and legal action taken. These are simple, self-evident decisions which are taking far too long to implement.

f. Financial Sufficiency
My final doubt is whether all this will be enough. Measuring the added financial costs of debt service over the next three years adds up to more than the preliminary savings announced by the current reform plan. It is highly probably that absent an economic recovery (which no one expects), Greece will have to extend the bailout for at least another 3 years, and possibly restructure some debt (probably in the form of an interest freeze, or a lower interest rate). The restructuring of the debt for domestic creditors—notably construction firms and pharmaceutical suppliers—has already started.

Foreign analysts and observers have been quite concerned as to whether the government will be able to implement these reforms, or whether:

• The government will lose its parliamentary majority and fall, or
• Whether the country will dissolve into armed anarchy.

Either one of these options is possible, although the second option would probably not last long if it did occur. What is clear, is that there does not appear to be any alternative among the Greek political parties. New Democracy is clearly trapped in its own illusions and the morass of its past corruption. None of the smaller parties have a credible economic platform or the leaders needed to handle the crisis.

Many people therefore find themselves in the position I find myself: cross your fingers, and hope Papandreou succeeds. The reforms need time to take effect, and political upheaval at the present time is not in anyone’s interest. There is simply no alternative, since about 50% of Greece’s official debt is now in the hands of other Eurozone countries and institutions. I estimate that about 40-45% of the difficult decisions are behind us, but at least the process has started. Will it be enough?

EIB pours more money down the Greek Railway Drain

I was hit by a powerful sense of unreality in reading today’s announcement that the European Investment Bank allocated a EUR 2 bln loan for Greece, of which EUR 1 bln will be spent on rail investment. This including upgrading the Patras-Athens-Thessaloniki-Promahonas line, developing a railway node at Acharnes, a freight complex at Thriassio and a rail link to the Neo Ikonio Container Terminal at Pireaus.

It should be mentioned that OSE, the Hellenic Railways Organisation, has a debt of over EUR 9 bln. Its 2008 turnover of EUR 195 mln was far outstripped by its operating loss of EUR 794 bln.

I have not seen an investment plan, business plan or turn-around plan for OSE. The government claims it wants to sell 49% of the business, including the management, to a strategic investor. Unless the government takes over the debt, and backs the potential investor to reduce and replace staff, I fail to see who could possibly be interested, or how such a partial privatisation could work.

The fact that the government has recently been asked by the Troika to take OSE’s debt directly onto its balance sheet, rather than treating OSE like a special-purpose vehicle, only worsens Greece’s fiscal situation.

Unless this investment somehow translates into a major demand for passenger and cargo traffic between Pireaus, Patras and Thessaloniki, I do not see how it can possibly be justified on economic grounds:

· The high debt of OSE means that adding a further EUR 1 bln, for an investment project that will take at least 3 years to complete, and then will not easily result in a direct return on investment, simply seems irresponsible at this point in Greece’s development.

· If Greece is to take on more debt, it should target an annual ROI of at least 10-15% within the first 2-3 years. This means that the debt can be serviced quickly, the project can be implemented quickly, and the investment adds to national income, not national debt.

· Greece has not mastered multimodal transport hubs, and neither Pireaus nor Patras appear well-suited for such a hub involving a rail-road-port nexus. The fact that the major ports, with the exception of part of the Pireaus cargo terminal, are controlled by militant unions or unproductive state monopolies means that any development in these areas will be slow, expensive and uncertain.

· The terrain of Greece and the unstable geology along the northern shore of the Corinthian Gulf and the eastern coast of continental Greece means extremely high costs and technical risks, as well as recurring costs due to high maintenance and engineering costs.

· The presence of a national highway which is currently being upgraded, and the relatively short distances between the three cities, means that road transport is very competitive against rail. What alternative returns would have been gained by simply expanding the road network, or investing in road transport, which is in fact the objective of the 2 PPP contracts? Why split the potential ROI between two competing transport forms, and invest in double infrastructure (road and rail) along both routes?

I am also continually wondering why Greek and the EIB do not examine and back alternative, more productive investments?

· A EUR 1 bln investment in Patras, Corinth or alternate locations on the Corinthian Gulf, to create and integrated cargo and high speed ferries port as well as bonded warehouses, commercial zones and manufacturing sites similar to the Jebel Ali Free Trade Zone. Such an industrial, trade and transport hub would be much easier to reach from Athens, and can link directly to the Corinth-Athens-Thessaloniki national highways (which are already being upgraded through 2 PPP partnerships).

· A EUR 1 bln investment into Thessaloniki airport, creating a Balkan transport and cargo hub for the rapidly-growing Balkan countries plus Turkey, would enable Greece to compete against the regional hubs of Istanbul, Vienna and Munich. This would link into the Egnatia road, and hopefully into a modern port complex, which is sorely needed in northern Greece.

· A EUR 1 bln investment in renewable energy would bring far higher returns to Greece, both in terms of offsetting carbon emissions (for which Greece will soon be paying a financial penalty) as well as in terms of improving the trade deficit. Rather than importing oil at $ 80/bbl (or burning our high-sulfur coal), we would generate carbon-free energy.

· A EUR 1 bln investment in modern, large-scale agriculture using geothermal energy and modern greenhouse technology (which requires almost no pesticides or chemicals) would create a new export sector, improve the trade balance, and create many places of employment. Each 100,000 m² unit costs about EUR 20 mln, employs around 45 people, produces about 15 tonnes fruits and vegetables per day, and generates annual sales of about EUR 7-9 mln. This would literally revolutionise high-value agriculture in Greece, which could then be further valorised by investing in processing.

· A EUR 1 bln investment in a high-technology IT and energy incubator for entrepreneurs of any nationality who wanted to set up in Greece would lead to potentially world-class technologies which could transform the country in ways we cannot begin to imagine. While such an investment would have to be managed by several established sectoral VC firms operating under contract (of the caliber of Accel Partners, 3i, Kleiner Perkins, etc), this would show more than anything else that Greece is investing in the future, rather than in the hoary past of loss-making railway lines.

Instead, Greece continues to allocate scarce financial resources to a sector which is operated by a state-owned monopoly with impossibly high fixed costs and no competitive future. We expect OSE’s annual losses to continue, and see now way in which it’s debt can be repaid. Rather than privatising OSE, we should be liquidating large parts of it, and channeling any further financial resources into sectors with a greater future viability, far beyond the dead hand of the Greek state.

Related Links

First Steps in Consolidating Greek Debt: OSE/OASA

Thinking about Government II: The Role of OSE

First Steps in Consolidating the Greek Debt: OASA/OSE

Back in February, I posted on this blog that the Greek government had at least a further EUR 40 bln, and possibly up to EUR 50-55 bln, in debt which was not declared on the central government’s balance sheet.

Today Kathimerini reported that the “Troika” of the European Central Bank, IMF and Eurozone have finally gotten around to demanding that the debt of certain semi-governmental organisations be transferred onto the Central Government balance sheet. These are:

·         OSE, the National Railroad Organisation, who’s total debt will hit EUR 10 bln this year

·         ETHEL, the natural gas-powered bus network

·         HSAP, the electric tram line that runs from Pireaus to Kifissia

·         HLPAP, the trolley lines in Pireaus

·         OASA, the bus and trolley company for Athens and suburbs.

These organisations are estimated to owe at least EUR 12.5 billion, with their annual 2010 loss estimated at EUR 1.26 bln. They are entirely public sector organisations, and the debt is guaranteed by the central government.

If the Greek government accepts this demand, it means that Greece’s debt-to-GDP ratio will rise by at least 5.4% (assuming a minimum 4% GDP fall in 2010 to EUR 230.4 bln).

In turn, this means that Greece’s deficit in 2010 will be around 12-13%, well above the 8% target in the Stability and Growth Plan.

Together with the agreement in the hospital procurement sector, we can assume that approximately EUR 18-20 bln have been added to the central government’s debt so far this year. This means that, not counting current expenses and added interest costs incurred so far in 2010, the total national debt will now be approximately EUR 328-330 bln, or 143% of 2010 GDP.

In the meantime, the government has embarked on a political courageous process of social security reform, which contains many of the elements PASOK voted against over the past 5 years. They have also launched the process to consolidate public sector organisations which, though it will not result in the reduction of permanent government workers, will result in the reduction of temporary staff and theoretically some overhead costs.

These are all very necessary reforms, and long overdue. But they will not be enough to make a significant reduction to the public debt burden, and thus the annual financing requirement, by 2013-2014. The government will have to identify at least EUR 10-15 bln additional spending cuts or revenue raises per year to give Greece the chance to survive without a debt restructuring.

The government also needs to start acting faster. Particularly the Ministry of Economics, led by Dr. Louka Katselli, is not working anywhere near as fast as it should be. As a result, several key pieces of legislation have been delayed, while the absorption of EU funds is at extremely low levels.

This Ministry probably needs to be split up into 6 units if any of these sectors/functions is to operate effectively:

·         Shipping

·         Investment Promotion

·         Public Sector Reform / eGovernment

·         Economics / Competitiveness

·         European Union Cooperation

Normally, I am against fragmentation, but the inter-ministerial cooperation framework is so dismal in Greece, the only solution is a temporary increase in the number of Ministries until things get sorted out.

Related Links on Philip Atticus

The Next Greek Debt Discovery

Is the Greek Debt Media Reporting Wave Over?

Thinking about Government: The Role of OSE

Restructuring of Greek Debt Continues

General McChrystal and Afghanistan

I’ve just read Michael Hastings' Rolling Stone article on General Stanley McChrystal and America’s campaign in Afghanistan that yesterday resulted in his dismissal. It’s honestly been one of the most enjoyable articles I’ve read in weeks. General McChrystal sounds like a formidable Special Forces commander who probably never should have been put in charge of the campaign in Afghanistan. Not because he is unqualified or unsuited for command, but because the civilian authorities appear to be.

The paradox was that on the one hand, the US wanted a counterinsurgency strategy for Afghanistan, but on the other hand wants to do this by minimising civilian casualties and keeping military activities at a minimum. The two goals are admirable, but contradictory, at least in the way they have been translated into policy. For instance, the article described the reaction of troops at Combat Outpost JFM, who have been given laminated cards that say: "Patrol only in areas that you are reasonably certain that you will not have to defend yourselves with lethal force.” I’m trying, and failing, to think what part of Afghanistan that would be.

The article also points out a salient fact: that the main Taliban rear areas in Pakistan have been largely untouched by the ground campaign, except by aerial drone attacks. This means that, just as in Vietnam, the US army is fighting on behalf of a political leader with little apparent authority in his own country, while the enemy’s main force huddles in safety on the other side of the Pakistani border.

Add to this the fact that the surge has been slow in getting off the ground, and that it is timed to end next year. It seems that in terms of strategy, the campaign is bound to fail: all the enemy have to do is remain in the fight. By not losing, they win.

Either the US and its allies need to fight with every means at their disposal, or they need to find a way to reach some accommodation with the Taliban and withdraw. If these two options are unacceptable, then the campaign will continue as it is presently configured: an expensive and inconclusive effort, with no end in sight, and little possibility of victory. Hamid Karzai has come to precisely the latter conclusion, according to recent press reports.

As for General McChrystal: I got the impression of a tremendously competent man, a warrior, who should be out planning missions and kicking down doors than suffering through dinner in Paris. He sounds like a classic Special Forces officer in the impossible and undesirable position of managing a conventional war planned and stage-set from national capitals, against an unconventional enemy that he probably understands better than anyone else.

The “trash talk” so magnified by the press honestly seems insignificant. The group of officers in that hotel room were blowing off the not inconsiderable steam that comes from being in a combat zone. While it’s unfortunate their comments had to be relayed in this way, I’m sure hundreds of thousands of other American citizens, government employees and members of the Armed Forces share similar thoughts.

It’s also interesting to note the double standard at work. None of the comments made by McChrystal or his aides were as vitriolic as those made by one senator against another in the 2008 Presidential race. Or by one senator against the President in a State of the Union speech. Both senators and generals are supposed to be leaders, and both are paid by the government, right?

When do you remember a US senator ever resigning for something they’ve said?

Time for a Margaret Thatcher Moment

Dear Prime Minister,

This morning, and all through today, a group of about 100 dockworkers from 2 small unions of marine employees are blocking the departure of several high speed ferries from leaving the port of Pireaus.

This is despite that fact that a court ruled that the strike was illegal. Hundreds of tourists, businesses and ordinary citizens were prevented from boarding ferries to get to the islands. Besides the inconvenience to ordinary citizens and the damage to Greek enterprises, the damage to Greek tourism and Greece's public image are devastating.

To add insult to the injury, television broadcasts showed policemen protecting the dockworkers by pushing away the hundreds of unhappy travelers who simply wanted to board and get on with their journey. Why are the police protecting an illegal strike against the legal rights of Greek citizens?

Either Greece will be a country governed by anarchy, where the ordinary citizens and tax payers are systematically held hostage by a small group of corrupt special interests and dead-enders. Or it will be a country governed by the law, where society and the economy are allowed to operate unhindered by blockades and special interests.

It’s your choice.

Please act soon. We are all waiting.

Sincerely yours,

Philip Ammerman

Hello Stagflation

The Hellenic Statistics Authority (ELSTAT) released quarterly and 5-month economic statistics yesterday which make for grim reading:

· Inflation (CPI) in May 2010 is up 5.4% year-on-year

· GDP fell by 2.5% in QI 2010 (temporary figures)

· Unemployment rose to 11.7% in QI 2010

· Industrial production fell in April 2010 by 5.1% over April 2009

· Construction fell by 35% in March 2010 over March 2009.

These figures are worse than expected, and can be forecast to continue into the future.

The CPI increase is due mainly to the VAT rise as well as excise taxes on fuel, cigarettes and other items. Only about 1% is estimated to by underlying CPI. With the price of oil predicted to top $ 80/bbl this summer, and future tax rises in the works, we can only assume that inflation will continue to rise, despite the dismal economic situation.

The increasingly present danger is that Greece enters a period of stagflation for the next 2-3 years. A combination of economic stagnation (GDP contraction) and high inflation, this is potentially the worse outcome for a government struggling to implement its Stability and Growth Agreement. It means that basic consumer products become more expensive at the very time when economic activity is less, and unemployment increases.

Figure 1 shows monthly CPI and unemployment figures in Greece from January 2004 – March 2010, sourced from ELSTAT. It’s interesting to note that the period January 2004 – July 2008 appear to be a classic “Phillips Curve”, or an inverse relationship between unemployment and inflation. (The original Phillips Curve was the relationship between wage growth and unemployment). Right in July 2008, however, at the height of Greece’ tourist season, things start to fall apart: unemployment gives a mysterious jump upwards, while inflation peaks and starts to fall.

It’s interesting to note that at roughly the same time, the price of oil collapsed from about $ 140/bbl in July 2008 to below $ 40/bbl in January 2009. Figure 2 shows Greek unemployment and CPI, with an added plot of WTI crude prices in $/bbl on the right axis.

That was also the point where Greek GDP started to fall precipitously. In September 2008, Lehman Brothers collapsed and the credit crisis began in earnest. Figure 3 plots GDP (annual change, current prices) with unemployment and CPI. The GDP figures are temporary and subject to revision.

Looking to the future: most economic analysts indicate a GDP decline of between 2-4% in 2010, followed by a further decline in 2011 and possibly 2012. Assuming a continuing inflation rate due to taxes, oil prices and other factors (such as food prices), it’s clear we are in for a very difficult 2-3 years.