The Good News from Thessaloniki

Perhaps for the first time since the present financial crisis broke, I see encouraging signs of progress in the way the PASOK government made its case at the Thessaloniki International Exhibition. The reasons for this are both due to what was said, and what was not.

On the tangible side: Both the Prime Minister and the Minister of Finance made an explicit case for continued reforms, including the liberalisation of closed professions, continued tax inspection, and public sector reform. Some of the interesting initiatives announced include:

·         A potential reduction in corporate income tax rates from 24% to 20% in 2011, accelerating the schedule of tax reform initiated by the Karamanlis government. This is potential, because the specific measure announced is to reduce the tax for reinvested profits or dividends, while the Ministry is studying the impact of making the measure apply to all profits and dividends from 2011.

·         A final tax assessment, or “closure” (περαίωση) under which companies and individual professionals will pay a fee for the final closure of tax years 2000-2009.

·         Additional employment support for up to 500,000 places of employment through a 50% (or subsidy) of social payroll taxes.

While these are not in themselves significant enough to engender an economic recover, they are encouraging signs that the government understands the need to improve the business and economic environment of the country, and support employment-creation measures.

Indeed, the President of the Hellenic Chamber of Commerce and Industry described these measures as “aspirin”, given the more competitive tax systems in Cyprus or Bulgaria. But we must reflect that one of the main sources of the deficit in Greece is the fact that companies and independent professionals do not pay their full tax assessment.

I therefore assess them as a net positive. The tax closure in particular is expected to result in EUR 2.5 bln in “additional” income being declared for the years 2000-2009. This has a double benefit, in that 25% of the tax must be paid as a downpayment, and that a large number of legal cases currently in court could be resolved through this settlement, freeing up the court system to address other issues.

If this tax closure does take place, the Ministry of Finance may be on track to achieving its EUR 18 bln deficit target in 2010. In addition to the extra EUR 500-2,500 mln from the “closure”, the Ministry will gather at least EUR 1 bln in vehicle circulation taxes in December, together with the QIII VAT payment in September-October. These could close the gap in deficit spending, although it is too early at this point to tell if these can be collected within financial year 2010.

The Thessaloniki was also notable for what wasn’t said. Contrary to expectations, there was only minimal pandering to the electorate in the form of government hand-outs. (We should make no mistake here: a tax closure, corporate income tax reductions and subsidy of payroll taxes are certainly a form of hand-out for companies).

Some additional measures announced deserve comment:

·         The Prime Minister confirmed that there would be no equalisation of VAT on heating fuel and unleaded gasoline, since a mechanism for social equity was not in place. If we read between the lines here, it appears that the choices will either include raising the tax on heating fuel to the tax on gasoline, or raising the minimum VAT level from 11% to 13%. This issue will be decided and postponed until 2011.

·         A range of measures have been announced to increase female employment. This is an area Greece needs to do much more work in, since it has among the lowest female employment rates in the European Union, and thus marginalises a valuable human resource for the country.

·         A range of initiatives on liberalisation of closed professions, streamlining bureaucracy, restructuring semi-governmental organisations, promoting investments, and other points were promised. Some important ones here include restructuring the court system to provide for the more rapid settlement of legal cases; privatisations; liberalisation of the energy sector; completion of a Single Payment Authority; bank sector restructuring; health sector procurement reform; and others.

These initiatives, should they be implemented, will be among the boldest and most far-reaching reform of the public and private sectors ever attempted in Greece

The first signs are small, but encouraging. The price of pharmaceuticals purchases has apparently declined by up to 25%, according to the Minister of Finance. The truckers strike, scheduled for Monday and Tuesday, has so far been dealt with firmly by the police, with the result that the truckers have not entered Constitution Square as they had in July. Four large renewable energy investments have been announced. A Coordinating Committee of key ministers meeting under the Prime Minister has been set up

The problem Greece faces, however, is not so much the scale of reforms, as the pace of their implementation given the scale of problems in total. For every reform announced, there seem to be 2-3 negative issues holding Greece back.

·         In the pharmaceutical procurement sector, for instance, despite the price reduction, the debt settlement for previous years has still not been implemented, and pharma providers are threatening to withhold supplies from public hospitals. There are press reports that unpaid pharma invoices so far in 2010 amount of over EUR 1.7 bln.

·         The truckers may be acting in a more civilised manner, but the entire issue of tax evasion and price setting in the petroleum refining, distribution and retail value chain will continue to be a barrier to the transparent development of this sector. Gasoline sales are being used as a tax collection mechanism; most filling stations operate at a loss on their primary gasoline sales.

·         In the energy sector, the fear is that the “liberalisation” is being accomplished in such a way that favours the entrenched monopolist, DEH, which has set up its own renewables firm with a EUR 2 bln budget.

·         Investments in the energy sector are taking far too long, primarily because the Renewable Energy Authority claims to lack staff. Of the four projects announced yesterday, the SunRay and EDF projects have been under study for 3 years; while the Rokas and Ellaktor projects for 4 years. The total value of these projects amounts to EUR 2.072 bln; the output will reach 835 MW.

·         The backlog of projects under study apparently amounts to thousands of MW: the danger is that, as in other EU countries, a main investment incentive is the ability to sell renewable energy to DEH (or other customers) on a “green tariff”. The experience of Spain, Germany and other countries, however, indicates that this green tariff may be too high under market conditions, and too high for the government to subsidise. A future change in incentives may therefore be necessary to prevent yet another “green bubble” from emerging.

Such reforms would be difficult to carry out even in a relatively healthy economy (as the public sector and pension reforms in the UK and France demonstrate). In a time of economic crisis, they are even more difficult.

But it seems that the reform train has left the station: let’s hope its momentum in the next months will increase, and tangible benefits start becoming apparent at the ground level in this country.  

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.