Changing the General Business Environment in Greece

The main problems faced by Greece remain a large and dominant public sector, and an adverse business environment for the private sector. Unless rapid structural changes are made to this business environment, it is difficult to envision how Greece will be able to compete in the future, let alone handle the challenges of managing its public debt.

Today, few of the business closures or sectoral difficulties evident in Greece are the result of the Troika’s structural adjustment programme. If we take sectors such as tourism, construction, shipping or retail (which are the mainstays of the Greek economy), the main problems are due to public sector taxes and distortions, as well as inevitable economic changes which have long been taking effect.

Some examples are seen below:

Construction Sector

a.     The construction industry was formerly a powerhouse of the economy, comprising over 7% of GDP in 2006-2007. Since then, the sector has seen a major decline, with a resulting impact on high unemployment. The origins of this “crisis” are in fact driven in the first place by the change in taxation of property which took effect on 1 January 2007. All buildings with licenses after this date, and all transactions after this date (with some exemptions) became liable for a VAT rate of 18-19%. This touched off a classic boom-bust cycle, with a spike in construction licenses issued prior to January 1^st, 2007 (which made these buildings exempt from the new VAT rates). This stock of new buildings hit the market between 12-18 months later. Most urban centres in Greece have an oversupply of new buildings, which cannot be absorbed according to normal supply and demand.

b.     A further distortion in the construction sector is the adverse impact of high social security taxes (44% between employer and employee) and the resulting use of low-paid, black market labour, primarily immigrants. To insist on social security taxes of 44% is economically irrational in Greece, given that there is so little value returned from the public health or retirement system. This is a major reason why there is so much illegal labour in the sector.

c.     Today, very little is being done by the government or the Troika’s structural adjustment programme to counteract these two distorting taxes. In fact, the new environmental and zoning regulations recently passed make things worse. If Greece wants to see a recovery in this area, it should reduce both the VAT and social security taxes, and loosen the town planning requirements of a 4,000 m2 land plot for buildings outside urban zones. The entire town planning and building codes should be rationalised and revised.

Tourism

a.     Greece is an important  tourism destination in Europe in terms of arrivals per capita. The recent crisis, as well as the wider economic crisis and exogenous factors such as the decline of the British Pound have seen declining arrivals and expenditure per tourist. Moreover, these arrivals are far below potential. If we compare Cyprus or Singapore to Greece, for instance, we see that it is possible to achieve a ratio of arrivals to permanent population of 4:1. In Greece, this would amount to at least 40 million tourists per year: the highest number Greece has been able to attract peaked at 17 million arrivals per year.

b.     Arrivals will only occur once the product is developed to correspond with a more diverse and demanding customer segmentation, but also once the price:quality relationship is rationalised. There are urgent issues to address in product development which have remained unaddressed: golf courses, marinas, conference centres, and integrated tourism resorts all insufficient or inadequate.

c.     The licensing process for new hotels, marinas or golf courses is a major disincentive to development. Major projects have been cancelled or delayed for this reason, depriving Greece of new products and badly-needed sources of investment and employment.

d.     Transport infrastructure (ports and airports) has not been properly developed. This is an issue of both quality and quantity. Regional airports need urgent upgrading to handle direct international charter flights and seasonal flights from source markets. The potential of Thessaloniki as a regional multi-modal transport hub has been ignored for too long. New airports are needed in areas like Igoumenitsa and the Peloponnese.

e.     Employment in the tourism sector will remain seasonal, so issues of staff transfer, retention, development and employment need to be addressed—among them the futility of a 44% social security tax, and the institution of flexible work time.

f.      Higher tourism arrivals require a stable, long-term marketing campaign and professionalism among the public and private organisations in the market. Neither exists. Greece spends far more on agricultural subsidies each year than on tourism promotion, despite the fact that the agricultural sector is less than one-fifth the value of the tourism sector.

g.    There has been an uncontrolled policy of subsidising hotel investment over the past 20 years. This has had the unforeseen result of an oversupply of small hotels (5-20 rooms). These are usually under-capitalised and run by families with no professional experience or background in hotel management. This oversupply destroys market quality and pricing power. These units operate on a seasonal basis, using low prices and often create a negative brand image. They rely on untrained or unmotivated family members or black labour, and have little economic future without resorting to tax evasion or unsustainable working conditions.

h.     As with other sectors, we see almost nothing being done to address these issues. The policy commitment to turn over regional ports and airports over to private operators for long-term lease could yield results, but it has not yet materialised, and there is no apparent effort to link this with strategic business development or investment attraction. Yet the tourism sector offers the greatest chance of short-term growth in GDP and employment in Greece, and given the unrest in Egypt, Tunisia and other countries, it’s clear the government is missing a major opportunity.

Retail

a.     The retail sector shows some of the greatest investments, but also some of the greatest changes needed, in Greece. Over the past 15 years, the sector has been revolutionised through the entry and expansion of big box retailers as well as specialists ranging from Public and Marks and Spencer to the development of large malls and high-end outlets such as Golden Hall, The Mall, etc.

b.     While these investments have by and large been successful, this has had an inevitable competitive impact on the small family retail points which used to be the backbone of the Greek middle class. Such stores are still present in all neighbourhoods of Greece: few of them are doing particularly well.  For many, the financial value of their inventory (their cost of goods sold) is far higher than the value of their sales turnover. Yet the transition is unstoppable.

c.     Additional structural challenges exist in this segment: in the past, loans were given based on hard assets which were collateralised (e.g. a family apartment). Such liquidity is no longer available, and in any case should not be extended given the business potential of most small points. Many of them are housed in inadequate retail space: average floor space is low. Many are undifferentiated: they offer largely the same products at the same prices. Few of them are computerised; few have a stock control or customer relationship management programme; few have a website. The same problem with social security costs exists, leading to a high use of illegal or part-time labour.

d.     In short, far too many small retailers are operating according to the same playbook as they were in the 1970s. Yet both customer expectations and competitors have changed. We can predict a far higher liquidation rate of small businesses of this sort, with an attendant impact on unemployment and GDP decline. There is little that can be done here, except to make the playing field more attractive for those companies and entrepreneurs that are able and willing to invest further.

Shipping

a.     The major problem with shipping always has been that the Greek government does not offer an attractive investment regime for companies which are based in Greece but do the large majority of their businesses abroad. In addition to high taxes, Greek regulations sabotage the sector by imposing outmoded requirements on shipping crews and obscure rules of cabotage. As a result, the number of ships sailing under the Greek flag continue to fall, while those registered in offshore jurisdictions continue to rise.

b.     The sector is further weakened by Greece’s inability to develop clusters of excellence for service professions such as ship chandlers, brokers, maritime insurance specialists, finance, and others. As a result, most major shipping companies and professions are based in London or other international centres.

c.     The strength of unions and extremely poor public sector planning and services (e.g. a corrupt Customs service) has damaged Greece’s ability to development multi-modal shipping hubs or duty free zones, which would enable certain areas to become high value, high volume transport and logistics nodes.

d.     As with the other sectors, we see nearly no movement on what should be a series of logical, strategic steps to develop this sector.

So what is to be done? I will cover general (structural) recommendations here, and cover sector-specific recommendations in the following days.

Corporate Taxation and VAT

1.     Reduce the tax on corporations (Societe Anonym) to the same tax level as limited liability companies, partnerships and individual enterprises to 20% in 2011 and 15% in 2012.

2.     Tax dividends from corporations and limited liability companies should be taxed at 5%, with no further personal taxation.  

3.     Reduce the VAT on construction, real estate purchase or transfer and building materials to 10%. Allow additional exemptions from VAT for families, first-time home buyers, etc.

4.     Reduce VAT on tourism services to 10%. Eliminate all other indirect taxes on tourism.

5.     Develop an International Business Company legal form. Enable companies which are registered in Greece, but gain income exclusively outside Greece, to pay a reduced corporate income tax to 5%. This is an expansion of the existing Law 89 regime. Eligibility includes a EUR 10,000 minimum paid-in capital, requirement of 1 full-time employee and a permanent office. Encourage the establishment of corporate headquarters units, shipping companies, and other international firms or their subsidiaries in Greece using this IBC regulation. Assure proper infrastructure and support, e.g. all documentation and registration online, in English language, with immediate processing of visa requests and other requirements.

6.     Develop an International Shipping Centre to highlight the IBC corporate form and host ancillary services.

Labour Taxation and Social Security

7.     Reduce the social security tax from 44% to 20% of the gross wage, splitting this equally between employer and employee (10% / 10%).

8.     Enable flexible labour arrangements. Allow each worker to choose where they will register (OAEE or IKA) in line with their own requirements and desires.

9.     Assure that part of each worker’s social security is personal and portable by setting up individual retirement accounts. Transfer all social security functions online and enable each user to see their contributions, social expenditure incurred and likely pension levels and pay-in requirements. Enable the selection of doctors and clinics online. Assure all documentation in Greek and English.

10.  Develop a real labour inspection function to ensure that the current widespread abuses seen in the private sector are effectively and immediately punished with high fines and future business closure and asset seizure. 

Investment Promotion and Incentives

11.  Restructure the Hellenic Investment Promotion Agency so that 50% of its share capital is from the government, and 50% is from private sector organisations (chambers of commerce & industry, the Society of Greek Industrialists, etc.).

12.  Develop transparent procedures for the promotion of specific investment opportunities. Ensure that the President and Vice-Presidents of this agency are recruited independently; are not a civil servants, and have a contract based on performance and results, monitored by the Board of Directors.

13.  Spend at least EUR 100 million per year promoting Greece as an investment destination.

14.  Develop a list of priority sector and specific investment projects, available online and promoted internationally.

15.  Provide scaled income tax incentives (exemptions) for investments at all investment levels, starting from projects as small as EUR 100,000, and provide a real “fast track” investment licensing regime for this.

16.  Develop a business / investor’s visa and citizenship scheme. Make it easier for companies to bring skilled labour and management into Greece (it is currently nearly impossible for citizens of non-EU countries). Make it possible for non-EU nationals who want to live in Greece year-round to gain residence permits easily and effectively. Specifically:

·       Grant fast-track residence permits to all investors and their families who purchase a property of at least EUR 300,000 in Greece.

·       Grant fast-track residence and work permits to investors with specific investment project with a value of at least EUR 1,000,000

·       Grant fast-track residence and work permits to company staff, where the employer can demonstrate the need to bring in high-value, skilled managers and labour.

·       Grant the right to fast-track citizenship for investors and their families who invest over EUR 50 million in Greece.

·       Grant fast-track residence and work permits to individuals of Greek descent and their immediate families.

17.  Eliminate all military service requirements foreign citizens of Greek descent.

Building and Town Planning Codes

18.  Fundamentally restructure the building code to make it simpler, eliminate bottlenecks and provide for energy-efficient building. Develop a pro-growth building code.

19.  Revise the Urban Planning code to encourage growth in specific areas. Incrementally transfer public land, via long-term lease or sale, for development.

Most of these recommendations can be implemented within 6 months. They should all be implemented in 2011. 

Media and the Greek Debt Crisis (ii)

Today brought about yet more examples of sloppy analysis from international media on the Greek debt crisis and its supposed impact.

Bloomberg led off with a rather absurd article entitled Euro Crisis may hit East European Recovery with the statement:

Eastern Europe’s economic recovery may be scuttled by any Greek debt restructuring, which would curb lending by western banks and undermine investor bets that have propelled the region’s stocks, bonds and currencies.

To suggest that the Greek debt restructuring is at fault for what is undeniably a difficult international credit environment is absurd, and I speak from enough personal experience in bank portfolio audits and due diligence studies in the region to confirm this personally.

In the Baltics, for instance, credit growth has resumed, but will remain restricted given the disastrous GDP growth conditions and the fact that most international banks, notably Scandinavian and German ones, have suffered major write-downs as a result of over-heated real estate investments. Greece has absolutely nothing to do with this: it’s an independent economic cycle.

In the Balkans and former Soviet Union, credit expansion remains limited for a wide range of factors, not least of which is the fact that Greek banks have a leading market share in the region. Despite this, Greek and other banks are lending, but in a very difficult market environment: rule of law is incredibly difficult to enforce and there are hundreds of thousands of corporate loans which are non-performing, but where assets cannot be seized. Inflation is rising again and while hard-currency loans are at a premium, fewer and fewer creditors have foreign-currency income to handle another potential currency devaluation.

In Central Europe, the economic record is mixed. Although economic growth is strong in Poland, the government itself is anxious to prevent unsustainable credit growth, and faces internal debates about its own public debt. In the Czech and Slovak Republics, the issue is less credit growth or availability as it is the fact that these two economies are too dependent on a few manufacturing sectors and in particular to the German market.

So let’s be clear: if the writers of this Bloomberg article think that Greece is to blame for the credit allocation decisions of western banks (or even multilaterals such as the EBRD or the IFC) in eastern Europe, they are wrong. Credit scoring and loan reviews have become more stringent everywhere as a result of the 2008 economic collapse and the real estate bubble. Greece is hardly a factor.

This is confirmed by the fact that according to most estimates, only EUR 70 bln in Greek government bonds remains in the hands of private banks world-wide: a miniscule amount compared to credit stock in eastern Europe. It’s also miniscule compared with international exposure to Irish private sector debt. But I don’t suppose this is a factor.

Another glaring error was heard this afternoon on France 24’s English edition. I was amazed to hear Dominique Strauss-Kahn referred to as the “saviour” of Greece. This was certainly news here: someone should call up those unionists and tell them to stop blaming the evil IMF and instead start strewing rose pedals at the feet of Poul Thomsen when he next visits George Papaconstantinou. They can play the Arcadian lyre while they’re at it, and maybe weave crowns of grape leaves and eat dried figs.

Silly buggers. I’m not sure who’s stupider: the unionists or the media that comes up with these ridiculous stories in the first place.

Why any number of reporters suddenly believe that because DSK was caught in flagrante delicto or worse with a New York city chamber maid, the Greek economy plummets is beyond me. Can we not accept a Greek economy where millions of rational, economic actors make voluntary transactions every day independently of the IMF Director’s sexual escapades?

If not, I’ll turn my office into a gamistrona and give DSK, Baroso, Trichet, Schauble, and all the other great financiers, including that clever fellow from Luxembourg, free access so they can get on with it, and thus Greece can survive. 

Once again: Greece’s credit policy is largely in place until early 2012. The best thing that could happen to Greece now is no new loans. Let the structural adjustment process take its course, keep the pressure on the government, and stick to what’s been agreed.  

And for those erstwhile journalists out there: it would be far more beneficial for all involved if you did some cursory analysis of the underlying situation rather than trade office gossip. It's not even that difficult, since all major banks have quarterly earnings statements, and you can clearly see what loan write-downs and what credit decisions have been made. 

Hellenic Debt Crisis – Progress Report

It has been over one month since the last entry in this blog. Unfortunately, I’ve been hit by conflicting emotions about the utility of continuing any further posts on the debt crisis, either in Greece, or the United States or other potential countries affected by this issue. The fact remains that amidst the cacophony of opinion online and offline, any single comment adds very little to the debate and much to the white noise and misinformation.

This past month has also seen an unusual recurrence of maudlin pessimism and scandalous rumour-mongering. Comments submitted to English-language periodicals in Greece such as The Athens News or Kathimerini’s English edition verge increasingly on the misinformed or the lunatic. The Greek press has been fully caught up in this process, with journalists who enjoy unparalleled access to government sources publishing a constant, daily forecast of government failure, fuelled by the deliberate sabotage of any reform effort by many of the opposition parties in Parliament.

Much more disturbingly, there is increasing evidence that the reform effort is being derailed by what can only be described as sloppy foreign media reporting and/or financial speculation. Two salient examples in the past month indicate this:

·        Some weeks ago, a rumour was started that Citibank had forecast an imminent restructuring of Greek government debt, which would have been held around Easter time. This rumour apparently originated in one of Citibank’s Asian offices. Despite government promises of an investigation, nothing more has been published. The rumour was sufficient for yet another spike in Greek bond rates and CDS prices.

·        Two weeks ago, Der Spiegel’s online edition published a rather hysterical article about a secret meeting in Luxembourg during which Greece’s exit from the Eurozone was being discussed. This appears either a case of journalistic hysteria (which has not been absent from international reporting about Greece), or deliberate misinformation. Despite denials from all parties involved that a Greek exit was on the agenda, this rumour has apparently entered mainstream debate, and I have lost count of the number of friends asking me when Greece will exit the Euro.

At one point, the process of any turn-around project becomes self-defeating, as the internal resistance to change overwhelms that small minority of elected or corporate officers who are working for change. While I don’t think we have arrived at this point yet, it’s clear to me that the number of people who really understand what the Papandreou government is trying to achieve is becoming more limited by the day, while the scandal-mongering and rumours surrounding what should be a largely technical issue has reached unprecedented heights.

Political conspiracy? Financial speculation? Poor journalism? All of the above? It’s difficult to quantify or qualify. Let’s take a brief look at what has changed in Greece over the past month.

1.      The EUR 50 bln Privatisation Plan

The full details of this plan remain to be published, as does the timeline. However, we are looking at a combination of a partial sell-off of government enterprises, with the public sector retaining a share and/or management, as well as a sell-off (rental / leasing) of government property. This includes privatisation of Hellenikon airport; private management of ports and airports; further sales of government stakes in key parastatals such as OTE, DEH, EYDAP; partial privatisation of the Agricultural and Postal Banks, etc.

What’s new about this?

It would present a major roll-back of the public sector from major areas of economic life, and as such is, in my opinion, urgently necessary on the grounds of basic economic rationality. The corruption, incompetence and low objective return-on-investment of government shareholdings in areas such as gambling (through the OPAP monopoly) or power generation and provision (DEH) has been clearly documented.

Moreover, it’s the first time the government is actually discussing economic figures of the necessary dimension to effect a real change to the economy and to the debt. The proceeds of this privatisation will be used to purchase Greek government debt on the open market: given the 40% discount on government bonds, a EUR 50 bln privatisation income could result in buy-backs of EUR 70 bln in debt, which would be a major and welcome achievement. From my viewpoint, Greece would be able to achieve this target by 2017-2020, but should also set as a goal the attraction of a further EUR 50 bln in additional foreign direct investment in a number of key areas.

Challenges

The challenges remain those expressed in earlier posts (e.g. The Unrealistic Outlook for Greece’s EUR 50 bln Privatisation Programme, February 18, 2011). On the one hand, the low valuations on the Hellenic Stock Exchange means it will be difficult to achieve fair market value for the privatisation of government companies. On the other hand, internal political resistance to privatisation will be difficult to handle. In neither of these two issues does Greece represent an exceptional case.

Likely Future Developments

While I have commented negatively on many issues of the PASOK government’s decision-making processes, the commitment to a privatisation on this level is one of the most courageous decisions made in Greece in the last 50 years. PASOK has a generally positive track record in privatisation achieved under the Simitis government, although in many cases this was not a full or optimal privatisation process (It has been neither full nor optimal in most countries where strategic privatisation has taken place, so in this respect Greece is not much different from other European or North American countries).

Nevertheless, the fact that both the Troika has been pressing for a specific timetable, and the fact that some elements within PASOK itself have shown the political courage necessary indicate that not every decision should be discounted. What we need to see are results, and the fact that a new bail-out package is apparently on the horizon and will be linked to a specific privatisation programme is positive.

The issue of privatisation of semi-governmental organisations is the rock which may break the back of PASOK. The ‘deep PASOK’ owes much to union militancy, and billions of Euro have been made in the shadowy nexus of public procurement and semi-governmental organisations over the years. This is the single greatest political challenge the current government faces. Not land sales or leases: semi-governmental organisations.

2.      Repaying the EUR 340 bln Debt

The main problem which remains is how the EUR 340 bln in debt will be repaid. It is increasingly clear to all that this will be a largely impossible task under the present conditions of the bail-out package. The objective of a market return in 2012 for EUR 26-30 bln in Greek debt will be impossible. Press reports now indicate the likelihood of a second bail-out package on the order of EUR 60 bln, linked to further specific structural reform.

What’s New About This?

It is the first time the Troika partners accept that the current plan is unlikely to be implemented as planned, and that additional public money will be needed. Alternatively, a default and restructuring should take place. Any such default would have major negative consequences primarily for the domestic banking system: addressing this issue has still not been done.

As a parenthesis: it’s important to differentiate between the fate of the Greek public sector debt and that of the ‘real economy’ – households and companies. The public sector represents at least EUR 75 bln of spending (counting the central government, pension funds and semi-governmental organisations) out of an official economy of EUR 225 bln. The public sector only assures about EUR 50 bln of income, leaving EUR 20-25 bln to be financed by deficit spending. If the public sector is cut off from the international debt markets, the impact on a cash flow basis is about EUR 35-40 bln. It’s a big number, and it will adversely affect vulnerable groups, but it’s a manageable hit to handle.

What is less clear is how Greece would survive a banking collapse. Greek banks depend on ECB loan refinance. Their exposure to government loans is estimated at EUR 46-50 bln by various observers; their own capital is estimated at EUR 29 bln. The difficult scenario, therefore, is not what happens if the government is starved of loan capital, but what happens to the real economy if Greece’s companies and households face such an event.

Challenges

The main challenge to a ‘rational’ public sector solution involving a future bail out is the increasing political resistance to ‘north-south transfers’ by member states of the Eurozone. I believe that the most likely solution will be a second Troika bail-out in 2012, linked to further specific targets and an updated conditionality package. It is likely that the Troika will have to use the existing EFSF: the Eurozone’s contribution would be about EUR 45 bln, which should be manageable (unless Spain is hit by contagion as well).

The second challenge is what has already been addressed in this blog: the fact that the current payment schedule of even one third of the bail-out package makes it nearly impossible to forecast a positive outcome. (See for instance The Good News from Brussels—and the Problems which Remain. March 12, 2011).

Likely Future Developments

The wider political / financial objective of the initial bail-out package is clear and is in place: a long-term substitution of public financial guarantees is bailing out the European banking sector’s exposure to Greek government bonds. Various observers currently place exposure among international private banks to Greek debt at about EUR 70 bln, far lower than at the beginning of the crisis.

I believe this trend is set to continue, until an orderly restructuring can be conducted in 2013 or 2014 under ESM. This restructuring will likely comprise a ‘voluntary’ extension of loan maturities to at least 20 years and a lower interest rate. In some cases, it may include a haircut of 20-25% of bonds held by private creditors: this is still a vast improvement over the existing 40% discount on the open market.  

However, this scenario depends on the international financial environment as well. The greatest threat on the horizon is no longer a Greek default, which would be minor, but the financing problems we can forecast for Belgium, Italy, Japan, the United States and other countries who have reached a 100% debt-GDP ratio or have surpassed it. The financing problems faced by Portugal or Greece in terms of public debt are minor compared to what will probably happen in 2013-2015 internationally.

3.      Public Reform Process

The general attempt to reform the public sector continues. Among the challenging pieces of legislation implemented include a proposal to streamline public sector salaries, to cut additional central government guarantees to non-performing semi-governmental organisations, and to increase public sector working hours from 38 to 40 hours per week. The pension reforms have been implemented, raising retirement ages and pay-in periods: this was a major reform which, though incomplete, required a major act of political courage.

The main problems in the reform process continue to exist:

·        Much of the public sector refuses to implement many of the reforms.

·        There are major delays in procurement and implementation: the installation of an electronic procurement system, for instance, is fragmented across various ministries, and beset by technical and deeper problems.

·        Many decisions are taken not in light of what is efficient, or what Greece should look like 3-5 years in the future in order to compete, but in light of political expediency. It is impossible, for instance, that the head of the Forestry Service would gain the same salary as the head of the government-owned gas distribution company, but that is the case required by this new law.

·  Corruption has still not been addressed. Despite the recent ‘movement’ against Akis Tsohatzopoulos, the former Minister of Defence, nothing has been done about the myriad additional cases of corruption in the private sector.

·      Regrettably, the enforcement of private sector conditions of employment has been abandoned. I see major cases of employment abuse on a daily basis: in bakeries, where staff are required to work 7 days per week, 10 hours per day at one national chain; in gas stations; in small retail points.

·     The government continues to misunderstand the requirements for attracting foreign direct investment, and as a result not only cannot attract any headline deals, but risks undermining its privatisation targets. It is critical that the political and permanent staff responsible be replaced and a real investment strategy be put into place. It’s clear that unless this happens, the rest of the reform effort will founder.

In short, there is not much new in the previous month. The case of Greece remains one of high expectations and a glaring divide between reality and idealism. The lack of any real public relations plan and investment attraction strategy means that the foreign and domestic press steamroll Greece every day online and off, yet the government does little to respond. Outrageous statements are made in The Financial Times, the New York Time, CNN or other media by journalists who don’t understand the situation, which are never rebutted. This feeds into a vicious circle which daily makes the process of reform ever harder. This is a long-term weakness in the Greek government (irrespective of political ideology) and the country is and will pay a high price for it.

Internally, it’s clear that not all ministers are working at the same intensity, or are following the government’s policy. The lack of a more forceful response by the Prime Minister is regrettable. And there continues to be a basic lack of understanding of how the real private sector works.

And finally, there appears to be a total absence of negotiation or reubuttal internationally. It remains unclear whether anyone realises that Greece’s commitment to fully repay its debt is at the core of the current crisis. If Greece had followed the same debt restructuring strategy as Argentina or Sweden, the crisis exit would be shorter, although the current situation would have been far worse. The fact that Greece accepted as a loan conditionality (a) not to default or restructure, (b) to comply with the original debt payment schedule and (c) without being able to devalue or adopt a tariff strategy, remains an exercise in making foreign private creditors whole, and in removing any sort of moral hazard for the international banking sector that scrambled to lend money without a proper due diligence in the first place.

I would be very interested to see what would happen if CNN or the New York Times made the same statements about Deutsche Bank, Societe General, or other private creditors that they can apparently make about Greece with impunity. The double standard is alive and well in mainstream journalism, and it’s too bad nothing is being done to address this.

Delays in the Greek Tax Collection System

I dropped by my accountants’ office and had a word with the lead partner earlier this afternoon. He was surrounded by files and tax declarations and had a resigned look on his face. This is what he told me:

The Ministry of Finance only recently activated the MOF website for personal tax declarations. By recently, he means about 2 days ago, and the site is still beset by bugs and slowdowns. This is despite the fact that personal taxes can be filed since February.

He was wondering how the Ministry expected to address the deficit if there was a 2-month delay in getting the website operational for tax declarations. His office alone (2 accountants) had over EUR 250,000 in personal income tax ready to submit.

To make matters worse, he showed by a folder full of bank cheques (money orders) for tax payments from his clients. In the absence of a functioning website, the Ministry issued a circular stating that individuals can submit their tax declarations in person at the Tax Offices (ΔΟΥ), using a paper-based form and a banker’s cheque.

So he’s been going to the tax office for the past 2 months, but the staff there refuse to accept either the tax declarations, or the payments. They say “We are not responsible for this–you have to submit through internet.” No matter that a circular has been issued. My accountant suspects it’s because the staff at the Tax Office would have to manually enter the data on each form: this takes 3-4 minutes per form.

He also said that the MOF had still not issued instructions on collecting the 2009 real estate tax, or the 2010 tax on large real estate holdings. The value of these taxes are extremely high, and in a period of deficits, he was understandably wondering why they just didn’t go ahead and start collecting these taxes.

His conclusion:

a.      Despite the fact that Greece is in an unparalleled financial crisis, the front-line staff of the Ministry of Finance—the Tax Office—are well-paid civil servants in permanent positions who basically don’t give a damn about doing their jobs professionally or looking after the good of the country.

b.     That as long as this mentality exists, whatever promises Greece makes to the Troika will be impossible to keep.

I can’t say I can find anything in this conclusion to disagree with. I’m just wondering why nobody does anything about it. 

The Libyan “Liberation”

Greek public television channel NET aired a programme called “Ανταποκριτές“ (“Correspondents”) yesterday night dedicated to the conflict in Libya. The guests included NET’s correspondents in Libya and Egypt Panos Haritos (who covered both events) and Giorgos Alpogiannis.

The segment led off with an interesting statement, which I translate and summarise here:

“The first symptoms of the manufacture of news occurred three weeks ago, when we arrived in the town of Ras Lanuf. We were informed that Quaddafi’s forces were about to attack Brega, about 100 km behind us. Since this would have left us exposed on the front line, we got back in the car and returned to Brega. Colleagues in Benghazi informed us that international media were reporting that Brega had fallen to Quaddafi, and that his air power had played a major role in the attacks. I told them that we were in Brega: the situation was calm, the rebels were there, and that what I was reporting was in front of me.

Brega certainly did not fall that day. However, on that day, the UN Security Council began the imposition of a no fly zone on Libya.

On March 19^th, another incident took place. A large media channel reported that Qaddafi forces were attacking Tobruk during the night. After hard fighting in the early morning hours, the town was recaptured by the rebels. Together with my colleagues at the hotel [in Tobruk], we waited to hear a reconfirmation of the news, because we didn’t believe our ears. Tobruk was taken and recaptured in an all-night battle, which none of us heard.

On March 22^nd, the following digital video footage was released, showing a Grad rocket attack on Benghazi. The foot was purportedly taken from the cell phone of a Qaddafi soldier, killed in the air strikes of March 19th. Where this was filmed, we cannot tell: it could be anywhere. What is certain is that Benghazi was attacked with mortars, tank guns, anti-aircraft guns and automatic weapons. Grad missiles were never used against Benghazi. If they had, buildings would have been levelled, and the city would have looked like Grozny in the second half of the 1990s.”

Obviously, I am in no position to confirm their statements. The fog of war means that inevitably mistakes will be made by journalists and generals everywhere. I therefore won’t repeat or endorse their conclusions about the Libyan conflict, although I believe they are worth listening to. Unfortunately, NET does not publish archives, but you can see the introductory fragment of the show on Youtube for as long as it remains posted there.

What I will do here is list some of my own impressions of this conflict:

·         The alacrity with which France and then the UK determined that Qaddafi “must go” was remarkable, and in great contrast to their responses in other cases.

·         During the critical time period when it was reported that Qaddafi was “massacring” Libyan civilians there was no footage such massacres or their aftermath, in contrast to Rwanda, Srebrenica or Kosovo, and despite the presence of hundreds of journalists on the ground.

·         The evidence on which the Security Council decision to impose a no-fly zone on Libya (on the basis of a humanitarian intervention to prevent a dictator attacking his own people) has never been publicised.

·         During the entire conflict, I have yet to see TV footage of a “pro-Qaddafi” military-strength formation in action. This is despite the hundreds of Western journalists and TV crews embedded on both sides of the conflict.

·         Apart from the release of the Lockerbie bomber Abdel Basset al-Megrahi, the United States, the United Kingdom, France, Italy and a range of other countries have had nothing but praise for Muammar Qaddafi recently. A US diplomatic cable leaked by Wikileaks (and published in the Asia Tribune) describing a 2009 meeting between Senators John McCain and Joseph Liebermann describes this relationship:

3.(C) Characterizing the overall pace of the bilateral relationship as excellent, CODEL McCain opened its August 14 meeting with National Security Advisor Muatassim al-Qadhafi by noting the drastic change that the relationship had undergone over the last five years. "We never would have guessed ten years ago that we would be sitting in Tripoli, being welcomed by a son of Muammar al-Qadhafi," remarked Senator Lieberman. He stated that the situation demonstrated that change is possible and expressed appreciation that Libya had kept its promises to give up its WMD program and renounce terrorism. Lieberman called Libya an important ally in the war on terrorism, noting that common enemies sometimes make better friends. The Senators recognized Libya's cooperation on counterterrorism and conveyed that it was in the interest of both countries to make the relationship stronger. They encouraged Libya to sign the Highly Enriched Uranium transfer agreement by August 15 in order to fulfill its obligation to transfer its nuclear spent fuel to Russia for treatment and disposal. [Note: The Libyan Government subsequently informed us of its intent to sign the agreement on August 17 and has begun taking good-faith steps to do so

·         According to The Telegraph (24.11.2010), it appears that BP has influenced the al-Megrahi prisoner release in the influence of a Libyan deepwater oil deal. BP signed a $ 900 million exploration and production deal, initially believed to be worth $ 20 billion. Since the initial deals, however, progress in oil development has proved slow. As reported in the Financial Times (23.08.2010):

Recent exploration efforts have, however, proved disappointing and have dented the optimism that accompanied the return of international oil companies to Libya after the final lifting of sanctions in 2004.

“We are coming up to the end of a five-year period where there has not been a lot of notable exploration success to point to,” said Ross Cassidy, Libya analyst at Wood Mackenzie, the oil consultancy. “Results have been poor when you compare with what was expected and hoped for.”

Big oil companies piled into Libya, competing for blocks in four licensing rounds held between 2005 and 2007, lured by the promise of an under-explored country that has the largest proven oil reserves in Africa. So far they have little to show for their huge investments in recent years. Offshore, only Hess reported finding hydrocarbons that can be developed commercially, in its Arous el Bahr well.

·         Most of Libya’s oil and refining infrastructure was or is in rebel-controlled areas.

·         There is no apparent exit strategy for this conflict. The fact that Muammar Qaddafi is not being actively targeted, and that a future political settlement may include both a rebel-held territory in the east and a pro-Qaddafi territory in the west, makes little sense on ethical or humanitarian grounds. It may make some sense in looking at the map of oilfields in the previous point.

·         NATO is a military and political alliance which historically and traditionally has been developed for the defence of Europe. None of its Member States face a material threat from Libya. It’s involvement in this conflict, apart from its obvious capabilities, is questionable.

I do not have an opinion as to who is right or wrong on the Libyan invasion; nor do I have evidence of a conspiracy or anything else which might explain things. Whether Libya was invaded to save Libyan civilians or President Sarkozy’s poll ratings or BP’s oil leases is unknown to me. Certainly, I am no supporter of Colonel Qaddafi, and have no business interests in Libya.

What I am certain of is that this intervention is one of the strangest I’ve seen in the last 20 years. Together with the 2003 Iraq invasion, there appear to be a confluence of motivating factors which are perhaps only tangentially related to the supposed cause of protecting civilians from Qaddafi’s air attacks.

Where this leaves a world struggling to deal with vital issues of human rights, national sovereignty or the rule of law is beyond my capacity to understand. The logical and legal conflicts of interest in this case are self-evident. As more and more such precedents build up (Kosovo, Afghanistan, Iraq, Libya), it becomes painfully apparent that these will be used or misused in the years to come.

And at the end, it appears that only one rule remains: that of survival of the fittest. Colonel Qaddafi and his oil and arms contracts were feted in Paris, London, Rome and elsewhere for years. In February-March 2011, he was apparently no longer sufficiently useful, and Libya was invaded under the guise of a no fly zone. Where this adventure will end, and what consequences it will have 5 or 10 years from now, remains to be seen. 

On Beer, Waste and Sugar

Reading the news today, two articles caught my eye in Kathimerini:

Beer

The first is that the Athenian Brewery, the brewer which produces Heineken and Amstel in Greece, and the company which the New York Times improbably cast as the villain in a recent article on entrepreneurship in Greece, was voted the best place to work in Greece in a survey implemented by the ALBA Business School. Re-reading the NYT article, I was struck again by how outlandish the claims are. Evrypides Stylianides, a former ND minister, is quoted as giving the example of a Greek law giving donkeys the right of way on Greek roads.

Memo to Mr. Stylianides, and to the NYT: I have never seen a donkey claiming the right of way on Greek roads. If you do, I suggest you use your own considerable good judgement on how to proceed.    

Waste

The second is the order given by the Interior and Environmental Ministries to regional administrations to—once again—close 63 illegal landfills by June. The story of landfill closure is a recurring one, since a modern integrated waste management system based recycling of organic and inorganic waste does not exist anywhere in Greece. The result is that landfills are “buried”, but then new sites started in remoter areas. We see this quite often driving through Boetia and Fokithas Prefectures.

Reading this article, I had to ask myself, given these headlines, how this new order, together with the continuing chaos in Keratea over the waste disposal site there, reflected on Prime Minister Papandreou’s plans for the Mediterranean Climate Change Initiative. 

“But change will be difficult,” I hear his supporters admonishing me. “Rome wasn’t built in a day. The journey of a thousand miles begins with a single step.” This is no doubt true. But the fact of the matter is that even today, there are no steps being taken for an integrated waste management / waste disposal site anywhere in Greece. Such a site would include:

·         A medium-scale recycling facility, which would serve industrial customers by selling waste paper, glass, plastic and various metals (mainly aluminium). There is sufficient industrial demand within Greece for these products; there is also major demand among export customers.

·         An organic waste treatment facility, which would turn organic household waste into compost and energy through biogas. This energy would either be sold into the municipal grid, or used to power the recycling facility, depending on output.

·         A municipal-based recycling collection network, enabling the recycling plant to be located in close geographic proximity to the waste production and collection points.

The main problem, of course, is that household and municipal recycling remains a government monopoly, and remains based on inorganic waste. There is only one state-owned recycling company in Athens, for instance, which has signed exclusive contracts with most municipalities. Yet there is no economic reason for this, particularly when we see just how inefficient the waste collection and treatment system is.

The number of “green” garbage skips which are for general garbage, for instance, far outnumber the “blue” ones which are for general recyclable materials. (There is no primary separation at the point of collection on a wide scale; there are very limited collection points for glass bottles, paper and aluminium, which do not begin to meet demand). On several occasions, I’ve seen municipal garbage trucks adding the recyclable skips to their loads, together with the organic refuse. The recycling truck rarely comes by most neighbourhoods: the skips are constantly full and overflowing.

All this points to a latent demand for recycling. The quickest and surest way of meeting it is not to expand yet another inefficient public enterprise, but to license private sector operators for municipal recycling on a planned basis, allocating a number of operators per specific geographic areas in a first phase, and then allowing proper competition in a second phase. This would require a change in zoning laws, as well as the possible provision of public land. But there is no reason this could not take place within 6 months, if the political will were in place. This would not only create employment and attract investment, but would go a long way towards allowing Greece to comply with EU environmental regulations–which it has signed, but never implemented.

Perhaps after the first baby steps towards modern waste management have been taken, the Prime Minister could return to the Mediterranean Climate Change Initiative and purport to give other countries a lesson in how to save the environment.

Sugar

On the other side of the ideological spectrum, To Vima reported on Sunday that the Hellenic Sugar Industry (EBZ) was finally being put up for sale by the state-owned Agricultural Bank of Greece. According to “Vima”, EBZ has seen losses of EUR 84.05 mln since 2005, and this year faces a further loss of EUR 10 mln in the best case scenario. It employs 424 staff (far more than would reasonably be expected) and purchases sugar at EUR 41/tonne, versus EUR 32 in the “rest of Europe.” Part of this cost difference comes from the fact that it grants seeds and pesticides at 20% below cost to its network of 6,000 families involved in sugar beet cultivation. EBZ apparently sells refined sugar at EUR 800/tonne, versus a European market price of EUR 600 per tonne.  

EBZ appears to be yet another one of hundreds of inefficient state enterprises and organisations which remain funded or subsidised by the Greek government, and thus the taxpayer (as well as various international creditors). It would really be better for all involved if both the primary production of beets were restructured (or the fields replanted), and domestic refining stopped entirely, at least at current commercial practises.

The domestic market price of refined sugar at EUR 600/tonne is a protectionist measure for European farmers established by the EU’s Common Agricultural Policy. The 2010 average world price for white refined sugar, Europe FOB using spot prices, was about $ 609/tonne, or EUR 470 per tonne. But import tariffs meant (and still mean) that that same sugar which you buy at EUR 470/tonne could not be sold at less than EUR 600/tonne in the European market. And EBZ doesn’t produce it for less than EUR 800/tonne, nearly twice the market rate.

If Greek sugar beet producers are producing at EUR 41/tonne versus a European price of EUR 32/tonne, and if the cost of refined sugar is EUR 200 more per tonne than the EUR 600 market price, then there is no way this boondoggle is every going to make money.

The sale of EBZ should be done as soon as possible: alternatively, it should be liquidated. The sale of the Agricultural Bank of Greece should occur as soon as possible as well.

I am sure some people will ask: but what about the 424 staff at EBZ? What about the 6,000 families producing sugar beets? My answer is that we—the taxpayers and consumers in this country—are already paying for their lack of competitiveness through a high sugar price and Common Agricultural Subsidies and who knows what other direct or indirect subsidies. In the previous 6 years, EBZ has run up EUR 84 mln in debts—nearly EUR 200,000 per worker.

If they can’t survive despite all this aid, then they should find another job to do, and fast. One would hope that the job of the government isn’t to bankrupt a country on behalf of a series of small special interest groups. This is precisely the type of industrial logic which has led Greece into a EUR 340 bln debt, and we can no longer afford it.