Are Greece’s creditors really loan sharks?

I’ve lost count of the number of times I’ve heard Greece’s creditors referred to by local media and politicians as usurers or loan sharks (τοκογλύφους). According to Meriam Webster, a usurer is defined as a person who lends money and requires the borrower to pay a high amount of interest

The idea that Greece’s debt burden is too high is at the centrepiece of SYRIZA’s political promises (to implement a haircut of 50% of the total debt; to restructure the rest and link it to GDP growth).

But what does it mean for debt to be unmanageable? And who is responsible? There are no fixed definitions here, but let’s look at a few interesting points.

Greek Debt and Interest Rates

The current Greek debt level is listed by the Public Debt Management Agency at € 321.7 billion as of 30 September 2014. According to the provisional 2014 Budget Execution Bulletin by the Greek Ministry of Finance, Greece’s 2014 central government expenditure was € 54.967 billion, of which interest expenditure was € 5.569. Therefore, two key ratios* are:

·       Effective Interest Rate: 1.7%

·       Interest Share of Central Govnt Expenditure: 10.13%

United States Debt and Interest Rates

The United States Federal Debt was approximately $ 18 trillion at the end of December 2014. According to Wikipedia, US Federal Government expenditure was $ 3.77 trillion in FY2014. According to TreasuryDirect, the United States paid $ 430.8 billion in interest costs in FY2014. Therefore, two key ratios* are:

·       Effective Interest Rate: 2.4%

·       Interest Share of Central Govnt Expenditure: 11.6%

Comparing Greek and US Debt Costs

Just to make sure the full import of these calculations is understood:

·       Greece has a lower effective interest rate than the United States on its public sector debt.

·       Greece pays a lower share of its annual government budget to service the interest on that debt.

	Greece	United States
Government Expenditure	€ 51 bln	$ 3.77 tln
Interest Costs	€ 5.57 bln	$ 430.8 bln
Effective Interest Rate	1.7%	2.4%
Interest Budget Share	11.0%	11.6%

So are Greece’s creditors loan sharks?

If we assume that Greece’s creditors are loan sharks, then we need to make the same assumption for all buyers of US Federal debt.

In a word, no, they are not. There is nothing usurious in an effective interest rate of 1.7%. Particularly not when Greek 10-year bonds are yielding 9.36% on 10-year GGB today.

Why can’t Greece Manage its Debt?

So the question remains: if Greek effective interest rates and debt service amounts are lower than in the United States, why can’t Greece manage its debt?

The first obvious reason is political instability. To put it mildly, the latest tactics and statements from both SYRIZA and New Democracy have caused investors to shun Greek debt as well as Greek equities since September 2014. And rightly so. The result of these tactics is a necessary and perfectly understandable aversion to lending more money to the Greek public sector.

The second reason is government incompetence in the area of tax collection. This is seen in at least three major examples:

a.     In April 2014, there were € 68 billion in private sector and household taxes owed to the government which could not be collected.

b.     In recorded instances of tax evasion, notably the Lagarde List or the list of Greeks who purchased property in London, successive governments have refused to do a systematic tax audit.

c.     The resignation of the Director for Revenue Collection Haris Theocharis in mid-2014, and the refusal of the government to appoint a new director, as well as recent distortions in the Greek tax code, indicate the true state of affairs. 

The third obvious reason is that Greece hasn’t reformed its public sector or implemented real structural reform. A good example of this is headcount reduction and restructuring in the public sector. What headcount has been achieved has mainly been done via early retirements, which simply shifts costs from the central government payroll to state pension funds. Of the 322 organisations that have been identified as useless, not a single one has been closed. The labour reserve has been a total failure.

The fourth reason is that what investments have occurred in Greece have been delayed. Three major privatisations, for instance—the Astir Hotel (€ 400 million), Hellenikon (€ 915 million), and the regional airports lease (€ 1.23 billion)—have taken place, but have not actually been completed. This means that investments of approximately € 10 billion are being held up due to public sector bureaucracy. There are many more examples of private sector investments which have been blocked by intractable public sector decision-making.

Conclusions

Today, the debate on Greek public debt remains convinced—in the total absence of facts and logic—that the Greek debt is unmanageable. The reality is far different. Greece’s debt is sustainable providing the public sector mobilises around real reforms: making the public sector more efficient; promoting investments; reducing needless red tape; promoting employment and entrepreneurship. Although almost every single political party claims allegiance to these objectives, not a single one appears to have a plan for them. The quality of public debate worsens with each week. Whether this is deliberate misinformation or simple ignorance, the result does not bode well for the future.  

(c) Philip Ammerman, 2015

This article was originally published on Navigator Consulting Group. 

* Note that the interest paid in 2014 reflects interest costs from 2013: the calculation of Greek and US debt ratios is done using the same [incorrect] temporal distribution. Greek budgets are done on a calendar-year basis (1 January – 31 December). US budgets are done on a fiscal year basis from 1 October – 30 September.

Distortions in the Greek Tax Code

Despite five years of “structural reforms” and repeated promises by every single Greek political party to “reform the tax system”, the distortions in the Greek tax code continue. This is illustrated nowhere more clearly than in two decisions announced recently by the Hellenic Ministry of Finance.

Exemption from Issuing Automated Electronic Receipts

In the first decision, the Ministry of Finance published (ΠΟΛ 1002/2014 issued on 31 December 2014) a list of 12 professional categories that would be exempt from the need to issue electronically-printed receipts in 2015, i.e. receipts from a cash register or point of sale device. This list includes the following professions (I’ve translated most but not all of the professions on the list):

1.     Beauty centres, gyms, accommodation areas, training and educational centres, kindergartens, clinics or therapeutic centres, doctors and orthodontists

2.     Parking lots

3.    Theatres, lottery agents, including Pro-po, Lotto, etc., transport firms except taxis

4.     Self-employed tailors or seamstresses, as well as operators of health spas licensed by the Greek Tourism Organisation

5.     Veterinarians, physical therapists, biologists, psychologists, judicial employees, architects, civil engineers, topographical surveyors, chemists, geologists, foresters, oceanographers, designers, journalists, authors, interpreters, tourist guides, translators, teachers, trainers, sculptors and painters, drawing artists, actors, musicians, singers in nightclubs, dancers, choreographers, producers, interior designers, economists, analysts, programmers, researchers, management consultants, accountants, tax advisors, sociologists, social workers, advisors, homeopaths, alternative therapists, psychotherapists, speech therapists, speech coaches, dieticians, nutritionists, occupational therapists.

6.    Operators of agricultural machinery or olive oil mills, or flourmills.

7.     Any profession involved in construction of any kind of technical work, including woodworkers, iron workers, plumbers, electricians, builders, builders, and marble workers.

8.    Property agents, real estate brokers, funeral home operators, marriage offices, confidential business offices, and recruitment firms

9.    Press agencies and magazines, in terms of collecting subscriptions, car rental firms, services issuing common expenses for buildings, elevator maintenance, and transport firms

10.  The public sector, municipalities and other public agencies

11.  Insurance firms, banks, credit institutions, and the Hellenic Post Office, for retail sales and services

12.  Operators of highway tolls as well as travel agents.

This decision is incomprehensible for the following reasons:

a.     It has long been known that a key issue in Greece is under-reported income. Earlier decisions required the issue of electronic receipts precisely in an effort to avoid this problem. The law is now changing (and right before a national election), giving entirely wrong signals to economic operators.

b.     Most of these occupations have already implemented electronic cash registers and POS. Hairdressers, parking lots, gyms, olive mills, theatres, etc. have all been issuing receipts.

c.     It is impossible to understand how the public sector is being exempted – by the public sector – from issuing electronic receipts. What problem does the Hellenic Post Office have with issuing receipts?

Given that Greece needs every cent of public revenue needed to pay both for ongoing public sector operations as well as debt, it is impossible to understand how this decision makes any sense in a rational context.

While it is true that some professions have not invested in cash registers (for instance, consultants), they do as a matter of course issue either printed receipts, or in some cases hand-written ones. It is understandable if this is a law designed to absolve some professional categories of using cash registers, but there are obviously better ways of handling this than by granting a blanked exemption to professions that are already using them—as decided by previous laws.

VAT Exemption for Professions Reporting under € 10,000 in Annual Income

According to article 251 of law 4281/2014, economic operators with under € 10,000 in annual income will be able to opt out of paying Value-Added Tax (VAT), provided they register with their regional tax authorities by January 15^th.

If they choose this option, they no longer have to collect and pay value added tax, which is currently in different bands from 6.5% - 23%. The economic justification for this is that it will alleviate the administrative cost of reporting for small enterprises and self-employed professionals.

Unfortunately, this law contains three major distortions:

a.     It increases the moral hazard of under-reporting income. Given that this is already a problem among most self-employed artisans or professionals (doctors, dentists, plumbers, etc.), and given that most of these people are systematically offering their services “with VAT” (at a higher price) or “without VAT” (without an receipt of payment), we can assume that we will see a large increase in professionals reporting under € 10,000 in annual income in 2015.

b.     The second distortion is that of VAT refunds. Operators who do not collect VAT cannot apply for a VAT refund on their purchases or subcontracts.

c.     The third distortion is that of future tax audits. In the case of a future audit on an operator who will claim a VAT exemption in 2015, how robust will the Tax Authority’s record-keeping be in terms of registering who did and who didn’t opt out of VAT?

An operating charging € 10,000 per year is charging € 833 per month. This hardly creates a massive administrative burden.

Conclusions

In an election year, any changes to the application of tax laws automatically create friction in terms of achieving tax revenue targets. The present two laws are largely unnecessary and contradict previous efforts at tax compliance. If everything else were functioning correctly, there might be a rational explanation for these laws. Given that very little is functioning correctly, and given the massive incentives and moral hazard contained in these laws for further tax avoidance, and given their contradiction of previous laws and initiatives, it is difficult to understand through rational analysis why they have been announced.

(c) Philip Ammerman, 2015

This article was first published by the author on Navigator Consulting Group's website on 10 January 2015. 

Charlie Hebdo Reading List

In a moment of remembrance and honour for the victims of the terrible events that occurred in Paris this past Wednesday - Friday, I've started a list of media articles that I consider most representative of the situation at hand. This is not inclusive and will be updated from time to time. 

Video of the execution of policeman Ahmed Merabet outside Charlie Hebdo offices in Paris

Extremely graphic content of the point-blank execution of French (and Muslim) policeman Ahmed Merabet by Said and Cherif Kouachi.

Horrible attaque au siège de Charlie Hebdo

UOIF website, 7 January 2015

The Union of Islamic Organisations of France, an organisation representing over 250 Muslim organisations in France, condemns the Charlie Hebdo attacks. UOIF also participated in the remembrance march of 11 January in Paris.

Muslims Blast Charlie Hebdo Attackers

OnIslam website, 7 January 2015

OnIslam reviews statements of the leading Muslim clerics, scholars and organisations that condemned the Charlie Hebdo attacks. Dr. Wael Shehab stated that:

“Charlie Hebdo attacks are totally divorced from the teachings of Islam, its general spirit, and its sublime objectives.  Islam protects people’s lives, properties, and honor. Attacking even a single human is regarded by Islam as grave and heinous as killing all innocent people of the world. The Qur’an reads, {Whosoever kills a human being for other than manslaughter or corruption in the earth, it shall be as if he had killed all mankind, and whoso saves the life of one, it shall be as if he had saved the life of all mankind.} (Al-Ma’idah 5: 32)”

Paris policeman’s brother: ‘Islam is a religion of love. My brother was killed by terrorists, by false Muslims’

Guardian, 10 January 2010

Emma Graham-Harrison covers the extremely moving speech of Malek Merabet, brother of slain policeman Ahmed Merabet.

Charlie Hebdo cartoonist Wolinski’s daughter: ‘I don’t think you can kill ideas’

Guardian, 9 January 2015

Anne Penketh reviews statements made by Elsa Wolinski, daugther of George Wolinski who was killed in the Charlie Hebdo attack. She has posted a poignant post on Istagram: “Dad is gone, not Wolinski”. (Shown in photo, above). 

Paris attacks: unless we overcome fear, self-censorship will spread

Guardian, 11 January 2015

Nick Cohen takes a closer look at self-censorship among British media relating to threats, perceived or otherwise, of Islamic terrorism.

‘Dangerous Moment’ for Europe, as Fear and Resentment Grow

New York Times, 7 January 2015

Steven Erlanger and Katrin Bennhold provide a summary perspective on the threats to European societies of Islamic integration, immigration and terrorism, and the tensions between a secular society and religious extremism.

Charlie Hebdo’s Most Controversial Religious Covers, Explained

Slate, 7 January 2015

Miriam Krule explores some of Charlie Hebdo’s covers and the meanings behind them. This article would be better if it included additional covers satirizing other faiths. Charlie Hebdo has published content ridiculing Christianity, Judaism, women, politicians, “Europe” and many others.

Charlie Hebdo Is Heroic and Racist. We should embrace and condemn it.

Slate, 8 January 2015

Jordan Weissmann comments on the tensions induced by Charlie Hebdo, and why even though offensive, free speech is necessary.

Satire Lives

The New Yorker, 15 January 2015 issue

Adam Gopnik writes on the satirical tradition of Charlie Hebdo in France: “The magazine was offensive to Jews, offensive to Muslims, offensive to Catholics, offensive to feminists, offensive to the right and to the left, while being aligned with it—offensive to everybody, equally.”

The Blame for the Charlie Hebdo Murders

The New Yorker, 7 January 2015

George Packer takes a brief look at the role of Islam and terrorism.

Extremists are united in an unholy alliance

Financial Times, 8 January 2015

Philip Stephens reviews the debate of ideas in Europe and elsewhere.

Queen Rania of Jordan’s Official Statement

Queen Rania’s moving statement on her response to the attacks. Unfortunately, I could not find her website, but am referencing a third party site.

First Amendment to the United States Constitution

I am continually reminded of what a magnificent document the United States Constitution is. The First Amendment reads:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

In an age of social and mainstream media incoherence, trolling, national security restrictions, political correctness, and self-censorship, it is vital that the right to free speech, no matter how difficult and caustic, is upheld.

Greek Public Debt Maturity, 2015

 

Greece faces public debt redemptions (and refinancing) of at least € 20 billion in 2015. According to the Public Debt Management Agency, € 20 billion in central government debt matures in 2015. According to Kathimerini, € 22.37 billion matures in 2015, including general government debt.

George Stathakis, SYRIZA MP and shadow development minister, was interviewed by the Financial Times on January 6th (SYRIZA to crack down on Greece’s oligarchs if it wins election) and stated that:
Greece is running a central government primary surplus of € 3.566 billion in the first 11 months of 2014. Assuming the year closes without a loss of income due to the elections, Greece will have sufficient reserves to pay for nearly the first three months of debt redemptions in 2015.

“We don’t have to worry until August,” he said. “We will have enough cash from the 2014 budget surplus and the finance ministry reserves to keep going through July, and that’s without raising any short-term financing from issues of treasury bills.”

The Finance Ministry reserves are not identified. However, other SYRIZA statements imply that SYRIZA will tap the unallocated reserves of the Hellenic Financial Stabilisation Fund, which was established to recapitalise the Greek banking system following the 2012-2013 Private Sector Involvement (PSI), or debt haircut. HSFS was capitalised with € 49.7 billion, and according to its 2014 9 month Interim Statement, has suffered losses of € 20.3 billion in the first 9 months.

Quite apart from the fact that HSFS is a private sector organisation and not part of the Greek government, there are no actual cash reserves available for “sequestration” by the government. HFSF's 9-month cash reserves in 2014 were only € 625.3 million (far less than the unallocated capital raised). HFSF is financed by European Financial Stability Fund (EFSF) floating rate notes. Therefore, any attempt by SYRIZA to use HFSF’s unallocated reserves is therefore an illegal seizure of EFSF funds. We recall that the EFSF is instrumental in the main bail-out of Greece, with € 141 billion disbursed to date (including € 48.2 billion in bank recapitalisation funds).

It is impossible to see how SYRIZA would float short-term Treasury Bills, and at what interest rate. It might be able to “convince” the systemic banks to absorb a certain amount of domestic demand (much as the current coalition government did in 2014), but it is difficult to see how this can be done in conjunction with a potential European Central Bank refusal to accept Greek government bonds as collateral, as would certainly be the case if SYRIZA persists in its “hard default” negotiation scenario.

In short, it is difficult to understand how SYRIZA would both be able to pay for its legislative programme announced at the Thessaloniki Trade Fair, and handle Greece’s debt redemption schedule in effect for 2015. Even the low amount of € 20 billion can only be refinanced by a third financial aid facility to Greece. The only other alternative is a real default on the Greek national debt.

(c) Philip Ammerman, 2015
This post was originally published on Navigator Consulting Group's website.