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.

Symptoms of a worsening public finance situation in Greece

All public announcements to the contrary, many signs indicate a worsening short-term public finance situation in Greece. Some of these warning signs are recounted below: there are quite a few more, many of which cannot be precisely quantified.

1.      Construction companies are owed EUR 2.5 bln by the Greek government for completed works;

2.      Pharmacists’ unions are on strike due to unpaid reimbursements by public health insurance funds: media reports indicate that EUR 300 mln are owed;

3.      Public hospital staff are on strike over unpaid wages, particularly for overtime and short-term contract staff;

4.      Police staff held a protest march, claiming that over 2,000 vehicles where not working due to lack of maintenance, and that unjustified cuts in operating expenditure and overtime were taking place;

5.      An article in Kathimerini claimed that a Eurostat audit revealed a deficit of EUR 500 mln in public pension funds, versus a surplus claimed of EUR 900 mln (the Eurostat results have not yet been published).

The Ministry of Finance has made statements to the effect that the severity of the recession is lessening, and that the central government deficit in January-February 2011 was EUR 1,024 bln, or some EUR 55 mln lower than forecast. They also point to the expiration of one-time taxes, such as taxes on heating fuel, as well as “savings” in the Public Investment Budget.

Yet the five warning signs mention indicate that something is wrong with public cash flow and expenditure. The debt to construction firms, for instance, logically should have been paid through the Public Investment Budget (unless the works concerned maintenance): the sector claims EUR 2.5 billion in unpaid bills for primary construction. How is it possible that “savings” have been achieved if bills have apparently not been paid?

Greece and its international creditors have been claiming that Greece’s financial needs have been met through 2012 / early 2013. Yet there is increasing evidence that government obligations have not been paid. In the absence of information from the Ministry as to which specific obligations are still unpaid, and whether these are been included in the monthly budget progress, it is extremely difficult for any external observer or analyst to understand what is going on.

The situation in the private sector is worsening. Unemployment will rise following sectoral lay-offs in retail, although the overall situation may be minimised by higher seasonal tourism employment, partially higher manufacturing and by people exiting the labour force. With corporate income tax filings in April, we should have a clearer picture of 2010 GDP figures. 

There are press reports that the final 2010 deficit figure will be revised upwards to 10% (against an original target of 8.2%). This fact, more than any other, indicates that something is seriously wrong.

The difficulty of what Greece is trying to achieve should not be underestimated: a paradigm shift in state operations and function; the liberalisation of sectors and professions; large-scale privatisation; real structural reforms; fully repaying the public debt of EUR 340 bln. These reforms are taking place not only during a major recession, but against a long-term loss of competitiveness in key sectors such as tourism, industry or shipping.

And while the structural reform agenda is a worthy one, the fundamental dangers remain: 

·         Large segments of the Greek population, and apparently a large share of the public sector, do not accept the need for real structural reforms;

·         The pace of reforms is slow; reforms are sometimes watered-down or not implemented in their entirety; the most serious reforms have not yet taken place;

·         There remain significant questions on whether the economic data provided by the wider Greek public sector is valid;

As I have also reported in earlier posts, the scale of debt instalments and repayment period is severely challenging to manage. Although I believe a debt restructuring is almost inevitable, and to some extent has already begun, the current process must run its course, if for no other reason than to gain even some limited traction in terms of structural reform.  

(c) Philip Ammerman, 2011

Navigator Consulting Group 

www.navigator-consulting.com

The Greek media and the financial crisis

One of the greatest challenges affecting Greek understanding of the current debt crisis is the apparent difficulty of the mainstream television channels to understand the key issues and ask the right questions.

This reticence may be a structural issue: most probably journalists do not have an in-depth understanding of economics or finance, and may be appointed to their posts for other reasons (including physical attractiveness, personal connections, and personal ratings). It may also have to do with the fact that the government exercises certain forms of control over the media, such as allocation of public advertising budgets or issues such as debt forgiveness (which is a major issue with Alter at the present time).

Yet the fact remains that in the public broadcasting channels (ERT, NET, ERT3), the quality of coverage is extremely poor. A typical example is seen in the coverage of comments today, Monday, 14 March, in which the results of the EUR 110 bln debt rescheduling led each broadcast, together with the Japan earthquake.

Some typical points mentioned in the afternoon (15:00) and evening (21:00) broadcasts were:

·         Coverage of George Papandreou’s press conference outside the Presidential mansion, that Greece had “won a battle, but that the war was still being fought.”

·         Coverage of Press Spokesperson Petalotis’ bombastic and contradictory press conference, in which he stated among others that “we did not ask for anything, no one gave us anything, whatever we have earned we have fought for”, etc.

·         That European leaders apparently commented about the unfair decision made by Moody’s.

·         That the revised agreement would, according to a statement by George Papandreou, “save” Greece EUR 6 billion per year.

·         That spreads had “fallen” while the stock exchange had rebounded.

The tone particularly on NET was triumphalistic: that Greece has one again prevailed in a war against external enemies, that Greece has been “saved.” Additional comments were made or implied that Greece was no longer part of the problem, but part of the solution; that Ireland and Moody’s were the new problems, etc.

As a parenthesis, I must say I was equally amazed at George Papandreou. Upon his return from Brussels, he summoned his Cabinet for an emergency meeting, and read them this speech. Honestly speaking, I can’t think of a graver waste of time than to summon 30 people into a room on a Sunday afternoon to read out a 5-page speech full of empty platitudes and inaccuracies. I am certain that North Korean reports on agricultural output are more interesting than this. 

Yet throughout this television coverage or the Prime Minister’s speech to his Cabinet, I didn’t hear any of the really important questions being raised:

a.       I didn’t see a single chart or table showing what the annual instalments and total interest paid were before the loan rescheduling and after.

b.      Because such data were not presented, no reporter asked how Greece would pay back the EUR 110 bln, which by simple calculation will cost at least EUR 18 billion per year from 2014 onwards, and which implies an 8% GDP surplus being allocated to debt repayment. (Such a surplus has never before been achieved in Greek history in hard currency terms.)

c.       Nor did I hear any reporter question Greece’s future payment capacity given that the budget deficit in the first two months of 2011 is EUR 1.028. Equally, no reference was made to the remaining EUR 230 billion (in present value) which have to be repaid, or what happens when interest rates on this re-set from 2013 onwards.

d.      Although reference was made to a lowering of bond yields, the fact that they remain over 12%, and that the average discount on the open market for a 10-year Greek bond is 35%, was not mentioned. This raises significant doubt as to how successful the European “solution” for Greece actually is.

e.       Although Moody’s was once again cast as the villain, no one bothered to present what was actually written in the downgrade notice, or explain the reasons Moody’s may have indicated for downgrading Greece. This caused the media to miss the basic fact that in a debt restructuring after 2013, the European Stability Mechanism (ESM) will likely lead to a haircut on securities held by private bondholders.

f.        In turn, no mention was made about the possible risk exposure of Greek and Cypriot banks to (a) Greek government bonds, and (b) the dramatic decline in domestic banking indicators and the rise in non-performing loans.

g.      No indication was given of the direction of the EUR 50 billion privatisation package, or whether the Prime Minister’s earlier promise to pass a law making it impossible to sell public land without a Parliamentary vote might act as a deterrent to potential investors.

Although I heard George Papandreou and George Petalotis speaking, I didn’t hear a single question being asked to them. All that was broadcast was their set remarks. It looks as if the reporters have accepted their “achievement” at face value, and are simply, and mindlessly re-transmitting these to the public.

This is literally astounding. Given everything we have learned about corrupt and incompetent politicians in Greece, the fact that today the media give them the benefit of the doubt is unbelievable. I have rarely seen such a misrepresentation of reality, because this is what we are dealing with. If the average Greek citizen gets his news from the mainstream television broadcasts, then he can be forgiven for thinking that everything is all right.

We should not be surprised if, 12 or 24 months from now, Greece’s fiscal situation has worsened, but we hear the same shameless cheerleading emerging from the media and the government. 




(c) Philip Ammerman, 2011
Navigator Consulting Group 
www.navigator-consulting.com 

Main risks in the implementation of the Greek Structural Adjustment Programme

The agreement reached on Friday between Greece and its three creditors (the Eurozone member states, the European Central Bank and the International Monetary Fund—otherwise known as the “Troika”) for the EUR 110 billion emergency loan is a positive development in that the lower interest rate and longer loan term mean that the country has an improved chance of managing its debt burden.

Unfortunately, there remain a number of major problems which have not been addressed by this revised loan agreement:

1. Troika repayments by 2014 will be nearly impossible to meet

The revised loan term requires debt repayment to start in 2014 and end in 2021. The annual principal and debt instalments from 2014-2020 are EUR 19.14 billion per year. Assuming moderate GDP growth from 2013 onwards (in line with the forecast in the IMF Stand-by Arrangement), this implies that in 2014-2015, 8% of nominal GDP will be allocated to debt service for the Troika alone. Such a budget surplus has never been achieved in Greek history in hard-currency terms, and it is doubtful whether it has been achieved in other countries.

2. Government debt to private creditors is at least EUR 230 bln; re-finance starts in 2014

Apparently lost or ignored in the debate is the fact that besides the Troika loan, the Greek government owes an additional EUR 230 billion to private creditors at the present time. Repayment or roll-over commences in 2013, with main tranches set to refinance in 2014-2016. The total amounts are difficult to determine based on available public statistics, but according to the original IMF Stand-by Arrangement (which was drafted before the November 2010 Greek debt re-statement), the IMF forecast a 2014-2015 public sector debt rollover and re-finance of EUR 102 billion at an interest rate of 5.5%. Absent a new intervention by the Troika, it is impossible to see how this rollover can take place given current debt markets and spreads.

3. The EUR 50 bln privatisation target cannot easily be achieved; impact is limited

A new conditionality for the EUR 110 bln debt term revision is the achievement of EUR 50 bln in privatisation receipts over the next 3-5 years. As has already been analysed by this author, this target will be extremely difficult to achieve given the state of political tensions within the governing party, low asset values, Greece’s credit rating and international factors such as rising interest rates and commercial debt issues. However, it is also necessary to put this number in perspective: EUR 50 bln will cover the interest on the Troika loan (estimated at EUR 33.58 bln over the loan term) as well as two years interest on the EUR 240 bln private sector debt from 2014 onwards. In other words, even achieving such a major goal, which has never been achieved in Greek history, will not result in a substantial change in total debt levels. It will be more important to generate private sector investment and employment, which is not being effectively addressed by either the Troika or the government.

4. Greece’s economic survival depends on rigorous, strategic government action

So far, the government has not been able to meet the terms of the EUR 110 bln loan. Revenue is far below target, while substantive structural adjustment has not yet taken place. Rather than liquidating non-performing units and terminating staff, the government is transferring staff and maintaining strategic and operating control over public enterprises. There is no prioritisation of government activity: certain Cabinet ministers slow reform progress; energy is wasted in irrelevant and superficial initiatives which do nothing to reassure international markets or creditors. Economic activities such as developing Greece’s mineral or energy resources are blocked by government inactivity or Turkish irredentism.

5. Economic conditions are worsening

Domestic economic conditions are worsening. Unemployment has reached 14.8% in December 2010 and is expected to increase as retailers lay off staff in the spring 2011. Although tourism may provide an increase due to the instability in Egypt and Tunisia, the short- and medium-term prospects for the private sector are grim. A record number of companies closed in 2010, while the flight of bank deposits and companies delocating increased. Consumer spending has fallen; bank credit is difficult or impossible to access for the majority of consumers. Non-performing loans have risen to nearly 10% of total bank consumer lending. Real estate prices have fallen; a large stock of real estate remains unsold and unoccupied. Interest rates are set to rise on the promise of ECB “strong vigilance”, while rising energy prices cut into disposable income and drive higher inflation.

6. There has been no action on corruption or public sector incompetence

The three major corruption scandals—Vatopedi, Siemens and the structured bond scandal—which PASOK promised to investigate remain deadlocked or have ended without any substantial criminal or civil charges being levied. Additional cases of corruption, such as the Skaramanga shipyard sales, remain unaddressed. The fact that Greeks have extensive offshore holdings in Cyprus and Switzerland is well-known, yet despite multiple means of recourse no action is taken. Corruption in the tax authorities and the customs organisations is endemic, yet unprosecuted. The fact that the Hellenic Railways Authority ran up over EUR 10 bln of debt should be investigated: instead, the debt has been transferred to the central government books, and all staff have remained employed in the public sector. Siemens, despite its own admission of bribes of over EUR 90 million, remains a prime contractor in the public sector. It is impossible for Greek civil society to back the sacrifices required by a strong structural adjustment programme when the two main political parties have both been implicated in major corruption scandals without punishment.

Five Actions for a Turn-Around Management Plan

These factors make it imperative that the following five actions are undertaken:  

a.       The financial model which was used to generate the IMF Stand-by Arrangement and the wider EUR 110 loan agreement requires an urgent update. It does not take into account the restatement of Greek debt by Eurostat in November 2010. Its planning is based on a long-term interest rate which is roughly half the current rate. And its assumptions that Greece will be able to return to the markets in 2014 to borrow over EUR 100 bln in 2 years are unwarranted. These conditions are no longer viable.

b.      A restructuring of private debt is needed. Either this will be led by the successor to the European Financial Stability Fund, and will be an orderly process, or it will occur on a unilateral/market basis, and will be disorderly. There are two options for the restructuring are (a) a haircut of at least 30% (and probably 50%) together with a longer repayment term; and/or (b) the assumption of private sector debt by public sector organisations (a second bail-out). In the case of the second option, it should be noted that a simple transfer from private to public creditors is not a solution. Greece will be hard-pressed to allocate 8% of GDP to re-pay the EUR 110 bln: it is difficult to see where it will find the resources to repay the remaining amount.

We suggest that negotiations on restructuring begin with the assistance of major western investment banks. This requires the prior approval of sovereign creditors and the IMF. But such as step is unavoidable, and it would be better to begin the process in the next 2 years given that bond markets are already pricing in a default and haircut. 

c.       The Greek government needs to take urgent measures to raise revenue targets, decrease spending, privatise assets and attract foreign investment. A turn-around management plan is needed that prioritises government activities around the initiatives which bring the greatest return. These should include a more realistic public sector privatisation plan, based on full privatisation and sale, not partial sale/leasing. It also requires a more active private sector investment plan, which is currently non-existent. The targets per sector and segment are seen below, taking into account a 5-year phase-in:

Private Sector Investments	Revenue (€ bln)
Upstream oil and gas exploration and investment	10
Natural gas co-generation (replacement of lignite-fired plants)	10
Renewable energy investments	10
Mineral development	10
Shipping repatriation / Offshore shipping centre creation	15
Real estate sales / second residences / retirement homes	5
Agricultural & food processing sector / modernisation	5
Automotive sector investments	2
Education sector liberalisation and investment promotion	2
Total Private Sector (EUR bln)	69
Public Sector Sales	Revenue (€bln)
Sales of government land & property	10
Sales of government shares in state organisations & banks	12
Re-assertion of eminent domain on public property (sales)	2
Hellenikon Airport development	5
Total Public Sector (EUR bln)	29
Total Investment & Privatisation Income (EUR bln)	98

d.      The Greek government needs to take further urgent measures to reduce operating expenses and operations. We believe that there are an additional EUR 6 bln in savings and revenue per year possible:

Public Sector Restructuring / Savings	Annual Savings
Leasing airports and ports (annual fee)	1
Re-organisation of Hellenic broadcasting & others	0.5
Consolidation of public leases and rentals	0.5
Central Procurement Organisation	1
Reassertion of eminent domain on public property (rentals)	2
eGovernment	1
Total Income or Savings (EUR bln)	6

e.       All other commitments undertaken for structural adjustment and public sector restructuring must be implemented as soon as possible, exceeding the targets set by the Troika. 

Unfortunately, it should be clear that the main obstacle to achieving these five actions is the lack of political will and management competence at the EU and national levels. At the EU level, the greatest problem is the issue of private sector debt restructuring. At the national level, it is impossible to see how PASOK’s union supporters and regular members will permit a real liberalisation of the market, and a real restructuring of the public sector. We can expect nearly no support from the remaining political parties.

For these reasons, we consider that the outlook for Greece’s debt management is bleak, and that the years 2013-2015 will result in a technical default. Whether this will be orderly or disorderly is up to Greek and European politicians to decide, and this fact more than anything else minimises the hope for a reasonable solution.

(c) Philip Ammerman, 2011

Navigator Consulting Group

www.navigator-consulting.com