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Global Macro
Beware Greeks Bearing Gifts
September 1st 2014
Primary surplus.
Little comfort when debt:GDP is over 175 percent.
Greece still reliant on bailout money.
Plans more debt issuance.
Behind every data point, the near-term prospects for the Eurozone economy are haunted by the
menacing shadows of disinflation and stubbornly high unemployment. Yet, if the sentiment is turning
sour in the stronger, northern economies one wonders why there is an air of expectation in Greece.
Since Greece emerged as the fire starter for a Eurozone sovereign debt crisis in 2009 the overall size of
the economy has contracted by 25 percent. However, much is made of the fact that given Greece
recorded a primary surplus in the spring of this year, i.e. it had a national budget in the black before
debt repayments are calculated. As such the nation assumes it has earned the right to undertake
exploratory talks with its international creditors about easing its huge debt burden; currently measured
at 175.10 percent of GDP, Figure 1.
Figure 1: Debt : GDP (%) Source: Eurostat
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Beware Greeks Bearing Gifts
September 1st 2014
However, surely before any further accommodation is considered, let alone extended toward Greece
the troika of international creditors… the European Commission (EC), the European Central Bank (ECB)
and the International Monetary Fund (IMF) have to demand quantifiable proof that reform has been
and will continue to be implemented. After all it is only by the largesse of the troika worth some
EUR240Bn that Greece has been able to stay inside the Euro tent and that accommodation has
helped keep the nation solvent.
It should not be forgotten how close Greece was to declaring bankruptcy in just four years ago.
In office since June, the Greek Finance Minister Gikas Hardouvelis will open three days of dialogue with
the troika in Paris on Tuesday, September 2nd. Times may be tough inside the Eurozone, however, this is
not the time to show a lax attitude toward demanding Greece ups the pace of delivering change.
Reform is slow, so slow it is almost static:
The glacial pace of reform within Greece has raised concern within the Eurozone’s largest economy
and chief individual creditor, Germany. The CDU/CSU conservatives have expressed opposition to any
suggestion of relaxing of the reform conditions for Greece if the troubled nation is to require a third
bailout package. Norbert Barthle, the CDU budget committee leader said back in February that
Germany required details about the reform measures planned by the Greek Government in exchange
for aid. He said there could only be more aid if conditions were met.
"…It's a proven method…”
However, until now that has not been the case. With painful regularity we see that Greece has failed
to deliver on its promises and then it has the audacity to come back to the table in an urgent need of
new financing. The enforcement of a contract has been forsaken on the political expedient of keeping
the Eurozone club intact.
For Mr Hardouvelis the challenge is to apply and effect a new round of tough love medicine on the
Greek population that are enduring deflation at -0.7 percent (July), unemployment at 27.2 percent
and youth unemployment of 53.1 percent. It is no exaggeration to say that after five years the Greek
population are finding ever more and deeper reform hard to stomach, Figure 2.
Stop tax revenue leaking away
The first measure which has been need of reform since 2009 is a radical overhaul of the inefficient tax
system. Greece has collected only 0.0014 percent of the tax owed by the country’s biggest tax
debtors because wealthy individuals are using fake invoices to throw inspectors off the track and many
companies have filed for bankruptcy. The Greek government has reported that claims of unpaid taxes,
fines and other liabilities total EUR2.3Bn so far this year, bringing total unpaid arrears owed to the Greek
state to approximately EUR63Bn; of that EUR23.7Bn are unpaid taxes and fines. Most of these arrears will
never be recovered because the companies that owe the money have gone out of business.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Beware Greeks Bearing Gifts
September 1st 2014
Figure 2: Greek Unemployment and GDP Growth (%)
Sources: National Statistical Service of Greece and Eurostat
If only the tax collection agency has been more aggressive in 2009. Despite legalisation to force every
retailer to use a cash register so that the takings can be recorded accurately it is still common practise
for shops and restaurants to use a shoe box packed with notes and coins so as to avoid running the
takings through the till. In some cases a discount is offered for a cash transaction as against the use of
a credit or debit card which necessitates the establishment of a paper trail.
Much has been made of a small economic improvement in Greece this year as proof that tax revenue
will grow. However, one cannot avoid the fact that tax revenue for the first two months of 2014 totalled
EUR6.88Bn, a figure that was EUR454m or 6.2 percent, below target.
One issue that still needs to be tackled in an aggressive manner is corruption among tax inspectors.
Given the high level of unemployment it surely cannot be hard to find individuals that would be more
effective as tax collectors than the current crop of ineffective officers. Similarly why has the law
enforcement process been so lame in arresting the heavy weight tax evaders? Several hundred
significant serial tax evaders have been identified. Since 2009 none has been convicted or imprisoned.
•
On this basis alone Greece does not deserve any more bailout capital.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Beware Greeks Bearing Gifts
September 1st 2014
Playing with pensions and privatisation
There are other major areas where reform is needed. Firstly there is to be a second overhaul of the
retirement system at a time when the initial attempt at reform, first introduced in 2010 has not been fully
implemented. The new plan is to consolidate a myriad of small state sector pension funds into just
three. This will require the loss of 6,500 civil service posts so adding more pressure on the benefits system.
Once again privatisation of state-owned assets is being discussed even though the privatisation
programme is dreadfully behind schedule. The government missed its revenue target for 2013 even
after scaling it back twice, to a meagre EUR1.3Bn. The programme has been under almost continual
review, but Greece has shown no actual appetite for extracting the state from many areas of industry
and infrastructure.
It was suggested by Finland that to accelerate the process, Greek politicians should be removed from
the task of seeking a commercial bid for state assets by passing the role over to an unbiased agency
based in a neutral nation. Such an idea has met with complete inertia in Athens.
The last of the debt relief drip-feed?
Under the terms of the sovereign bailouts there is just a fraction of the total EUR240Bn to be disbursed.
•
EUR1.8Bn from the EC/ ECB
and
•
EUR15.6Bn from the IMF
These bailout facilities were always intended to be dispensed as instalments that would keep in step
with implementation of cutbacks and reform. Somehow, the phased relationship has become
completely out of sync.
At Spotlight we find staggering that when one has a nation that has failed to deliver the pace of
reform it pledged when signing up for the troika package of aid it could be allowed to return to the
international bond markets. In so doing Greece has been allowed issue debt on the back of the core
nation’s usufruct. When a debtor nation still is exigent, issuing more debt is equal to pouring gasoline on
the fire.
We look at the Greek situation and ask why did the capital markets take this sovereign back into the
fold? In 2013 the IMF suggested that it will required another EUR11Bn in financing by 2015… and if our
memory is correct additional bailouts would likely mean additional austerity and reform above and
beyond the measures passed this spring.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Beware Greeks Bearing Gifts
September 1st 2014
The Managing Director of the IMF, Christine Lagarde not so long ago observed:
“…The Greek authorities have continued to make commendable progress in reducing fiscal and
external imbalances, …However, progress on institutional and structural reforms, in the public sector
and beyond, has still not been commensurate with the problems facing Greece. Greater reform efforts
remain key to an economic recovery and lasting growth. …”
Greek officials contend that it is in the troika’s interest to hold off demanding additional austerity. It is
claimed that a relaxation of austerity demands will give Greece the scope to grow better service its
debt. I say that is the tail wagging the dog.
The Greek government has drawn up plans to promote state led investment in sectors such as
agriculture and shipping to create jobs and to diversify exports. However, as Spotlight has asked quite
frequently before when has the state sector in any nation ever show an ability to pick winners? The
private sector is more efficient as it is driven by efficiency and so seeks lower long-run average costs
and hence more profit. The public sector doesn't have to worry about profit so there is no incentive to
be efficient.
Greece needs an urgent economic transformation, however, that ambition will end when the state
starts to form a monopoly. Instead of increasing state spending and economic entanglement as a
default position the Greek government should have to provide sound justification why it should ever
operate a monopoly.
•
It sounds to us as if the Finance Minister Hardouvelis is trying to connect economic dots that
simply do not exist.
It is financial folly for the Eurozone to allow Greece any more debt forgiveness and yet one can sense
that the prospect of sovereign bond QE from the ECB is going to give Greece access to credit it should
not have and at a rate that is completely out of kilter with economic reality. There should be no time
wasted on considering any request for a new amelioration of Greece’s existing debt when it is
planning to launch new bond issues. If one cannot service existing obligations then do not even
consider asking for new facilities. More fool those that agree to do so.
Still, this is the fantasy world of Eurozone finance and economic. Greece is fully planning to tap the
international capital markets with a new bond issue in the coming weeks. This would mark a third round
of capital issuance in three months.
The bonds will probably sell, and the spread will tighten and for the investor who is fleet of foot money
can be made, but don’t be looking for your trunks when the tide rushes out.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Beware Greeks Bearing Gifts
September 1st 2014
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Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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