Friday 24 November 2017

Losing the default battle

With around €30bn of taxes going unpaid every year, Greece's under-fire finance boss is sinking faster than his country

With a debt default now seemingly inevitable, the Greek finance minister Evangelos Venizelos is resorting to ever-more desperate tactics to keep his country afloat.

This week Mr Venizelos announced a further series of public spending cuts. These included reducing public sector pensions, cutting the income tax threshold and axing 30,000 public sector jobs.

The most recent set of cuts are designed to persuade the EU/ECB/IMF Troika to release the latest €8bn tranche of bailout funds next month. If they don't then Greece will default on its debt mountain, the equivalent of more than 150pc of GDP, within weeks.

Even if the latest package of cuts persuades the EU/ECB/ IMF Troika to release the money, no one seriously believes that a Greek debt default can be postponed for much longer. Greek government debt is now virtually uninsurable and the country can only borrow for very short periods, usually three months or less, at ruinously high interest rates.

Unconfirmed media reports this week suggested that Mr Venizelos was readying plans for a unilateral Greek default which would see bondholders, to whom the Greek government owes €350bn, forced to accept a 50pc "haircut".

This week's package was merely the latest in a series of increasingly desperate ad hoc measures, whose only purpose is to placate an increasingly concerned Troika.

Property tax

Two weeks ago the Greek government announced a new property tax. However, such is the decrepit state of the Greek tax collection system, that householders will pay the property tax through their electricity bills.

Then there was last June's austerity package, which was only narrowly approved by the Greek parliament in the teeth of fierce popular opposition. The June package, which was required to release the previous instalment of bailout funds, included the imposition of an income levy, a 15pc cut in public sector pay and an increase in the VAT rate.

After two EU/IMF bailouts, the first in May 2010 and the second in July 2011, in little over a year and three austerity packages in just three months the suspicion must be that the current policies just aren't working.

With the Greek economy having shrunk by a cumulative 7pc in 2009 and 2010 and with a further 3pc contraction forecast this year, Greece is stuck in a classic "debt deflation" trap. The spending cuts and tax increases, far from helping to balance the budget, merely cause the economy to shrink even further, reducing tax revenues and widening the budget deficit.

Further complicating matters is that, unlike Ireland and Portugal, the other two eurozone countries which have been forced into bailouts, there is fierce public opposition in Greece to the Troika-dictated austerity.

At times in the run-up to the parliamentary vote on last June's package there were well-founded fears that Prime Minister George Papandreou's government would literally be chased from office by the angry crowds on Syntagma Square outside the parliament building in Athens.

This week's cuts were greeted with a national transport strike, with a general strike planned for next month.


Indeed, Mr Papandreou only secured the passage of last June's measures by sacking his previous finance minister George Papaconstaninou, who was moved to the energy portfolio, and replacing him with Mr Venizelos, who had previously been the defence minister.

By appointing Mr Venizelos, who had challenged him for the leadership of the ruling PASOK party in 2007, as finance minister, Mr Papandreou was attempting to tie his main leadership rival to the unpopular decisions that have, so far at least, prevented Greece from collapsing into bankruptcy.

Unfortunately, the financial markets are convinced that a Greek debt default is now inevitable. The country's catastrophic budgetary arithmetic supports such a bleak view.

Greece needs annual economic growth of at least 4pc just to stop its debt mountain from growing even taller. The absence of economic growth means that, without further austerity measures, Greece will have a budget deficit equivalent to almost 10pc of GDP in 2011 as against the 8.6pc agreed with the Troika.

It doesn't help matters that most Greeks regard paying their taxes as something that only other people should do. An estimated one-third of Greek economic activity takes place "off the books". The huge Greek black economy is estimated to result in up to €30bn of unpaid taxes every year.

Compounding the problems caused by an ineffective tax-gathering system is rampant corruption. Transparency International rated Greece as the most corrupt country in the EU in its 2010 report, putting the country on a par with the likes of narco-states such as Colombia and Peru. Transparency estimates that the average Greek household pays more than €1,400 in bribes every year.

While the official mythology of the Greek state, which won independence from Turkey in 1821, is that it stands in the direct line of succession from the ancient Greeks, the reality is somewhat different. Before independence, most of what is now modern-day Greece was part of the Turkish Ottoman Empire for over four centuries. Prior to the Turkish conquest, it was part of the Byzantine Empire for over 1,000 years.

The legacy of this complicated history is a deeply dysfunctional state and poisonous relations with its larger eastern neighbour, Turkey. Greece spends over €7bn a year on defence, at 4.3pc of GDP the highest proportion of economic output of any European country with the exception of Macedonia. An improvement in relations with Turkey and a reduction in defence spending would go a long way towards solving Greece's budgetary difficulties.

Despite a thaw in Greco-Turkish relations over the past decade, any reduction in Greek defence spending is still some way off. Mr Venizelos' own family history shows why. In 1922, Greece suffered a catastrophic defeat in its three-year war with Turkey. Following the defeat 1.5 million ethnic Greeks, including Mr Venizelos' grandfather, were expelled from Turkey.

Some of Mr Venizelos' critics have accused him of changing his family name to that of the widely-admired early 20th century Greek statesman Eleftherios Venizelos. However, the reality seems to be that it was Mr Venizelos's grand-father who changed the family name in honour of the great man following his arrival in Greece almost 90 years ago.

A native of the northern Greek city of Thessaloniki, where many of those expelled from Turkey in the 1920s were re-settled, Mr Venizelos originally qualified as a lawyer.

He first made his mark when he successfully defended former Greek prime minister Andreas Papandreou, the father of George Papandreou, on corruption charges in 1992. He was rewarded with a place on the PASOK list of parliamentary candidates in the party's victorious 1993 election campaign. He was elected and has retained his seat ever since.

Mr Venizelos has served as a minister in every PASOK government since first being elected to parliament. When the party returned to power in 2009 after five years in opposition he was appointed defence minister before switching to the finance portfolio last June.

Now it would appear that, after three months trying to stave off a Greek debt default, Mr Venizelos is preparing for the inevitable. Any Greek default would almost certainly be accompanied by its departure from the eurozone and force Mr Papandreou's resignation. Four years after the two men first clashed, Mr Venizelos may be about to finally emerge victorious over his rival.

Irish Independent

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