The current government in Greece has pledged not to cut the government workforce, proposed liberalizations of protected industries such as bakers and taxis also appears to be off the table.
The government is proposing cuts to pensions and benefits to fill the 11 billion Euro shortfall and at the time of writing the Troika do not understand how the Greek government is going to fill the gap which appears to be around 4 billion Euros after the proposed pension and benefit cuts.
Going on past experience I see no reason why the Troika will not continue to bail out the Greek government.
The government deficit has not been reduced since 2008 when interest payments are taken into consideration and this has not stopped previous bailouts, I do not see anything changing.
The economic landscape in Greece shows no sign of improving at least for the next 5 years.
The economy as it stands at the moment is still collapsing. This is due to the massive tax increases on individuals and businesses, the tax increases on their own would be bad enough, the real killer blow of the tax increases has been their nature.
The property, VAT, social security taxes and income taxes that have been increased are not tied to income. The tax increases in Greece are fixed amount regardless of whether the person is employed and independent of the profitability of the company.
Businesses and individuals would have found the recession more manageable if their tax burden decreased along with their income but the opposite is happening, earnings are decreasing and the tax burden is increasing.
The apparent saviour of the Greek economy according to the Troika and the Greek government is privatisations of state-owned businesses. For many reason I have highlighted before, privatisations will only “kick the can down the road” and will ultimately lead to the government facing even bigger deficits in the future.
Businesses such as the electricity provider and the water companies create significant revenue to the government, selling of these revenue creating assets will only inflame the government deficit issue in the coming years.
If there is a short-term boost from privatisations I will predict the boost will be extremely short-term. The proceeds from any privatisations will undoubtedly lead to a reduction in the aid packages the government is receiving so I find it hard to see a net gain by the privatisations even if they were to go ahead in any meaningful way.
To show what a small impact privatisation will make to the Greek economy compare the Greek government’s monthly deficit of 2 billion Euros to the market value of some state-owned companies.
According to Forbes the state-owned power company DEI is valued at 3.6 billion Euros, this privatisation would allow the government to cover its deficit for less than 2 months.
Hellenic Petroleum is valued at 3.4 billion Euros, this is enough to cover the government deficit for less than 2 months.
OPAP, the state-owned bookmaker is valued at 6.5 billion Euros, this is enough to fund the government deficit from just over 3 months.
So even if the government were to privatize the power company, the bookmaker and its oil company the government deficit would be covered for less than 7 months, and the values given by Forbes are from 2010, arguably the companies are worth less now.
And at the end of the 7 months the government has a reduced revenue of 1.7 billion Euros a year.
I cannot be the only person to notice this so you can expect the Greek governments cost of borrowing to increase soon after the privatisations as investors can see its revenues reducing in the very near future.
In short, privatisations, as I said above, will only inflame an already sore situation.
And this is assuming the privatisations can proceed, I can see simply massive legal hurdles in the way of these privatisations and if the contracts of these companies remain intact through the privatisation process you would expect these companies to be privatised at a massive discount.
The proposed privatisations of Greek state-owned businesses, to me at least, has huge similarities with the UK governments assistance to the management buyout of MG Rover.
As a prospective buyer of the state-owned power company, I would want to take over the businesses with all pension and employee contracts intact so I could leverage down the price of the business. I do not know the conditions of the employee contracts but I expect wages are high, retirement age is low, pensions are generous and working hours are short.
After I had bought the company with these huge obligations I would run the company for a year or so, declare bankruptcy, go through the relevant bankruptcy proceedings, whatever the equivalent of Chapter 11 is in Greece and come out of the situation having paid a low price for the assets while now owning a company which has shed its pension obligations and a workforce that starts with fresh contracts.
But I digress.
The only olive branch that the Greek government is showing to the Troika is the privatisations of state-owned companies.
For the reason I outlined above this is no olive branch at all, so in reality I have no optimism about the Greek economic crisis.
S&P have come out today and forecast the Greek economy to shrink by over 10% in 2013. This is in contrast to the Troika’s predicted 4-5 percent contraction.
I believe a 10% contraction is the more realistic of the 2 numbers.
Summary
Tax System/Philosophy
The tax burden on Greeks is not sustainable. For the tax burden to be made effective taxes need to be tied to income and not be fixed. If this does not happen the government deficit will snow ball until it reaches a critical mass. As it stands at the moment with fixed taxes, people and businesses can either afford to pay or they cannot, the government, with its fixed tax policy is not giving itself the option of receiving reduced tax revenue rather than zero tax revenue. The problem for the Greek government in tying taxes to income is that it is sure to destroy the primary deficit figures. However I think this is inevitable, the fixed taxes are just delaying the inevitable of tax revenues going off a cliff.
Regulations
Until the markets in Greece are liberalised and government subsidies stop, taxes will remain high and the cost of products and services will not represent their actual cost. As I mentioned above, it appears all market liberalisation measures are now off the table.
Privatisations
Arguably privatisations will not provide any boost to the Greek economy and in the long-term will undoubtedly hurt government revenues further aggravating the government’s deficit.
Government Workforce
This number needs to be slashed immediately, I would recommend laying off all workers under the age of 35. This would be the fairest method as well as limiting the increase to the government’s pension obligations.
All government funded “private businesses” should have their government funding terminated immediately but these cuts need to be done in conjunction with tax decreases and the cutting of regulations.
As things stand at the moment there are 2 possible outcomes.
The Greek economy continues to decline with the Troika pumping ever-increasing amounts of money into the Greek government in order to meet the tax revenue shortfall. The Troika bailouts allow the government to survive without carrying out the reforms needed to reduce taxes and regulations.
The second outcome is that the government defaults. This would force the government to immediately cut back. It is possible that the government will not cut back leading the country into some sort of communist economy like we saw in Albania under Hoxha. Unfortunately I see this being the most likely course of action post any Greek government default.
There is no question in my mind that should the current government fall that Syriza would come into power with a huge majority.
So things can continue as is or the government will default. Which is more likely? Very hard to say. Every 3 months of so we have the same headlines regarding the Troika’s uncertainty as to whether it will give more money and yet every time it does.
Going on the past 4 years, I would say the Troika will continue to pay even in the face of worsening economic figures.
This will undoubtedly lead to the GDP of Greece declining as more and more of the GDP is being made up out of Troika funding rather than real economic activity.
Following this situation to its logical conclusion, the government with the Troika will be the entire Greek economy, an economy that is much smaller in size.
Alternatively,
If the Troika were to cut funding the government would default, the government would not cut, taxes were to remain high or increase, the economy will decline until the government was the entire economy, an economy that was much smaller in size
or,
The Troika could cut funding, the government would default, taxes would be cut, government would be slashed, these actions would lead to a general decline in the trade deficit to manageable levels and the country would stabilise and have a solid foundation for the future. This is the most unlikely option if Greece were to remain in the EU and the Euro.
I think it is more likely that the Troika will continue to pump in funds (or possible transfer responsibility to the EU) and the Greek economy will continue to decline until it stabilises at a much lower level.
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