Greece enlightening

Yesterday I attended a presentation by Greek officials and delegates from the IMF and EU as part of the London leg of a two day European trip.  Considering this was a two day roadshow designed to reassure investors and rebuild confidence in Greece, and the speakers were Greeks and the guys who’ve lent them lots of money (and are likely to lend lots more), it was never going to be anything other than positive.  Nevertheless, there were some useful and interesting snippets.

Greek finance minister Giorgos Papakonstantinou spoke at length on the ‘political economy’, focusing particularly on the misperception about Greece in the media.  News reports of civil strife and TV images of burning trash cans on the streets are a wild exaggeration of reality.  Obviously there have been issues, but last weekend’s major protests in the city of Thessaloniki (Greece’s second largest), which were designed to clash with a keynote economic speech by Prime Minister George Papandreou, saw only 20,000 protestors.  Papakonstantinou couldn’t resist having a pop at ‘a central European country’ (France) that saw well over a million people protest against government plans to raise the retirement age from 60 to 62 – a change that pales in comparison to reform that the Greek government has implemented already this year.  There is still significant political will behind the Greek government despite the austerity measures, as evidenced by the healthy lead in the polls.

In terms of fiscal consolidation, results have so far been impressive, prompting the IMF and EU to release a 2nd tranche (€9bn) of the €110bn total loan package which Greece received a few days ago.  The budget deficit is on track to be cut from 13.6% to 8% by the end of year 1, with the deficit reaching 3% by year 3 of the package.  Public sector wages have been cut 15%, pensions by 10% and operating expenses by 50%.  Central government expenditure cuts have been successful, although control of local government finances has continued to be difficult (see here for a detailed IMF review of Greece’s progress).

Now the problems.  The biggest issue for Greece has been implementing reform on the revenue side.  Tax evasion is totally socially acceptable.  This issue is being addressed (eg a tax bill was passed in April, which included the introduction of a  presumptive taxation system) however tax revenues have underperformed the IMF’s expectations. 

Longer term, as Giorgos Papakonstantinou explained, the key challenge for Greece is to improve the country’s competitiveness and hence its long term economic growth potential.  Policies put forward include improving productivity of health and education, focusing on technologies such as green energy, and reform (reduction) of the large shadow economy.  These are considerable challenges, but the depth of the problems also give rise to significant growth opportunities.

The overriding message was that it is not in anybody’s interest for Greece to restructure its debt, since this wouldn’t solve the main problems which are a lack of growth and a lack of competitiveness. Greek banks are in difficulties, but that’s not due to exposure to toxic assets or over-leverage, instead the problems stem from the weakness of the sovereign.  So in Greece, perhaps in contrast to many other countries in the past few years, sovereign issues have brought down the banks rather than the other way around.  A debt restructuring would cause huge problems for Greek banks, and would rapidly become an issue for countries and banking systems outside of Greece.   

Two further observations.  Firstly, I was bemused by the initial reaction to the good but fairly obvious first question from the audience regarding what would happen at the end of the three year rescue package (when the Greek public debt/GDP ratio is expected to peak at over 140%).  The IMF and EU delegates whispered animatedly for a good 20 seconds  (had they not considered the answer to this rather important question previously?!) before finally answering the question by suggesting that if Greece stuck to its targets and progressed as hoped then this could be extended. 

Secondly, I was impressed by Giorgos Papakonstantinou – clearly you don’t get to become a finance minister of a country such as Greece without being smart, but the media portrayal of Greek government officials as being a bunch of wallies is far from the truth.  You need only look at the biographies of Giorgos Papakonstantinou or Prime Minister George Papandreou to realise that Greece has among the smartest, most capable people of any government in the world at its helm.  But brains may not be enough.  Even ignoring the short and medium term implementation risks (not to mention global economic risks), the only escape for Greece is to return to strong, sustained growth in the long term.  That may not be possible with such high debt levels and associated high interest costs.  Sure, Greek banks are able to refinance with the ECB, which means that Greece has a big advantage relative to emerging market countries that have historically experienced sovereign debt crises.  With the help of the IMF and EU, Greece’s life support system can therefore last for a very long time, and arguably for longer than the bond market is currently pricing in (we’ve recently started nibbling at Greek debt).  But if the patient is terminally ill then there is little you can do.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Mike Riddell

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