Thursday, September 16, 2010

A More Skeptical View of Greek Reforms

Had a chat with a buddy of mine in Athens last night who is responsible for a major investment project in Greece. He wasn't as optimistic on the country's economic reforms:
  • "I am not as optimistic as you and I think your stay in Crete is biasing your views. Crete is better off than the rest of Greece. They've been hit, but nowhere near as hard as the rest of Greece."
  • "Unlike elsewhere in Greece, Cretans understand the meaning of service. They take excellent care of their tourists which is why they see repeat tourism every year." (Other places also service their tourists properly, but it's true, Cretan hospitality and generosity is unparalleled).
  • "People like your uncle who you wrote about a few days ago, are the exception to the rule. Most businesspeople here do not think long-term." (That's pretty much true of anywhere else. My uncle is investing in solar and he told me in two or three years, the plant's energy costs will be zero. They will produce enough electricity to have some left over, which they can sell to the state's electrical utility organization).
  • "The biggest problem Greece has is tax evasion and lack of investments. The corruption among tax collectors is scandalous, and the investment climate is bogged down by bureaucratic red tape. Moreover, the government isn't paying back the VAT tax credit, which is substantial for projects like ours. Also, capital flight is all too common as the Greek elite have parked their money offshore."
  • "As far as the austerity measures, they should have fired half the civil service and other measures, like the fuel tax, are killing the economy. Road traffic is down, truck traffic is down, and car sales have plummeted. GDP was down 2% last quarter, and I bet you that figure was padded."
  • "I think Papandreou is smart. He will wait till revenues and expenses are balanced before restructuring the debt. Bondholders won't take a severe haircut, but I would't be surprised to see debt maturities being extended from 10 years to 30 years."
  • "As far as the banks are concerned, they are well managed, but they don't know what they have in their books in terms of bad loans, and just like the US, they can't foreclose and exercise security. They are basically like Japanese zombie banks"
  • "Bankruptcies will soar over the next six months. Things are dire and will get much worse before they get better."
Hardly the good news I was looking for, but my buddy is in the thick of things and even though I find him way too pessimistic, I listen to his views. Finally, on pensions, he had this to say to me:
  • "I agree with you, Greece needs a similar national pension plan run like Canada's Pension Plan Investment Board, but it will never happen. There are too many competing interests among various pension plans for the civil service, doctors, farmers, and bankers (IKA, TEVA, etc.). And corruption is rampant, which is truly the biggest problem here. I can just imagine what would happen if they ever created a large Canadian style pension investment board. Kickbacks will be rampant."
My answer to that is simple: Governance! Take the Canadian pension model and add more transparency and checks and balances. There is simply no reason for Greece not to reform its pension system by consolidating all the various pension plans and adopting world class investment and governance standards.

I am not as cynical on Greece as my friend in Althens. Sure, things are bad, probably will get worse before they get better, but for investors with a long-term investment horizon, Greece offers plenty of opportunities right now.

On that final thought, listen to Petros Christodoulou, the director general of Greece's Public Debt Management Agency, talk about the outlook for Greek bonds. Mr. Christodoulou ruled out restructruring. I know many of you will dismiss his views, but some large funds are starting to back Greek sovereign debt, which is very encouraging.

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