Tuesday, September 20, 2011

Rescuing the Titanic?

I've been taking it easy, slacking off from blogging and tweeting, but tracking the news in Greece very closely. Have to admit, it's depressing and I understand why Greeks are so turned off, not bothering watching the news. But there are also some excellent discussions going on in the news here that none of you will hear or read about in mainstream media.

I've also benefitted from my discussions with family members. One of them is my uncle who is one of Greece's most successful entrepreneurs. He started a plastics company, Plastika Kritis, decades ago and he knows what is ailing the Greek economy. Over dinner on Friday night, we had a long discussion on tax evasion which he calls "Greece's national sport." He said the public system is riddled with corruption and waste and that Greek labor is too expensive and unable to compete with other countries.

My uncle also told me that he will read what George Soros has to say about Europe and the global economy but he's less enamored with economists. "Economists have gotten it wrong because their models cannot take into account the huge underground economy in Greece and the corruption and waste that takes place in the economy." He gave me a few examples and I paid close attention to everything he cited.

My cousin, his son, was at that dinner. He also gave me examples of big tax evaders who even after getting caught, continued cheating on their taxes. Interestingly, he told me Turkey has now surpassed Germany as Greece's number one export market. Greece also imports a lot from Turkey, underscoring the important nature of the trading relationship between these two countries which have a long and difficult history.

But it was Greece and its problems that concerned us. At one point, I agitated my uncle, father and brother-in-law because I said that if they caught the big tax evaders and threw them in jail, at least the masses would see there is some justice in the system." My father told me that only a small portion of the 350 billion euro debt is due to these big crooks. My uncle and bother-in-law agreed, stating that fraud, waste and inefficencies caused the debt to spiral out of control, but I remain convinced if you throw some of the crooked politicians, business people, doctors, lawyers, accountants and tax collectors (yes, tax collectors!) in jail, seize their assets, make it public, the government would be sending a strong message to the public that they're getting serious on cracking down on tax evasion.

Instead, the government is increasing real estate and other taxes, cutting pensions, and now they're going to make drastic cuts in the public sector. Some of this is needed, as there is abuse and the public sector is overbloated, but these austerity measures are wreaking havoc on the Greek economy. And I'm not sure they will even succeed. For example, they haven't been able to collect taxes from 2009 and 2010 and we expect them to collect taxes on real estate?

Then there is the issue of the Greek Orthodox Church which is exempt from paying real estate taxes on their non income generating properties. We are talking about a fortune here. The Church is very rich (owns 18% of National Bank of Greece and prime real estate), very powerful, and politicians fear it and would never in a million years impose taxes on their properties. I guess when the Church talks about "shared sacrifices," they mean the masses have to sacrifice more, not the Church.

There is a lot of money in Greece that people aren't aware of. Just like Italy and Spain, there is a huge underground economy. When I say huge, I mean huge, easily 40% or more of GDP. On Friday evening, after my dinner, I went to share a drink with another cousin of mine who owns a popular bar in Heraklion. He told me that many employees at bars, shops, businesses and even hotels are undeclared. This means that businesses get away from paying "IKA," a payroll tax for social security, and many employees collect unemployment while working "under the table." And because tax collectors are seeing their incomes being cut, they're extorting many businesses to make up for lost income. And Greece has become a haven for drug trafficking and weapons smuggling, all of which goes on with the full knowledge of authorities who turn a blind eye.

(Note: my cousin is long National Bank of Greece, "NBG", and thinks foreign investors just don't understand its Balkan and Turkish operations and how cheap it currently is. He dismisses rumors of nationalizing this bank as "pure fear mongering" and reminded me that the Church owns an 18% stake in NBG and "it will never sell its stake").

In short, Greece's tax system is a joke. With every new tax, tax cheats find ways to circumvent it. This happens everywhere, not just Greece, but here it truly is a national sport. And the big fish with political connections are getting away with murder. They're the worst offenders. This forces the government to pensions and impose taxes on hard working Greeks that are already having a tough time making ends meet. If the government wasn't so corrupt, they would sign a tax treaty with Switzerland and immediately cease assets of these tax crooks.

At a minimum, Greece should introduce a tax amnesty program just like the one the IRS recently introduced in the US, allowing them to reap $500 million in back taxes and interest. Of course in the US, cheating on your taxes is worse than drug trafficking and the penalties are extremely harsh. Greece -- and dare I say Canada -- can learn a lot from the IRS and US tax system, which is far from perfect but at least they impose tough penalties on tax cheats.

But Greece is now the eye of a massive debt hurricane that threatens the global economy. Greek creditor talks will continue on Tuesday and now the Papandreou government is considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the eurozone or by exiting the single currency (as if Greece has money to waste on referendums!). And if that's not bad enough, S&P decided to downgrade Italy's debt by a notch (news coming out of Italy on Greek television is truly disturbing).

Sometimes it feels like the entire global financial system is hanging by a shoe string, and that Leo de Bever is right, "they're rearranging the deck chairs on the Titanic." It's depressing watching the news in Greece and elsewhere, but I remain hopeful that Greece, Europe and the world will survive this crisis. Admittedly, even I get frustrated with the slow and stupid responses from policymakers around the world, but the financial oligarchs have too much at stake to let the global financial system sink.

Finally, I want to end by plugging a book by a Greek economist, Nikos Christodoulakis, called "Rescuing the Titanic." It has not been translated into English yet but when it is, I urge you all to buy a copy as soon as possible. I heard him speak on Sunday morning on Skai TV and he's excellent. Below, for those of you who speak Greek, watch the latest episode of Skai's "Kiriaki me Drasi." A must watch discussion on the Greek economy.

Feedback: Someone who knows the Greek economy well sent me his thoughts:
The Titanic sank in the 1980's. This is a massive salvage operation to bring it back to the surface and we know how this will end.

Over my time in Greece, I met plenty of successful Greek entrepreneurs and they all understand the problem.

What surprises me is that they are incapable of doing anything about it. The political class is so powerful and so entrenched. They have rotted the system to the core.

The country needs leadership and it needs to expunge itself from New Democracy (ND) and PASOK. The political families that have ruled Greece since '74 must be shown the door. The old ND and PASOK must be dismantled completely in such a fashion that they can never resurrect themselves.

This type of wholesale change requires someone who is total SOB or a military dictator. Sometimes, I wonder if they are heading down the military dictator route.

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