Tuesday, July 16, 2013

The Risks of a Greek Collapse?

Alexis Papachelas of Kathimerini reports, The risks of a Greek collapse:
While Greece seems to be engrossed in its “success story,” the country’s partners appear more concerned with its “stability story,” in other words whether or not the country will stay on an even keel.
There are several reasons why this is what they are most interested in. Portugal is on the brink of a major political crisis; Italy seems unable to find solutions to its problems, and an out-of-control collapse in Greece would complicate this already tenuous situation.
There are also broader geopolitical reasons. The Americans and the Europeans are becoming quite frightened by the chaos in the Middle East, especially at a time when Israel is particularly isolated. Their stance toward Turkey has also changed as they grow more and more concerned by the instability there and Prime Minister Recep Tayyip Erdogan’s arrogant behavior. A Greek “accident” is seen as very dangerous in such a climate.
Of course there are those who expect Greece to fail, but argue that even if does, it will find a way to get back on its feet. The majority of international observers and officials, however, do not take the possibility of a Greek collapse so lightly.

So what is the problem? The Greek political system and public administration are nowhere near achieving reform targets, even when these are lowered. The international community is aware that it can exert pressure on Athens until the end of the year when Greece hobbles to a primary surplus. But, as that time approaches and it feels that it only has a few more months to exert influence, the more pressure it will apply. And this is where the danger lies: Greece’s creditors may cause the crash by applying too much pressure.

In the middle of it all are the markets, either in the form of large funds willing to invest in the new low-cost Greece or in the form of lenders who would like to see the Greek bond market operate again.

Prime Minister Antonis Samaras believes that maintaining calm is the top priority. He hopes that an excellent summer in terms of tourism, public works projects due to begin imminently, the TAP pipeline and some good investment news will create a positive climate come the fall.

At the same time he is equally aware that the people are about to be hit with a cascade of taxes and that if these are not collected the fiscal gap will be hard to manage. No one can predict whether there will be a sense of positive shock or an even greater feeling of misery in the fall.

All of this, meanwhile, is taking place ahead of an anticipated clash between Berlin, the International Monetary Fund and Brussels right after the German elections over whether Greece should receive a further debt writedown and a different policy mix.
Having just come back from Greece, I can share a few thoughts with my readers on the state of the country and what to expect. In a nutshell, here are the main problems in Greece:
  • No crisis in Greek public sector: Kathimerini reports that Greece’s two biggest unions, ADEDY and GSEE, launched 24-hour general strike on Tuesday with the aim of convincing the government to withdraw its multi-bill of reforms, which is due to be voted on by MPs on Wednesday. Last week,
    Greek Administration Reform and E-Governance Minister Kyriakos Mitsotakis talked to Bloomberg about plans to sack 15,000 state employees and put another 25,000 on notice for possible dismissal. To put things into context, the 1.3 million unemployed in Greece are all from the private sector. Those 15,000 job cuts represent 2% of the Greek public sector, which is negligible. And while politicians talk about reforms, the truth is nobody is doing anything because they fear repercussions from powerful public sector unions. 
  • Taxes to bolster the public sector: To add insult upon injury, Greeks are getting hit with all sorts of taxes, a lot which still go into feeding the bloated public sector. The 23% VAT tax is hitting restaurants, retail stores, and many other companies hard but businesses have to wait an average of 337 days to receive their value-added tax returns (if they are lucky). Moreover, Greeks are bracing for new taxes to hit real estate and their utility bills. The government is hoping to raise 7 billion euros in tax revenues, equivalent to about 3.5 percent of GDP, by the end of the year. About half of this is due to come from income tax but only 30 percent of taxpayers have made their income tax declarations so far, and I doubt the government will achieve its target. In fact, the more taxes they introduce, the less revenues are coming in.
  • Greek youth waiting for an economic dawn: Bloomberg published an article on how Greeks are waiting tables and hoping for an economic dawn. The article profiles the plight of Olympia Angeli, a 28-year-old clinging to the security of working as a waitress even as her wages have fallen by half in three years. And she's part of the lucky few who has work as tourism is booming this year. The article quotes Andreas Koutras, an adviser at the Lucerne, Switzerland-based investment company SteppenWolf Capital LLC, an investment fund that holds Greek debt: “Greece has the holy trinity of crises. It has a public debt crisis, a bank crisis and a cultural-political crisis. These are self-feeding. Greece has become the lighthouse of Europe: Steer well clear of that area.” 
  • Greece has tremendous potential: Despite the tone of this post, Greece has tremendous potential. It's blessed with a rich cultural history, an incredible climate, pristine beaches, and a highly educated population. But it's cursed with a political system which ensures nothing meaningful will ever get done in terms of reforming the economy for the better. Austerity has overwhelmingly hit the private sector and the country has reached the end of the line. Most sensible Greeks recognize this but the pace of reforms is frustratingly slow. I don't see a collapse but there will be some major hurdles in the coming year.
And while I write on Greece, the truth is this is a European problem. We are witnessing the same backlash in Portugal, Spain, Italy and now in France. 

Some concluding thoughts from my trip to Greece:
  • Russians love Greece: There is a significant increase of Russian tourists in Greece. I saw this in Crete where speaking Russian is fast becoming a prerequisite to work in tourism. Russians are coveted tourists because they spend a lot of money and don't just stay at some all-inclusive resort all day (which is what most tourists on a tight budget end up doing).
  • Chinese love Greek olive oil: Greek exports of olive oil and other agricultural products are booming, especially to China where the Chinese realize the health benefits of the traditional Greek diet. Italy remains the number one export country for olive oil (they buy Greek olive oil and export it as their own). 
  • Athens is insanely expensive: Went to the beach in Athens at Varkiza on the weekend. Entrance fee was 7 euros and there was an additional charge of 20 euros for four chairs and two umbrellas. A family of four pays almost 50 euros to enjoy a day at an organized beach in Athens (and that does not include food, beverages and gas which is expensive). And it was packed, which goes to show you that while Greeks are complaining, many have money (you wouldn't know there is a crisis by looking at beaches, restaurants and bars in Athens). Still, there is poverty and misery and if you look closely, you can see it. 
  • Greece will always be a great vacation spot: There are many beautiful places in the world but Greece will always be among the top destinations. And while Santorini and Mykonos top the list of islands to visit, the true gems are in the Peleponnese region and islands where tourists rarely venture. You can spend 500+ euros a night to stay a luxury resort like Costa Navarino, but you can also spend a lot less to enjoy some truly beautiful spots in Greece.
Below, Greek Administration Reform and E-Governance Minister Kyriakos Mitsotakis talks about plans to sack 15,000 state employees and put another 25,000 on notice for possible dismissal. Ryan Chilcote reports from Athens on Bloomberg Television's "Countdown."