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Greece: A view from the ground.

First of all greetings to everybody as I just joined SeekingAlpha – this is my first piece and I apologize in advance as English is only my second language, being Greek. Allow me to give you a picture of Greece from the ground  as numbers dont tell the whole truth. 

The country has been under the spotlight for past 6 months, making the headlines as the budget deficit spiraled out of control and the state of the economy has been deteriorating.  This was no surprise for any analyst covering the country, as the structural issues of the Greek economy have been the same for the past decades.

 a) A huge public sector: Greece boasts (?) 1m public servants at a country of a total population of 11m! Moreover, the financial organization of the public sector is non-existent. Very few public entities are required to file Balance Sheets and P&Ls (the exception being of course the listed entities). This leaves plenty of room for corruption. Local authorities (municipalities etc) top the corruption list. Public companies are extremely overstaffed on administrative personnel and short on actual technical/ qualified personnel, as political parties used these entities to hire non-qualified staff (prospective voters). Public servants cannot be fired while up until only a few years ago, women public servants had the option to retire after 18 years of work (!). We have thousands of pensioners at the age of 38-40! In case you wonder why the pension system is on the verge of collapse!  Please note public sector wages and pensions (combined with debt interest) eat up more that 80% of the tax revenues – thus the annual need for debt which now stands at close to 120% of GDP.

b) Tax evasion: Tax control is inefficient, the tax controllers are often corrupt and the tax regime changes VERY often (believe it or not Greece’s tax regime changed almost 100 times within the course of the past 10 years). The unclear and ever changing picture of the corporate tax regime and the always changing  personal tax/ VAT regimes are the No 1 reason for tax evasion by both small/ medium and large scale entrepreneurs.

c) The unorthodox growth of the Greek economy: In the course of the past decade  GDP growth was fuelled by consumption which was in turn fuelled by easy credit as a result of falling interest rates and the inclusion of the country in the Eurozone. Limited real investments, no real production – just a bubble of consumption.  Last but not least, the educational system has gone down the drain, with universities being “puppets” of political parties and doing everything else except research and teaching (when they are open, as last year 4 months were lost due to protests). This has a direct negative effect on the quality of the public sector management as most graduates (future managers) are “trained” in political intrigues and games from the tender age of 18…

Bottom line. No matter what fiscal measures the government announces, the underlying state of public affairs/ business is unlikely to change. Unless drastic and unpleasant measures are taken as soon as possible, there is little hope for a sustainable recovery, in my view. The only way to clean up this mess is  harshness and boldness (two qualities no Greek government has shown in the past 35 years).  Investors should be looking for the following (not some of them – all of them):

a)      Pension fund reforms with age limits climbing to 67

b)      A big privatization schedule for 2010

c)      Closing down / major  restructuring of major organizations - like the Greek Rail (OSE) which currently has accumulated losses of Eur 3bn (1% of GDP!). OSE operates a handful of lines  with load factors below 30% and thousands of employees!!!!

d)      Slashing of benefits for public servants and reduction in the absolute numbers - introduction of lay-offs

e)      A universal tax rate for corporates and individuals at the range of 10-15%.  We have the precedent of Cyprus and Romania where governments cut the tax rate into half, and the absolute tax revenues tripled as it didn’t pay off any more to tax evade.  Introduce tax for the real estate owned by the Church (one of the biggest players in the sector is currently tax exempt!).

f)        Changes in Local Authorities and reduction of the admin staff in municipalities which are the No 1 black boxes of corruption and spending (by merging prefectures – we have 51 prefects (or States) and we are 11m!).

g)      Modernisation of public management (still in 2010 there are loads of entities with no IT systems – no cross checking is available leaving huge room for fraud) and audited annual reports by ALL public entities with accountability for managers.

h)      Major and drastic  reform of the IRS in order to improve collections and controls.

If these steps are taken then there might be a chance for sustainable recovery in the medium term. Such actions would provoke huge social unrest - underpinned by unions which have been pampered to such an extent that in some occasions they protest because they don’t wont to their members to pay taxes( recent examples:  gas station owners, taxi drivers) and they get away with it.  On the positive side, the current government has a 60-70% approval rating with the mandate to take harsh measures. Nevertheless, the remaining 30% are the pampered minority which can be extremely vocal and paralyze economic activity with strikes. It remains to be seen if, finally, there is a Greek government willing to do what it takes and not what is nice! Until then, although a relief rally in Greek equities should be expected, investors should adopt a cautious stance.




Disclosure: Long NBG Pref (NYSE), Long Bank of Cyprus common stock