THE UFOS IN THAT LATEST IMF PAPER, PLUS WHAT WE WILL BE DEMONSTRATING ABOUT THIS YEAR

One of the easiest ways for journos to get a scoop these days is to go through the latest IMF projections for Greece and search for the word 'unidentified.' This is basically another way of saying 'not sure how.'

The word occurs 11 times in the latest review of Greece's programme, and although not each UFO (unidentified fiscal objective) tells a story, together they tell the following two:

• Page 46: The programme is short of financing: EUR4.4bn in 2014 and 6.5bn (2.4% and 3.4% of GDP respectively) in 2015, as original commitments anticipated market access around this year. 
• Page 50: The Greek government will have to bring forward 100m of savings or revenue in 2013 and  find an additional EUR3.4bn and EUR0.7bn (or 1.8% and 0.2% of GDP)  in 2015 and 2016 respectively.
• Note that the IMF aggregates figures assuming all unidentified savings will be delivered.

Also, watch out for the following demonstration hotspots:

1. The Government will prepare a new draft Medium Term Fiscal Strategy (pg 82) by early September.
2. The Government will call for expressions of interest from potential buyers of EYDAP in Q4 2013 (Pg 96)
3. By October 2013, any state entity that is not contributing to the Commitment Register (i.e. the central register of approved spending that doesn't yet correspond to actual invoices) will have its state funding cut off, unless it has a budget of under EUR1m.
4. An audit of Social Security Funds is due by end-August (pg 88)
5. A new Code for Lawyers is supposed to have been rolled out by end-July (pg 92).
6. Greece is supposed to have rolled out its anti-corruption action plan by end July 2013. The tax administration version of this plan has been ready since January and can be read in Greek here. Warning: it opens with a Gandhi quote. 
7. New reforms to social security contributions are due by November (pg 94) 
8. Electronic import declarations should be phased in by end November (pg 94)
9. By end September some medical supplies will be available to buy outside of pharmacies (gasp!)
10. By end 2013 the government is meant to have hired 400 new collections officers to claw back overdue social security contributions from employers (pg 86-7)
11. The Government plans to consolidate all agencies related to tax administration and economic crime, and has already prepared the legal framework that will allow this (Pg 84)
12. A whole raft of new luxury laws will come in by end of August 2013 and a memorandum of understanding will be signed with Greek shipowners (pg 79). I think the first shorts of that battle have already been fired. 

And a parting note. If you want to feel in your bones the sheer evil of Greek government bureaucracy, read page 82 on how we intend to comply with the Late Payment Directive. Then read pg 86 on the treatment of VAT owed to businesses. The Greek Government is calmly informing the world that it intends to break the spirit, if not the letter, of the Late Payment Directive.

KILL MEEE... KILL MEEEEE... PART 4

BACKGROUND:

Kill me no. 4 is the sequel to the original 'Kill Me' post available here, which in turn is the sequel the Dog Ate my homework v. 2 post and of course the original 'Dog Ate my Homework' post. All of these posts are reactions to the IMF staff reviews of Greece's standby arrangement and the subsequent letters of intent from the Greek Government. 

Together the two sets of documents could explain how the Greek Government is from Venus and the IMF is from Mars, except of course everyone knows where the Greeks are originally from. 

Anyway dear readers, I know you've been waiting for this so here goes. 


Here are the quickest possible highlights of the Fourth Review by the IMF with only a little play by play from me.

Open discussions of Greece’s financing challenge and euro-zone countries’ insistence on private sector involvement to resolve this have convinced markets that Greece will restructure its debt (pg. 4)

[Translation: The market expects a default.]

The fiscal position has stalled (pg. 6)

[Translation: Current austerity measures aren’t working]

Wholesale funding markets remain closed, and exceptional ECB liquidity support has grown (pg. 5)

Banks’ combined market value of €13 billion falls well-short of their reported Tier I capital of €30 billion (pg. 6).

[Translation: The market says that the stuff regulators say your banks are OK to hold as capital is actually crap. Nice job everyone.]

First quarter 2011 targets were met, with the help of temporary factors (pg. 7)

[Translation: Q1 2011 targets were ONLY met with the help of temporary factors. Your coach is about to turn into a pumpkin]

GDP is now projected to contract by 3¾ instead of 3 percent in 2011 (an outlook broadly in line with that of other forecasters). (pg. 9)

[Translation: Everyone else’s forecasts haven’t changed; we should have listened to them]

Risks remain skewed to the downside in the near term (p.g. 9)

[Translation: You are more likely to miss your targets than meet them for the next few quarters]

The scope for shortfalls in policy implementation or in macroeconomic outcomes is limited […] stress testing shows that full and timely program implementation is absolutely critical: incomplete fiscal adjustment, privatization shortfalls, or delays in structural reform implementation (producing a considerably slower economic recovery and fiscal adjustment) would see debt remain at very high and likely unsustainable levels through 2020 (p.g. 10)

[This point is repeated in various different ways throughout the report. Translation: You mess this up one more time and it’s Good Morning Harare!]

The discussions focused on Greece’s deeper medium-term policy needs and identifying ways to replace the expected market financing that is now likely no longer available (pg. 10)

[Translation: you can’t borrow from the markets anytime soon.]

At the end point, Greece would be targeting a primary surplus in the range of 6½ percent of GDP (pg. 11)

[Translation: The adjustment programme only works if you achieve an impossible primary deficit target]

there is a good motivation to switch the headline program targets to focus on primary balances, namely to insulate the fiscal assessment from the potential variability in interest payments (pg. 11)

[Translation: In addition to the markets we also expect a default, which is why we’re not counting interest payments anymore]

The government has prepared a medium-term fiscal strategy (MTFS), which would […] reduce the size of the Greek state: overall spending would decline from 49.5 in 2010 to 43.1 percent of GDP by 2015 (pg. 12)

[Translation: The nightmarish small state we have in mind for you is the same size as Canada’s.]

All administratively complex programmes are massively back-loaded (this is not verbatim, but see Pg. 13)

[Translation: We’ve given up on administrative reform]

[T]o begin implementing the strategic plan for medium-term reforms, the authorities will begin […] a number of major institutional changes (creating a central directorate for debt collection, a large taxpayers unit, as well closing and merging several uneconomic and inefficient local tax offices). (pg. 14)

[Translation: You don’t have a large taxpayers’ unit or a debt recovery unit? WTF?!]

[T]he system will remain heavily reliant on ECB support […] peak support could top €130 billion. Greek banks cannot by themselves rapidly reduce their existing level of ECB exposure (pg. 16)

The authorities also committed to encourage banks to seek foreign merger partners (pg. 17)

[Translation: Someone has to bail out your banks. We’d rather it was other banks from abroad.]

The BoG […] may appoint a commissioner with managerial powers to run a troubled bank; it may withdraw a bank license and then put the bank into liquidation; and it can impose a moratorium on a bank's claims. However, the Greek legal framework lacks specific bank resolution tools towards lowering the cost of resolving banks. [T]here are no techniques to allow the continuity of banking operations, including sustained depositor access (pg. 18)

Reforms are also needed to ensure that the deposit insurance fund can be used to fund such techniques, and to establish depositor preference over unsecured creditors. (pg. 18)

[Translation: If you default before you fix this shit, your citizens will not be able to get their deposits back.]

[UPDATE: Since people are asking, this doesn't mean people will lose the deposits necessarily, and it could just be a scare tactic. But what it does mean is that in the event of a default, restoring people's access to their deposits will take time and the Greek government will have to negotiate the status of depositors' claims. Unless of course we sort out the legal framework first.]

The supervisor has thus requested that undercapitalized banks meet regulatory requirements or find appropriate merger partners by end-September. (pg. 18)

[Translation: Your banks need to put a fire sale together pronto.]

Still, for the timetable to hold, market demand must exist. This is a significant risk which the authorities can manage by ensuring that foreign investors can participate, and by establishing a track record of even-handed and timely execution of transactions (to demonstrate to bidders they have a real chance to acquire the assets). (pg. 20)

[Translation: Even if you hold a fire sale, who is going to buy this crap? They don’t even trust you to honour your end of the bargain]

firm-level collective agreements, introduced in late 2010, would allow for wage reductions below sectoral minima (to the nationally-agreed floor) within the formal bargaining framework, thus overcoming this rigidity, but had been used little to date. (pg. 23)

[Translation: Businesses aren’t using the one good labour market reform you managed to push through. Someone isn’t playing ball.]

the end-March indicative target on the accumulation of new domestic arrears by the general government was again missed in March. A waiver of applicability is being requested for end-June performance criteria (except concerning external arrears). (pg. 27)

[Translation: you’ve missed your targets but we’ll look the other way.]

A tailored downside scenario exposes additional vulnerabilities. Debt would peak at 186

percent of GDP in 2015 and remain above 178 percent of GDP in 2020, a situation highly unlikely to allow continued market access. (pg. 70)

[Translation: You know how you keep missing targets? Well if you stay on that path you’re on track to owe fuckloads forever.]

TROIKAS ALL ROUND!

Readers not living under a rock in the past few days will have noticed that financial contagion has spread to Italy's banks, putting strain on the sovereign itself. You can follow the snafu as it unfolds here.

My Greek readers need not worry that this is somehow our fault too - apparently it is the Spaniards' fault - no, really.

I will add more to this story later today but for now I must share with you the following paper, which just landed in my inbox. The timing is perfect.

You see, the IMF have by now realised that one by one all of the PIIGS will fall, that the EU as a whole is insolvent and that the battle lines will be drawn around the UK and France. So instead of obsessing about the next bailout, a clever IMF wonk, one D. Kanda, has tried to estimate what the optimal fiscal adjustment programmes might look like for six European countries -France, Germany, the Netherlands, Italy, Ireland and the UK- given the preferences of policymakers and existing commitments. The results can be seen here, or in the tables below for short:

Coming soon to a negotiating table near you.

KILL... ME... KILL... MEEEEE...

The latest review of our stand-by arrangement by the IMF staff has come out and it is apocalyptically hilarious. The IMF still refuses to publicly accept its mission for what it is: to act as administrator as we negotiate our default. The suits introduce the show with the following remark:

“The economy has been evolving broadly as projected.”

Translation: Our original GDP forecast was only off by about one eighth. The Greek economy contracted by 4.5% in 2010 or 6.6% minus seasonal adjustments, against initial expectations of a 4% drop.  And we’ve reached our 2011 unemployment ‘target’ already, a year early.  

In their headline figures, the IMF have somehow managed to maintain the fiction of Greek debt/GDP stabilising by 2012. Riiiight. As always the background figures tell the unmassaged truth. Expressed as a percentage of government revenues (a more accurate measure of sustainability), debt will now peak at 392% in 2014, not at 343% in 2012 as previously believed.

With no additional measures put in place, the IMF expect our debt to simply never come down, exceeding 211% of GDP in their forecast scenario. Even better, with key variables at their long-term averages, debt will stick to 141% of GDP and pretty much stay there.

Not bad enough for you? Even with the current measures in place, the IMF concedes that if we consistently miss its growth targets by 1 percentage point, as shown below, Greece’s debt will never return to a downward trajectory. Last year, the IMF overestimated growth by .6 percentage points so things are on a knife’s edge; a statistically insignificant misstep away from oblivion, even with a perpetual IMF loan facility. Weisbrot reports that the IMF typically gets it wrong by much more than that. Almost half of all adjustment programme reports make adjustments of 3% or more. 

Another way of looking at this is to consider that 2010 GDP growth (-4.5%) came in at the very end of the range of estimates. This year’s lowest estimate is -4.1% (courtesy of the Economist Intelligence Unit, although Pireaus comes close at -4%, for those of you who don’t trust foreigners). The IMF’s projection is [drumroll] -3%. Checkmate.

Appropriately, the IMF makes some allowances for error in its scenarios. Under one of these, our debt will have exploded to 250% of GDP by 2019. Importantly, these downside risks (recognition of implicit liabilities, bank recapitalisation, lower growth, failure of reform, low inflation) are strongly correlated, so the combined adverse shock scenario is hardly an outlier. 

Even more amazing: the interest cost projections of the IMF assume a spread of 500bp against German bunds. This may be twice what the original plan projected but it’s almost half the actual figure. [Ed: ZOMFG this is the most PWNED figure in the history of IMF and Greek Gov’t muppetry. WTF?????] That such a crucial figure is so far wrong in black and white can only mean one thing – the IMF have given up and are just cooking the books.

Now I must concede that even with moderate success the Memorandum should bring spreads down somewhat. How far down though? As I explain here, we've lost the glamour of a safe bet, so our spreads can't go back to where they were before the crisis. With the same fundamentals they should be about one third higher at the very least. And we're insolvent, so unless we can perpetually find investors willing to flip our short-term debt to others and pray the musical chairs don't stop while they're still in the game, insolvency will at some point mean illiquidity.  

Actually I’ve got a theory about this stupid number. It’s the average of two states. State 1 is Greece as an independent but mostly bankrupt country, with spreads of 1000bps. State 2 is Greece as a German protectorate, without debt of its own, and therefore a spread of 0. Like one of the twisted souvlaki vendors of old, the IMF is serving us Schrödinger’s cat on a skewer. More to the point, it's entirely likely that with EFSF intervention our spreads could fall because German bonds will start to become junkier. The IMF will get their wish but we won't get cheaper debt. 

[Cue trivia point: everyone please look at the title of this paper]

But incredibly this LOLfest gets better.

‘In the banking system, deposit outflows have continued at a modest pace, and credit has begun to contract, but financial system stability has been preserved with the assistance of exceptional liquidity support from the ECB’

Translation: None of our banks would survive one day without the ECB, which provides 19.5% of the system’s funding. In fact in net terms the system can’t even lend any money. It only takes one badly written note allegedly forwarded by 10 nobodies to get deposits out of the system at the ‘modest pace’ of EUR200m in a couple of hours. Things are so bad that even the merger of two of our major banks cannot produce one creditworthy institution. And here’s the belly laugh : the IMF’s new projections anticipate EUR4bn less in bank recapitalisations over the next three years than the original plan! F*ck knows why, perhaps more wonder mergers like the Alpha NBG deal are meant to materialise somehow.

So when do we get to default? Under the IMF’s projections, our primary deficit is still on track to reach zero in 2012. Better start working on that debt audit.

All of this hot stuff comes hot on the heels of our latest Labour Force Survey (LFS) data, revealing that unemployment has rocketed to 14.2%. My favourite LFS metric is actually the % of the unemployed who received a job offer but turned it down. Because it’s not a headline unemployment figure there is very little incentive to game it and it’s indicative of much more than just labour supply and demand – including growth expectations and public sector jobs growth, as I explain here.

This figure is now 7.4%, less than half what it used to be in the good days of 2006 but still some way to go from zero. The closer it gets there, the more desperate the people will become. Other highlights include 17.4% unemployment in our worst-performing border region, and near-record differences in unemployment rates between graduates and school leavers as well as Greeks and foreigners. This kind of bifurcation bodes ill for everyone concerned.

Happy end of the world everyone!!!

YOU CAN HAZ MORE DEATH SPIRALZ!

The IMF and our own Government stuck to their line of -4% growth in 2010 for as long as they could. Then they reluctantly went down to -4.2%.

Now, Eurostat has finally confirmed that the Q3 GDP figure is most likely to end up at -4.6% after all.

Will they never learn?

DOG ATE MY HOMEWORK, PART 2

Another day, another little bit of vindication. Our government's latest Letter of Intent to the IMF is so hilarious they have taken a bit of extra time to respond compared to the last time. Half of the IMF staff are in tears, the other half are ROFLing; it will amount to the same thing in the end.

After denying the obvious for as long as they could, both our Government and the IMF have managed to admit that their growth projections for Greece were bullshit all along. The new target for 2010 is -4.2%, which is still over-confident. The IMF points out all past projections have been off by 0.5%, so my money is still on -4.6%, after two or three years' worth of inevitable reviews. Amazingly, although growth figures are disappointing, we don't seem to expect any corresponding disappointment on the Government revenue side. Hint: there will be. The IMF can always turn to its own report and look at where retail sentiment and spending are heading - ah, screw it. Here are the tables. The retail indicators spell out A-P-O-C-A-L-Y-P-S-E. If our exports can continue to grow in the fact of a renewed global recession, maybe something will be salvaged. What's the chance of that though?

We're also using our newly-disclosed debt and deficit figures to make more politically palatable the inevitable cuts to our wider public sector.  Eurostat's cynical decision to sit on these figures in order to maintain our delicate political balances ahead of the municipal elections of 2010 has turned out to be utterly pointless as everyone and their dog had by now realised the cuts were coming.



I will draw the readers' attention to one major WIN before I go on to my catalogue of FAILZ:

"Government reforms the mechanism for collective bargaining at the firm level in close cooperation with social partners. The new law establishes that firm-level agreements prevail over those under sector and occupational agreements without undue restrictions (for this purpose, Law 1876/1990, Article 10 is amended). The conclusion of firm-level collective agreements should not be restricted by law, notably by requirements regarding the minimum size of firms entitled to engage in collective bargaining." 

"Government amends Law 1876/1990 (Articles 11.2 and 11.3) to eliminate the extension of sector and occupational agreements to parties not represented in negotiations." 

This was honestly well done. If you don't know why, you can catch up with the facts here.

What is amazing is that our tertiary union for the private sector, GSEE, headed by my distant relative, Giannis 'punchbag' Panagopoulos, has responded anaemically  (what is a strike these days anyway?) to this development, which is essentially like turkeys failing to show up to the vote on whether or not to celebrate Christmas. As a result, GSEE's socialist-aligned faction is about to go rogue and either topple Panagopoulos or split in two. The result will not be fewer strikes, by the way. It will be wildcat strikes and of course the Union falling into the hands of the opposition, who have not to date shown any signs of being a responsible stakeholder.

And now for those gems:

Gem #1:

"Anti evasion plan. Based on the work of the task forces, the government will launch the anti-evasion plan by January 2011, including with a public communications campaign. The plan will include quantitative performance indicators to hold the revenue administration accountable. Information about the achievements of the plan will be regularly published."

You mean - we don't have a plan yet? Did we peak with that Google Earth business? And is this really the type of accountability we need? For background, consider this.

Gem #2:

"The Bank of Greece will continue to safeguard banking system liquidity. The legislation enabling a new tranche of government guaranteed bank bonds in the amount of EUR 25 billion was voted at the end of August, and Greek banks are now able to issue, if needed, those additional securities. The Bank of Greece, in close cooperation with the ECB will continue close monitoring of the liquidity situation of the banking system and stands ready to take the appropriate measures to maintain sufficient system liquidity."

The BoG is safeguarding banking system liquidity? I thought that was the ECB, which is 'safeguarding' liquidity by being its sole provider. Do people even care whether the BoG exists anymore?

Gem #3

"ATE Bank will be thoroughly restructured as a stand-alone institution. [The] management will announce a rights issue by end November 2010. [...] [A]n updated assessment of the capital needs of the bank will take place by the end of January 2011. This will be based on an additional review of the loan portfolio by an audit firm. [...] The government intends to keep this capital increase fiscally neutral, potentially by drawing from the resources available from the surplus of reserves within the Hellenic Loan and Consignment Fund (HLCF)." 

Fittingly, the Treasury-run HLCF's symbol is a Chimaera. [ed: it isn't. It's a Gryphon. That's why you should never blog when sleep-deprived.] The Fund, which we're turning into a slush fund for propping up our financial institutions, only has about EUR7bn of assets and less than EUR700m of reserves and was built with the explicit purpose of lending to civil servants and quango employees. Hence its assets are strong only because its debtors' income is essentially guaranteed by the state, and its creditworthiness will decline as we take the knife to the wider public sector and its pensioners. That would be a good time to call in its reserves but obviously we will have poured them down the black hole that is the Agricultural Bank of Greece by then. As the IMF notes:

"[The HLCF's] banking activities are unregulated, it does not have access to established facilities to help manage its liquidity risk, it is exposed to significant interest rate risk, and both its internal and external control procedures are deficient. While small, it can amplify liquidity shocks through the system by competing aggressively with banks for deposits. It was agreed that the HLCF should be unbundled through legislation, with the banking activities transferred to an institution able to properly manage them. Its sizeable surplus of reserves could be extracted to fund the capital increase in ATE." 

There's nothing fiscally neutral about using the HLCF as a slush fund; it's cash neutral but the taxpayer is essentially offering an implicit guarantee. As plans to spin off its profitable financial arm have surfaced, it was recently occupied by its own staff. Good luck guys.

Gem #4:

"The National Actuarial Authority provides by 15 December 2010 interim long-term projections of pension expenditure up to 2060 under the July 2010 legislation covering the main pension schemes (IKA, OGA, OAEE and OPAD)." 

This is massive. The interim report was already overdue months ago and there is no way the actuaries will come back with good news. Remember, Greek pensioners are more powerful than employees, but employees are on the ropes. Things are going to get ugly over pension reform.

Btw, where is that interim report? In case no one has noticed, the Letter of Intent was published on the 17th. Ironically, our mass media are so dependent on the Government for a steer on this as a news item they are happy to  repeat the whole 'by the 15th' point without even putting it in the past tense.

Gem #5:

"Government presents a report analysing the potential contribution of the tourism sector to growth and jobs. It should identify legislative, administrative and other obstacles hindering competition and market entry to the realisation of sector potential.

Government presents a report analysing the potential contribution of the retail sector to price flexibility, growth and jobs. It should identify legislative, administrative and other obstacles hindering competition and market entry to the realisation of sector potential." 

The former report has the advantage of not being another ludicrous tourism strategy, but in zeroing in on regulation it's missing the point. As the World Economic Forum has demonstrated. the point is quite simple - Greece is no longer price-competitive (see pg. 206), partly because of the Euro and, I suspect, because our public spending on tourism is opaque and inefficient (see pg. 72). Only employment law is a real hurdle, mostly with regards to the use of seasonal foreign labour.

The latter report is being pushed as some kind of bizarre industrial policy piece when in fact it's a review of the potential for price controls. Or perhaps a bargaining chip that, it is hoped, which will force retailers to exercise restraint. Par-tay!

Gem #6:  

"Services directive"

Which LOLmonger thought to include this in the Memorandum? Implementing EU Directives is our Treaty obligation. We'd have to do it if we didn't owe a penny to anyone. Although perhaps we'd get away with dragging our feet. We are, as it happens, one year behind already.

WORLD'S WORST KEPT SECRET OUT JUST IN TIME TO KILL THE IRISH

Our budget deficit for 2009 was 15.4% of GDP and Government debt was 127% of GDP, as revealed by Eurostat in its latest release.

Amazingly, although we have no credibility to lose anyway, Eurostat did manage to damage its own credibility by missing its own earlier confidence interval substantially. The ceiling had previously been set at 14.1% for the deficit and 122% for the national debt.

Amazingly, Eurostat was, er, unable to squeeze this work in before the second round of our municipal elections, even though the ballpark figure has been out for more than a month.

Presumably this was meant to foster stability by giving Yorgo (the Threesome's only credible counterparty in Greece) a boost in the polls. Instead the announcement has coincided with Ireland's final fiscal meltdown, for which I'm sure we'll get a lot of polite greeting cards, perhaps featuring leprechauns holding empty pots.

Sounds a bit like the way in which our Government put its foot in it in 2009 by reporting its estimates of the deficit and national debt right ahead of the Dubai Debacle.

The truth hurts, Eurostat, but it hurts less if you tell it all at once. MUPPETS

I CAN HAZ DEATH SPIRAL?

So, apparently our latest GDP estimates are in and they look predictably crap.

The 4.5% y-o-y fall in real terms was apparently close to everyone's expectations, except for those of one rather important player - the IMF, who projected a 4% fall up until its review in September. My naive estimate back in August was that we would see GDP fall by 4.6% to 6% y.o.y. by the end of 2010 and so it seems set to be.

UPDATE: An astute reader here in the City has brought two mistakes to my attention. First, there is a major discontinuity in the quarterly data from 2009 to 2010 - the data are not comparable, strictly speaking. So readers must take my analysis (and those of Eurostat and the Greek Government) with a pinch of salt. 


Second, my -6% figure is totally bonkers unless the anarchists do manage to burn Athens to the ground this November. -4.6% sounds a lot more plausible as it implies a quarterly fall of 1.2%, which is the rate at which GDP fell in Q3 2010. This may still be an overly pessimistic view, as even this downturn has to bottom out somewhere. That said, I suspect that unless we've applied some of our usual political 'stimulus' in the run-up to the elections  (at the expense however of revenue targets) then the combination of uncertainty regarding the electoral outcome, plus the effect of civil unrest in November will deliver very close to -4.5% by the end of this year, at least some revisions down the line when the GDP estimates have hardened a little.


Many thanks to reader NoC for these clarifications - saved me from getting caught out by less sympathetic readers.


Finally, we would both add that readers must be very careful as the revisions between the Q2 2010 and Q3 2010 releases are vast. Generally their effect is to start the decline in GDP much earlier, which affects the yoy figures. It is my belief that these are not aimed at addressing the discontinuity ELSTAT have highlighted - that, when it comes, will be a one-off, big-ticket revision. Cynics might call this manipulation but actually it is very likely to have been made in good faith.


Unsurprisingly, the IMF's target of 11.2% unemployment is also not on track to be met. In fact, the latest estimates were 11.8% for Q2 and even 11.7% in Q1 2010. Not that forecasting unemployment means anything in Greece since our labour market is unable to match labour to vacancies.

In addition to the fact that we still can't bring tax revenues in, the IMF may wish to note that another, far more important source of taxation is failing: inflation. The GDP deflator is now growing at 2.4% y-o-y, against an IMF estimate of 3.5%. This is despite CPI inflation estimated at 5.2% against an end-of-year target of 4.2%. My national accounts voodoo handbook tells me that this means that rising commodity prices and continued distortions in the market have kept input prices, profits and rents rising fast even as demand kept value added inflation subdued. This is the worst of both worlds - consumers are being taxed via inflation but the state is only able to use a small amount of this 'tax' to 'pay' down debt.

Isn't it time the IMF saw this for what it is? It's a death spiral.

I CAN HAZ GUNZ AND GUCCI JEANS?

Another big news item this week was Greece’s continued slide down the scale of Transparency International’s Perceptions of Corruption Index to the dubious accolade of ‘most corrupt EU country.’ I simply cannot summarise my impressions on this better than the inspired Twitter user @divinejudge1 [note by ‘lower corruption’ he means ‘lower transparency score]:

But that’s just perceptions. How about a stab at the facts? Well, there's no facts to be had about corruption but as readers may recall, I am particularly fond of a particular methodology for measuring the size of the shadow economy, which I also cite here.

According to Schneider (here), after a bumper year in 2009 when it grew by 0.3%, the Greek shadow economy is due to shrink by 3.2% this year, on the optimistic assumption that GDP is going to fall by 4%. Schneider’s estimate is that Greece’s shadow economy should reach 25.2% of GDP this year – still comfortably the largest in the EU in relative terms but also just barely over 2007 levels.

These figures underscore the point made by the IMF in its recent review of our adjustment programme: the resilience of the shadow economy is no insulation from the pain of recession or fiscal austerity. When the informal sector is large enough, it invariably comes to depend on the formal sector for demand. Fans of decoupling narratives always come to grief in this way and when they are governments the implications can be severe. I remember being subjected to this narrative by some of our leading lights back in 2008 – the same people that told me to stop worrying and learn to love the deficit.

Of course some academics will rush to explain that these ‘perceptions of corruption’ are just another bourgeois construct, or a way for the Americans to put us down and that the formality of economic activity is irrelevant. 

To this I can only say: try to read through this without rolling it into a joint.

I CAN HAZ DOVEY-WUVVY?

The IMF, we are often told, is a fiscal hawk whose single-minded, ideological pursuit of fiscal consolidation overrides all other concerns, including those of an indebted country’s citizens and even its creditors.

Why then is the IMF being so dove-ish these days?

First, the EU and the IMF tolerated a complete lack of progress in effective control of spending at the local government level which made it impossible for Greece to report against one of the explicit quantitative targets of our adjustment programme.

Then they allowed us to not count municipal authority employees in our controversial census of civil servants.

Then they tolerated the cover-up of our ‘final’ 2009 deficit figures until after the November elections, even though nearly everyone and their dog knows the figure is now estimated at around 15.1% to 15.5%.

Then they allowed us to delay the submission of our draft law on tax administration reform (draft here and rationale here), which they must know is desperately important.

Then they allowed us to set out a dubiously budgeted EUR2.3bn - 2.6bn plan to subsidise employment by offering incentives conditional on a stay in redundancies.

And for good measure, they now seem set to allow us to put off our capital gains tax hike until 2012 (here).

I can only assume that our creditors are incredibly invested in a Socialist victory in the 7 November municipal and prefectural elections, which they see as a make-or-break moment for our Government. Our creditors’ fears are well-founded. As I’ve explained here, while I hold most of them in deep contempt, the Socialists do offer our creditors their only hope of a stable and compliant government in Greece. Don’t forget, the Greek Right has foolishly tried to paint itself as the Greek version of Hungary’s Fidesz by claiming that signing up to the Memorandum was a choice made freely by the Prime Minister despite a host of alternatives (Russian money, anyone?) and that they would be able to bring Greece’s structural deficit down to 0% in two years (LOOOOOOOL).

Yorgo's thinly-veiled threat tο call a snap election unless his party does well in the upcoming elections has gone down very badly among Greeks, who resent being blackmailed. What they do not understand is that it is the IMF and our creditors that Yorgo is blackmailing. His signal says: 'cut me some slack, make me look good, or I swear I'll bring this whole motherf*cking place down with me.'

What our creditors and, worse, our Government, seem to forget is that the protest calendar is an even more important determinant of Greek bond prices than elections and that it is absolutely pulsing after 7 November. The 17 November celebrations are traditionally accompanied by an explosion of violence and last year’s spilled over into December due to the murder of a teenage protester.  Then four people died in May, and this too will pale in comparison with what could happen this November. 

It is amazingly short-sighted of the Government to kick the can further down the road – 7 November will simply never give it a mandate strong enough to survive another bout of austerity and the people will feel deeply betrayed. And although bad news before the 7th might dent its substantial lead in the polls, bad news between the 7th and the 17th could spark an urban war.

Live blogging the LSE Hellenic Observatory Fiscal Policy Conference

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Owsiak: change in public debt in Poland unrelated to GDP growth. This is meant to be Laffer-bashing. 75% of Polish state spending is non-discretionary, cannot be cut or re-allocated.

Options? Must review social model. What will be provided by the state? This must be resolved through a Swedish-type social pact. Tax must be reviewed, seen as an investment.

Sure Prof. I'll see tax as an investment when it finances investment. Right now it finances consumption - read your own slides.

Two conditions for social pact: One transparency. Who pays what, for what. And two: imrpoved management: how many civil servants?

Greece's problem also a problem for Poland. Society never knows what public finances really look like.

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Prof. Owsiak of the U. Cracow correctly notes an irrational approach to public finances, but says soaring budget deficits due to 'neoliberal' approach to tax as barrier to growth, tax competition by new member states, tolerance of tax avoidance.

Owsiak: time to concentrate on revenue side. Laffer curve does not work.

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Back from coffee break: FONDAFIP speaker comments that France is a public spending champion among the EU or OECD nation.

Reformed public finance in 2001, implemented in 2006, including a new 'peformance-centred' rationaly.

FR tries to deliver maximum spending forecasts, has a new comprehensive review cycle and a new 'multi-year planning law'.

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Q&A;

On role of external auditors, independence of government audit office: there are provisions in the law and efforts to establish a system of internal audit in finmin plus a new directorate to deal with GAO auditing. Gosh sounds pointless.

On moral hazard and government incentives in a world of easy debt and EU money and how to not return to these: Big political obstacles and vague gestures. Tax admin needs to be more autonomous from politicians, departure from partisanship. Some posts are goldmines, people lobby and fight for these.

On bank of Greece monitoring and why no one listened: Question dismissed with shared snickers with Christodoulakis about how the BoG wants to make recommendations to everyone but never wants to reform itself, like all central banks. Answer the question man.

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Rapanos: Greek tax offices extremely numerous by oecd standards for clientelist reasons. Tax officers have enormous discretion and can only be transferred with the minister's personal approval. A dd to this frequent tax amnesties destroying credibility and huge backlog of 150,000 tax court cases pending, no dispute reoslution mechanism - a recipe for corruption.

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Greek budget has 14,000 items - 6,000 to 7,000 transfers between them annually, each requiring approval.

LOL
- but new law will ban transfers and give more power of control to parliament.

Still now explicit national fiscal rules and lack of commitment, no external auditors (expect hospitals and municipalities I think)

Accrual accounting only on the revenue side.

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Rapanos - too much opacity. None or rudimental budgeting in General Gov't despite huge amount of money. Parliament is a rubber-stamp mechanism. The executive has all power on fiscal policy.

Greece needs huge improvement to institution and ex-post auditing, not just on a legalistic basis (e.g. 'Is money spent according to law?' Is pointless. Is it spent correctly and as budgeted?)

Also a need for efficiency measures beyond eu-funded projects.

Finmin control - too little accountability elsewhere. (See earlier note on new budget law)

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Rapanos - Greece GDP forecasts optimistic (plus 0.35 percentage points). OECD and EU also over-optimistic.

Even conservatives like the IMF used rosy projections for our fiscal measures.

Sounds like yomamanomocs but he has a point. Everyone was asleep at the wheel.

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Rapanos: takes 3 years for preliminary budgeted deficit estimates to be evaluated. Deviations are substantial - targets never met. We're getting revenues wrong consistently since Euro accession, revising downwards.

And that's just Central Gov't - none on local Gov't

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Rapanos: Greece missing numerical fiscal rules,independent fiscl councils, medium-term budget framework, budgetary procedures

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Rapanos is on now - the Chair of NBG. Says commentators misunderstand the Greek fiscal institutionl framework - which is a) crucial and b) missing.

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Christodoulakis hails Greece's latest bond issue. Ooh. We're getting cocky.


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Greek finmin has sent ms Drosou, hardly an operator. She rolls out the usual blurb and celebrates the new Organic Budget law requiring Greek ministries to have a CFO and take responsibility for their own budgets. Wow.

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FONDAFIP: EU "a common house in which we can survive difficult times"


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Objective is not to instruct one wayward member but to "learn from one another" - we're all bankrupt anyway!

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Prof. Featherstone touches on the CSR in the UK, remembers to moan about the cut to Higher Education budget.

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And we're off. Prof. Featherstone looks more like a Greek academic than I though - bit of a jowl, tweed, hideous yellow tie.


Prof. Bouvier can't make it but his wife will stand in. Great start to conference on sound management.

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Journos seem to have had a late night - taking their time getting in. The blog's favourite Economist hack isn't here yet either, but is meant to be attending.

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Conference Programme available here: lse.ac.uk/collections/hellenicObservatory/pdf/Events/CONFERENCE%20-%20Public%20Financial%20Management%20(22.10.2010)/Programme_for_website.pdf

Looking forward to ex-finmin N. Christodoulakis' contributions. He looks like a nice guy up close, and suitably low-key.

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Tune in later today for highlights of the event as they take place. I predict many LOLs.

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ITTY BITTY DEFAULT COMMITTEE!

So it begins.

An enormous amount of Greek debt is due to mature in early 2012. On top of the Memorandum money, we will need to tap bond markets for EUR13.1bn, which they almost certainly will not want to give us at anything like reasonable terms. Then it gets even worse.

So what to do? Reschedule our payments to the IMF and the EU, the option currently being discussed. I am not surprised our FinMin is happy to look into this option. I find it amazing though that even the FT's Alphaville doesn't have the balls to call this by its name - DEFAULT. Happily the Germans realise what they are dealing with and have called such discussions 'premature', which is code for 'f*in' bastards!'

I can only chuckle to myself bitterly. This is yet another thing we said we'd never do, and have ended up doing. Can anyone really believe anything we say anymore? Oh yes they do. They believe our PM when he says we're corrupt to our rotten socialist bones.(Though which PM that was became a heated issue for a while - turned out it was our current PM)

Of course our creditors are loving this because it means we get to default on the EU/IMF debt before we default on theirs. This is not something we could have done under the original Memorandum terms because the IMF was a super-senior creditor. They would have had to be paid before anyone else does, unless of course if they were to volunteer to extend their payment deadlines. Of course, as the IMF is not beholden to any taxpayers it can afford to take a small haircut. I expect it will take a bigger one eventually.

Incidentally, what happened to Premier Wen soaking up our bonds? What's that? The Chinese don't like losing money any more than any other people?  Who would have thought that?

Wake up folks. The end of the LOL is coming.

I CAN HAZ THAT MONEY U IZ HOLDIN BEHIND UR BACK?

The other day the economic historian and frequent reader, Alex, pointed out in his blog that Greece will never achieve any sort of sustainable fiscal adjustment unless it can tackle the informal economy. Another regular reader, Andreas, pointed out that increasing our tax take by 3.3% of GDP against the proposed 13.7% and trying to make up the shortfall by cutting spending a little bit further was madness.

Clearly, it’s past time I started talking about tax revenue. Let me put my cards on the table: I believe in a small state in terms both fiscal and regulatory. I’d be happy for the country to default and for much of the public spending in Greece (not to mention the UK, where I pay my taxes) to just wither on the vine. 

However, in our present state Greece isn’t going to be allowed to default until European banks can recapitalise.This means we need to control the deficit just well enough to convince the markets we can run a sustainable state so that we can have our sovereignty back - and then default. In the meantime, Greece also has to keep up much of the spending we currently do or risk serious social unrest, which will send us back to square one. Only if we can pull all of this off over the next four years do we have a serious chance of ever being a serious country again.  

To do all of that we need to get our hands now on what mad Keynesian attack dogs call the missing billions. So let’s prepare an amateur’s estimate of our tax ‘lag’ – the extra tax a country identical to Greece would collect with reasonable levels of success raising funds. It would give the layman an idea of where to look for those elusive extra funds.

This takes a bit of triangulation. First, you need the implied tax rates on capital, labour and consumption (the ratio of transactions to tax rendered). You can get all of these from Eurostat.  You can’t get the capital figures after 2006, but that’s fine because 2006 is the last year the Greek economy performed decently; at least no one can accuse you of a negative bias. Now the big question is which country you want to use a comparator. Ideally you would want a country of similar size and a similar tax system but finding genuinely good comparators is very difficult. If you must try, Portugal compares reasonably well. But I’ve gone for the Eurozone as a whole, which makes the data much less volatile.

Then you need the volume of transactions. You can get consumption from ELSTAT (as it is now known), and capital and labour compensation from EUKLEMS.

Here’s what comes out if you try that: we could have raised EUR22.4bn more in 2006 – well before our tax collection mechanisms collapsed. That’s 10.8% of GDP. Wow! Imagine if we could have got our hands on that kind of money. Why, we’d... have spent it on bullshit like all the other untold billions. But let’s suspend our cynicism and consider Alex’s question: whether this kind of adjustment could put Greece back on the path to fiscal sustainability (and thus buy us our sovereignty back).

The IMF’s long-term projections suggest that it is, just barely, enough, if your definition of sustainability is getting debt down to 60% of GDP by 2060. Frankly I think the markets would turn fractal cartwheels of delight if this prospect were to come into sight for Greece. Anyway, the IMF’s figures say that, as of 2009, Greece required almost exactly that kind of adjustment to get on the ‘60 by 60’ trajectory.

So it sounds like a good plan. Where do we get the missing 22.4bn? Well, just under half of that needs to come from taxing businesses (or capital), which basically get away with paying half what they would elsewhere in the Eurozone. Another 8bn or so needs to come from consumption, as in VAT. Presumably the problem is not the rate or scope of VAT – it’s the fact that so few businesses turn it over to the taxman. Only one seventh of our missing funds can realistically come from taxing labour – our employees don’t really make that much and they can’t hide what they make. Tax avoidance by the self-employed would come under capital, btw. 

Apparently some 4bn of the capital and labour tax lag is down to individuals avoiding tax. That’s a good third of the total.

Stay tuned for a series of posts on how to increase the tax take from capital and consumption. If you can think of something, please leave a comment and I'll dig up some figures.