Greece’s economy

Keep calm and carry on

Does the government have the will to see through its ambitious bail-out plan?

Aug 13th 2011 | ATHENS | The Economist

PATROCLES, a taxi driver, had to borrow his wife’s car to ferry customers to and from Athens airport to avoid being spotted by his colleagues on strike.

“I’m with them in principle but I have to earn an income,” he said. Last week Athens’s 14,000 taxi-drivers—5,000 more than are needed, according to Sata, their union—wrapped up a strike that had lasted for almost three weeks, infuriating summer tourists and giving Greece’s battered reputation a further kicking. The cabbies, already losing business as recession-hit Athenians switch to public transport, were angry about a scheme that aims to liberalise their closed-shop by lifting the ceiling on taxi licences. Yet, as with last year’s strike by lorry-drivers, another benchmark dispute, Greeks are betting on liberalisation. The price of a taxi licence on the grey market has slumped to around €30,000 ($43,000) from around three times that figure three years ago. Along with taxis, another 140 closed-shop professions, among them architects, lawyers and public notaries, were liberalised by decree last month. But back-up regulation for the new arrangements is not yet ready, suggesting that, after 15 months of assistance from the European Union and the IMF, most Greek politicians remain unenthusiastic about reform.

The latest bail-out plan—a complicated mix of cash loans, bond swaps and debt rollovers intended to meet €120 billion in gross financing needs over the next three years—is more or less in place. However, the recent turbulence in global markets may mean that officials take longer than hoped to get banks, insurance companies and other private bondholders to sign up.

Yet that is hardly Greece’s biggest problem. Few believe the deal will do enough to make the country’s debt pile manageable, and the goal of allowing Greece to return to the international markets by 2014 looks optimistic. The trouble is that, as fears have grown over Spain and Italy, much larger members of the euro-club, Athens’s second bail-out looks likely to be its last. This may be why George Papandreou, the prime minister, has told his cabinet to speed up reforms.

Evangelos Venizelos, the new finance minister, will be central to the effort. A constitutional lawyer from northern Greece, Mr Venizelos is not a details man. But he is keen to produce results and has set himself two tasks: pushing through enough privatisation deals to satisfy Greece’s international lenders (the new bail-out includes provisions for €28 billion from sales of companies and real estate) and reversing a disastrous fall in tax revenues that has derailed this year’s budget.

The budget deficit jumped by almost 30% on an annual basis in the first six months of 2011. It would have been 60% had Mr Venizelos’s predecessor not slashed public investment. Without drastic measures to reduce spending and boost revenues, say private-sector economists, this year’s deficit could reach 13.5% of GDP, compared with a target of 7.5%.

Mr Venizelos has opted for a tax amnesty to increase revenues, the second in less than a year. But such policies are frowned on by the IMF because today’s amnesty encourages taxpayers to dispute tomorrow’s tax claims in the hope that they can sit it out until the next pardon. Moreover, the €2 billion that the policy could net may not be enough to offset a continuing shortfall, as a third year of recession eats into consumer spending and firms’ profits.

As for privatisation, more than 20 deals are supposed to have been completed by January, according to the latest EU-IMF agreement. “Mission impossible”, says one senior official. One or two long-awaited disposals could go through, and some European investors are showing interest, hoping for fire-sale prices. But with only €390m of privatisation revenues in the bag so far, this year’s target of €5 billion will be as elusive as Patrocles’s taxi.