Give Greece Credit, Even Just for Treading Water

25DEC 6, 2016 1:23 AM EST
By
Mark Gilbert
Bloomberg

Here are two things I'll bet most people don't know about Greece. The country's just-appointed minister of economy and development, Dimitri Papadimitriou, was lured away from his position as head of the Levy Economics Institute at Bard College in America. He's not a member of the ruling Syriza party. And the man appointed secretary general for public revenue in January is Giorgos Pitsillis, a professional tax lawyer. He's not a party member, either.



For a group that parades its left-wing credentials -- Prime Minister Alexis Tsipras flew to Cuba to attend Fidel Castro's funeral last week -- Syriza is proving to be surprisingly pragmatic in its efforts to turn the economy around. And while the obstacles to recovery remain daunting and the potential pitfalls deep, Greece no longer looks like a failed state that deserves to be ejected from the euro.

Here's a chart showing what's happened to Greek bank deposits in recent years. True, banking deposits are still 48 percent depleted since the crisis took hold at the end of 2009. But depositors have been putting money back into their accounts in recent months.

Greece's growth outlook has also been improving. Gross domestic product expanded at an annual pace of 1.8 percent in the three months to the end of September, outstripping both Germany and the euro zone as a whole. Quarterly growth has outpaced the median forecast of economists for the past four periods, with the third-quarter expansion of 0.8 percent beating expectations for just 0.5 percent:

Beating Expectations
Greek quarter-on-quarter change in gross domestic product shows increasing trend.
Government revenue is also improving. This year's anticipated total of 50.5 billion euros ($54 billion) would be a 7 percent improvement on the nadir seen in 2013, with the revenue department predicting a further increase for next year:

Income Growth
Annual revenue collected by the General Secreteriat for Public beat the estimates.

The imposition of capital controls in the middle of last year has helped drive some of the cash-based black economy back into official channels as ATM withdrawal limits forced people to use plastic more often. The September value-added tax income on goods and services on the island of Mykonos, for example, beat the budget target by more than 250 percent; in Rhodes, the excess was almost 240 percent, with the tax take in Zakynthos, Corfu and Santorini all more than 80 percent above target.

There's more to be done. As Finance Minister Euclid Tsakalotos said in November 2015, "taxation had become voluntary." The revenue department estimates that voluntary compliance with the tax laws is running at about 80 percent; that still leaves 20 percent taking the traditional Greek approach of regarding taxation as something to be dodged wherever possible.

Greece's privatization program has also made progress, though it has fallen short of the targets set by the government. The Asset Development Fund will raise 500 million euros by the end of the year, missing its 2 billion-euro target partly because 1.2 billion euros from the sale of regional airports won't be banked until next year. It's supposed to collect a total of 2.5 billion euros by the end of next year, rising to 6 billion euros by the end of 2018 as assets including marinas, motorways, ports and utilities go to auction.

Papadimitriou, the minister for economy and development, says he'd rather targets were missed than assets were sold at fire-sale prices. "When you have a deadline and you're in a hurry, and the other party knows you have a deadline, then you have a problem," he told me.

There's one very big privatization that risks turning into a proverbial white elephant. The site of the old Athens airport, Hellinikon, is almost three-quarters the size of New York's Central Park and has been disused for 15 years apart from a brief supporting role in the 2004 Summer Olympics. Currently housing a refugee camp, it was bought by the publicly traded Greek real estate investor Lamda Development, which says it will invest 7 billion euros to create the world's biggest coastal park -- featuring a casino, a medical center, a university and residences -- to attract a million extra tourists each year.

Except the project has been repeatedly delayed; the privatization department now says the development will "hopefully" break ground in 2017. But it's stipulated that the public parkland areas must be completed before the developer is allowed to build the lucrative residential units that will help fund the project. No wonder Lamda Chief Executive Officer Odisseas Athanassiou looked less than enthusiastic when he made his investment pitch to a conference in Athens last week.

Paradoxically, Greece may benefit from the resignation of Italian Prime Minister Matteo Renzi after he failed to pass his referendum on constitutional reform. The greater the risk of political and market turmoil, the more likely the European Central Bank is to add Greek debt to its quantitative easing program in the coming months to soothe investor nerves.

Ultimately, though, to go from taxi to take-off Greece needs debt relief. Frank Gill, who heads the European sovereign ratings group for Standard & Poor's, calculates that Greece spends about 7 percent of its GDP on debt servicing. That's lower than 8 percent for Spain and 9 percent for Italy, but on a much smaller GDP base which makes it "affordable but not sustainable," he says.

The Greek economy remains "hostage to recession," according to Panagiotis Liargovis, head of the parliamentary budget office. "The debt will remain a Damoclean sword hanging over the economy," he told a conference in Athens last week.

European Union officials meeting this week will discuss whether to grant Greece the debt relief it craves, as much for domestic political reasons as for what it gives Greece. They should find a way to overcome German objections and extend the repayment dates.

As well as recognizing the strides made in economic reforms, however modest, relief on its debt would give the Greek government something to show voters as it requests patience for more reforms. After years of stick, it's time the EU tossed a carrot Greece's way.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net