Sunday, 23 October 2011


Readers will know I only grudgingly report good news on the Greek deficit, but facts are sacred - as the Guardian says when it's not busy ignoring them. So here's a bucketload of pre-Halloween treats from Jabba the Hutt Deputy Prime Minister and Finance Minister of Greece (for that is how he styles himself these days), Prof. Evangelos Venizelos.

As you can see, Jabba has pulled off a good month. In fact, in terms of year-on-year gains this is the best month ever, with the government managing a small primary surplus.

In the meantime, last year's spending figures are now revised up by EUR350m, so an extra EUR10m of mystery spending was added to the September 2010 figures (more here) which no one feels an urgent need to account for. In fairness, what is EUR10m these days? Our Government figures are now taken straight from that Austin Powers gag.

So what, dear readers, accounted for the improved figures? Bear in mind that the success story is that year on year the primary deficit is now 'only' up by EUR132m. Well, year on year, revenue grew by about EUR1bn, half of which came from the public investment budget (you know, the one the Government keeps cutting and the one defaultniks would happily cut to zero). On the other hand, primary spending fell by EUR855m. All of this, and another EUR1.04bn came from cutting public investment. Yippee!!! Naturally, we can't do this every year. Cutting EUR1.9bn from the investment budget in a year may sound clever but in fact there's only EUR3.5bn left in that budget to cut. What happens when we run out of projects to cut? So enjoy this graph while it lasts:

That's the bad news. The good news is that something did appear to be moving on the revenues front. Apparently income tax receipts were up by 4.5% after accounting for rebates. Or -wait- is that really the good news?

According to this report, EUR650m was paid in September in extraordinary levies originally announced in June, which ranged from 1% to 4% of taxable income depending on one's income bracket (anyone earning less than EUR12K did not have to pay), a fixed EUR300 levy on businesses and the self-employed and a tax on luxury durables, such as boats or large cars (discussed here). There's still a bit of money yet to trickle in but this is the bulk of the revenue from that measure. And the key reason why this money was paid all at once was that Jabba gave taxpayers a 5% discount for paying early. Now I don't know about you but this to me sounds a lot like tapping the taxpayer for financing needs - kind of like the time when Samsung sold me a laptop with a 10% cashback offer. Expect to see more of this.

But let's not forget, this is not regular income. These are one-offs that can only be repeated by further undermining consumer and business confidence. Put it this way. If the extraordinary and artificially front loaded EUR650m from levies had not showed up, the primary deficit for September would have cancelled out every surplus month since January 2011. M'kay.

This tax situation needs sorting. People point to the way the Irish economy is recovering despite austerity, but they forget one thing: the Irish negotiated hard for certainty in their tax regime. They announced their tax policies four years in advance and signalled that their ultra-low corporate tax rate was to be maintained. People in Ireland have - to the extent possible - known all along what to expect, tax-wise. In Greece my folks switch on the news every night wondering whether there's going to be another tweak to the patchwork of incompetence that is Greek tax policy.

Medium-term tax certainty is good for tax revenues, and it's free. Jabba needs to be told this because he's a legal man - the priesthood he belongs to loves churn because it makes them important. Well, nobody else does.

Wednesday, 12 October 2011


Note 1: I am incredibly grateful to Aristos Doxiadis for citing this article in his excellent book, Το Αόρατο Ρήγμα.

Note 2: This blog was updated on 5 Dec 2014 to reflect new data on the size of bribes

Veteran readers will remember my epic slugfest with our new wave of defaultniks, a propos of the release of #Debtocracy. A central bone of contention was the defaultniks’ claim that much of the Greek debt was not attributable to the will of the people and was in fact odious. The defaultniks purposefully refused to offer even an approximation of what percentage of the debt they considered to be ‘odious’ in this way but pointed to excesses in public procurement and public investment costs as indirect evidence. When pressed on the matter of how much of the debt is odious, they flitted from ‘all of it’ to ‘some of it, surely we deserve to know how much!’ depending on their audience in any given moment. 

I argued, on the other hand, that with nearly two thirds of all spending going directly to the people in the form of direct transfers, pensions and public sector wages, it is very unlikely that most of the public sector’s debt in Greece was odious. Still, I acknowledged that someof it probably is.

The months have rolled past and the defaultniks are by now so convinced of their moral and intellectual superiority (or at least the physical muscle they can command) that they see no point in following up on this argument. If they've managed to put together a self-styled Debt Audit Committee, answerable to no one and selected by buddy-up, it has made no attempt at a figure and will likely not attempt one until after La Revolucion. Yawn.

Government, of course, has no interest in such calculations so I can’t count on them. 

So screw everyone. I have to do this myself. Like the defaultniks themselves, I will start with procurement because that's where the bodies are chiefly buried. 

First, I need an estimate of the actual procurement spending of the Greek government, going back as far as possible. Eurostat provides this (if you bother to divide % of GDP by % of total contracts) from 1995 to 2009, and you can find a link to this and other interesting datasets here.

The result – about 9 to 13% of GDP (about a fifth to a quarter of all government spending) went on public procurement annually. On a typical year, roughly 60% of this was under the radar spending that was never published in the official procurement journal of the EU because the contracts were (whether really or artificially) too small. The estimated amounts spent on everything, from the Rion-Antirrhion bridge to felt tip pens, are as follows:

Now we need an estimate of the percentage of this that went on bribes. The World Bank generally calculates that 3.7% of all procurement spending globally is spent on bribes, but I prefer to use the percentage admitted to by Siemens, whose executives have had their own run-ins with the greasy outstretched palm of the Greek government official. The typical Siemens bribe is 5-6% of the contract value. Let’s take 6% just to be on the safe side. According to this ratio, the Greek state must have paid between EUR1.5bn and EUR2.2bn per year on bribes. 

But of course bribery isn’t just about paying the actual bribe, it’s also about buying inferior services or paying over the odds. The bribe is meant to convince officials to allow this. These additional economic ‘capture’ costs come up to anything from 20% to 188% of the bribe itself.  Combining this calculation with the estimates on bribes it is possible to estimate an upper and lower bound for the cost of bribery and corruption in public tenders for Greece.

Now I realise that in applying these rules to all public tenders I am making a heroic assumption – some contracts will have been pimped to death, with contractors making incredible capture rents, and others will have been done by the book. I am also assuming that bribery and capture costs remained constant as a percentage of procurement spend every year, which can’t be true as there have been procurement bonanzas that will have been milked to death during this time, as well as some years when rents from bribery were low. 

I can’t help this miscalculation given the tools at my disposal. It’s just the best estimate I have. And it looks as follows. The total costs of capture (bribes and mispricing) ran up to anything from EUR900m to EUR5bn per year.

Now, in determining the extent to which these rents contributed to Greek Government debt, I must make some assumptions about their financing. To ensure I cannot be accused of bias I will make the most defaultnik-friendly assumptions possible, in the understanding that they may be biased in favour of overestimating the odiousness of the stock of Greek debt.

First, I will assume that all of this money came from the Greek public coffers. This is patently not true as EU money flooded into the country from 1995 to 2009 and much of it went towards procurement.

Then I will assume that all of this money came from excess borrowing and thus a) we are still saddled with the interest to this date and b) this debt is indeed odious. This is a very strong assumption and one that is moreover heavily biased towards the defaultnik case.

This means I need to calculate an acceptable interest rate for the excess borrowing. Given that Greece never paid down any debt but simply refinanced existing obligations throughout this period, I feel justified in calculating our effective interest rate by dividing the total stock of debt for each period with the total interest expenditure for each period. Both can be found here. I assume that costs before 2000 (when the Eurostat series begins) were constant at the same level as 2000, i.e. 7.2%. (Note: they were actually higher).

Now all that remains is to calculate compounding coefficients for each year based on the product of the (interest rate+1) for that year and all following years. They look as follows:

Now all that remains is to add up the up-to-date figures. The Grand Total comes up to a range of EUR29.8bn to EUR71.6bn, or alternatively 9.1% to 21.8% of our total stock of debt as of end 2010. 

Remember, these are very generous figures, and yet even on these assumptions, the amount of potentially odious debt is almost certainly less than the nominal 21% haircut agreed in July.

With procurement out of the way only straightforward graft and over-compensation of officials remain as possible avenues for the creation of odious debt. However, I believe that the contribution of these two is negligible compared to that of public procurement as indeed it is in almost any country not run by warlords.  

UPDATE: I realise in defending these estimates that there's just no pleasing some people. If you're not happy with my figures or my assumptions, let's at least agree on this: That it is possible, in theory if not in practice, to come up with a good estimate of the amount of debt attributable to things other than the will of the people; that carrying out such estimates is desirable; and that the extent to which Greece's debt is odious is a matter of fact, not politics. My assumptions are no doubt flawed but they are transparent, they come with some justification, and they are there for all to evaluate. In fact, you can just plug in your own assumptions and try to get an estimate that works for you.

2013 UPDATE: How fair is @talws' objection in the comments below? I explore the topic here.

2014 UPDATE: How accurate was my 6% assumption on the size of bribes, on which so much of this exercise depends? There is a new dataset for the researcher to draw upon: the recently released OECD estimates on the size of bribes as a % of contracts, based on records from 55 actual cases brought to justice between February 1999 and June 2014.

The average OECD estimate is 10.9%, which is significantly higher than my assumption. Bribes, of course, range widely by sector, from 14% for health- related spending (one of my Big Five deficit-drivers) and 17% for admin services, to 6% for scientific and technical consultancy, and 4% for construction. Ironically, the types of projects most commonly cited by defaultniks back in 2010 (Olympic construction for instance) attract relatively small bribes (less than my original estimate), while services- and consultancy-based projects are much worse. Anyway, please note these figures are based on a vanishingly small sample, involve foreign bribery only and do not seem to include any cases involving Greece. Still, if this estimate is accurate, then my estimate of our odious debt should grow by 81% to roughly 16.5% to 39.5% of Greece's 2010 debt. The mid-point of this range is now above our original creditors' haircut, but nowhere near the total debt jubilee defaultniks were after.

Once again, the facts simply don't bear out the Debtocracy story. They do reveal a good amount of debt we could have done without; and I wouldn't mind defaulting on that even now. But at least we would be seen as credible and honest, as opposed to opportunistic and hypocritical.

Monday, 3 October 2011


Dear readers, I know I am beyond apologies for the latest radio silence. I can only explain myself by saying that it has, for the last two months, felt pointless to discuss the realities at home. I have little to add to my main narrative and the fog of war lies thick over the day-to-day developments. I’m not convinced there’s any shortage of economists talking crap in the world, so why add to their number.

There are some core themes that cannot be denied. As I’ve been saying for over a year and a half now, Greece will default. I have hoped against hope that we would do so in an orderly fashion, in whatever little time the bailout money could buy us, and emerge a reformed country with an outside chance of growth in the future. It is clear now that this is not going to happen.

Why now? Because we have proof now that the bailout can never meet its three original objectives. Bear with me while I add updates; this is going to be a long post.



Whether one wants Greece to default or to start paying down its debt, maintaining a primary surplus is a necessary condition. As I have documented, for the first year under austerity the primary deficit did in fact fall. Then its trajectory reversed sharply. There are several reasons for this.

Topmost is the fact that the Government and the IMF ignored the latter’s own research which points out that the various means of reducing the deficit can be ranked as follows in terms of outcomes for employment and GDP:

cutting benefits > cutting public spending >  increasing direct tax > cutting public investment > increasing indirect taxes.

Ours was a slightly more novel approach. Compare the original plan (Box 3, pg. 11 here) with the plan as of the fourth review (Table 5, pg. 53 here and budget execution bulletins here). If you can’t be bothered, check out my brief summary below. The figures are contributions to the fiscal adjustment in % of GDP, and the 2011 figures are the IMF’s estimates.

Simply put, in the cause of political expediency, our Government delayed cuts to benefits and instead front-loaded the contribution of indirect taxes (remember, the best and worst way to cut the deficit respectively). It then proceeded to more than double the originally intended contribution of the public investment budget, effectively killing whatever recovery might have been possible in the womb. The result was, predictably, a deeper recession than expected, missing the original forecast by 0.6 percentage points in 2010 and by a lot more, possibly 2.5 percentage points, in 2011. Not that anyone can trust the actual figures. And as a result of that the Government missed its target for direct tax revenue by a whopping 2.5% of GDP and its target for indirect tax revenue by 0.9% of GDP, with 2011 accounting for nearly all of the shortfall.

But more than this, it’s important to realize just how ingrained the Greek primary deficit is. In the past decade, it took about 4.8% real growth per annum for Greece to return a balanced primary budget. You heard right. Successive governments built a state that could only. ever. work. in the best case scenario. And they almost got away with it because the combination of EU money, credit expansion and a benign global economy meant that, for a short while, that was the kind of growth we could look forward to. In fact, the real damage seems to have been done from 2003 onwards – when the level of real GDP growth required to balance the primary budget rose to an impossible 7%.

It is, after all, as they say. Once you give up on black, you can’t go back. In case people haven't noticed, the Government's job is to shift the trendline in the graph above upwards so that it crosses the origin - i.e. so that the trend primary balance without growth is zero. 

Realising this at last, the Greek government has given up on taxing income, which has the annoying feature of being dependent on growth. Instead it is now signaling that it going to directly tax wealth. By this I do not mean taxing the wealthy, just taxing people for the privilege of having property.

There is a depraved social aspect to this: as I explain here, the median Greek is relatively income-poor but relatively wealth-rich, and while the income distribution in Greece is very unequal by international standards, the distribution of wealth is not. Our government hopes that with the current set of incentives in place the people will start liquidating wealth in order to pay tax. It’s a very dangerous game to play.

The first instalment of this master plan was the now-notorious property tax, to be collected via one’s electricity bill. It has the advantage of not only taxing wealth but also delegating tax collection to the massively unionised  Public Electricity Company, whose union has predictably announced its intention to sabotage the new tax. Cue overture to the national anthem of WTFistan.

In the same vein, the Government unveiled its now postponed and possibly aborted plan (more emotional coverage here and here) to penalise any declared income that cannot be matched to consumption on the basis of receipts, to what looks like a ratio of at least 50%. The Greek state’s willingness to outsource tax administration to Joe Bloggs is of course not surprising considering how badly they themselves do it



The second reason for the bailout was presumably that Greece could, given time, return to a position of international competitiveness which was lost over many years, and increasingly so since the adoption of the Euro.

I cannot stress enough how important this is. The chasm between Greek per capita income (even post-austerity) and the per capita income that can be justified by our competitiveness rankings is massive. According to my much-maligned naive mean reversion model for Greece, Greek per capita income would fall back to developing-country levels if internal devaluation were to be pursued without any further gains in competitiveness.

Benchmarking against 2007 competitiveness rankings, the most likely compromise would be for Greece to target Czech levels of competitiveness and fall to their level of per capita GDP. This would have meant a 13.1% drop in PPP-adjusted per capita GDP (from 2007 levels) against 5.2% experienced so far. In a worse (but not worst) case scenario we would instead converge to Latvia’s per capita GDP, accepting a fall of 39%.

Incidentally, I feel vindicated in promoting this way of thinking about Greece’s internal devaluation: using the quick test I outlined above and data from the latest Global Competitiveness Report by the WEF, the level of per capita income that can be justified by our competitiveness ranking fell by 5.5% in 2010. Very very close to reality.

So if competitiveness is so important, how well are we doing? In summary we’ve fallen another 7 places in the past year, to 90th out of 142. Check pg 188 here for details, or quickly scan the tables below:

First, the professions have yet to be liberalized. In fact, the government has buckled completely before the might of the legal and engineering professions and is still fighting pathetic skirmishes with taxi drivers.

Second, despite a chorus of increasingly demented voices lamenting the selling-off of ‘the entire country’, privatisation and asset sales are proceeding at a snail’s pace because a) demand is abysmally low and b) the Government is committed to raising an amount of money that is simply impossible in a fire sale.

Third, while the Government made some headway on labour market reform, the IMF was forced to note in its fourth review:

…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)

Finally, public sector reform is becoming an irredeemable mess. Already, as discussed above, the balance of public consumption to public investment has been allowed to slip further towards the former. Never a good idea, as the eggheads have proven time and time and time and time again. Public investment builds capital which drives growth, while public consumption inevitably turns to shit. Literally.

To date, not a single civil servant has actually been laid off, although, in fairness, many on contracts have not had these renewed and many retirees have not been replaced. I still think our public sector is overweight to the tune of about 300,000 people, but this is not to say that laying off 300,000 people will solve the problem. We may well need to hire more of some kinds of civil servant and fire even more of some others; there’s simply no way of knowing because the actual skills needs of the civil service and the broad public sector are unknown. Because no one knows or cares what services the public sector is meant to deliver, the question of how many and what staff it needs sounds too much like advanced management speak.

To give you an example, here is a recent announcement of 65 Scientific Specialist vacancies with the Bank of Greece processed centrally by the Greek Supreme Council for Personnel Selection (more on this here). This is not a technical background note to a more user-friendly vacancy ad, by the way. This is the ad. Note how it never once quotes what the actual staff are meant to be doing. This is what we’re up against.

Hence the problem when the Government recently called on its agencies to provide a list of ‘surplus’ staff to be put on its controversial labour reserve scheme (essentially phasing them out of the public payroll gradually). Everyone responded that they were up to their gills with work and needed to hold on to every mammal with at least one working orifice.

Then there are those who have little time for competitiveness through reform anyway, and who are of course calling for a return to the Drachma, or a currency union with other Euro rejects. I realize many Greeks and indeed many of my readers are sympathetic. I can only point out two things: the following two questions are not equivalent, even though people treat them as such.

Would Greece be better off now had we not joined the Eurozone in 2001?
Would Greece be better off leaving the Eurozone now?

And here’s an even scarier thought.

Devaluation is actually possible even within the Euro and I suspect that future Greek governments (which, post-default, will still be lumbered with the euralbatross) will pursue this. The most likely alternative to having our own currency is what is called ‘social VAT’ – basically reducing employee and employer pension contributions and making up the difference to pension fund receipts with VAT. I don’t like this option, not least because it obliterates any hope of a pensions system that isn’t a Ponzi, but I’ve rarely got what I liked from governments in the past either. In fact it’s actually a pretty mild suggestion compared to this one, which would eliminate employers’ contribution altogether.

This will be the final roll of the dice – and if we do default, obliterating the capital of Greek pension funds, it may well be, along with a swap of bad bonds for slightly less bad bonds, the only option we have for recapitalising them in the short term.