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IMF gives Greece the thumbs up

Posted by Anthony Harrington, August 10, 2010

For the wealthy in Greece, evading taxes has been as natural as breathing. This attitude, a common strand in all tax-paying economies, but heftily combated by fiscal authorities in most developed countries, has become so much the normal way of life in Greece that successive Greek governments have simply taken it as a fact, rather than something to be fought tooth and nail. Now, if the IMF has its way, the cosy fraternity which has politicians and wealthy Greeks regarding large caches of private wealth as more or less off limits to the state tax collectors is about to be broken.

That, at least, is the theory. As the IMF puts it in its latest report on Greece [ http://www.imf.org/external/np/sec/pr/2010/pr10308.htm ], completed on August 5, the Government needs to pay attention not just to broad budgetary targets but to the detail at the subnational level.

“Going forward, to address potential risks to fiscal targets, it is critical to tighten expenditure control and monitoring, in particular at sub-national levels. Another key challenge is to further strengthen tax administration, including to reduce tax evasion by high-income and wealthy individuals. This is essential to secure tax revenues and to promote the overall fairness of the adjustment program.”

The last point about “fairness” is, one suspects, absolutely crucial if the Greek government is to retain any kind of popular mandate, for life in Greece is going to get dire. When the IMF talks about tightening up monitoring of budgets at the subnational level, what it is really talking about is squeezing essentials such as hospital budgets, the implications of which are going to be extremely grim for your average Greek citizen.

There is already deep public cynicism in Greece about the unfair distribution of the tax burden, but in a world where everyone was at it, that was sort of bearable. As state funding, under the lash of the IMF/EU imposed austerity programme retreats from key areas of Greek life, any sense of fiscal unfairness is going to get massively amplified. If there is no significant action to make the wealthy pay their full dues, the impact in terms of trouble on the street, and ultimately in the form of a massive popular backslash against the Greek Prime Minister George Papandreou and his government, is going to be huge.

Already worker resistance to the austerity regime is at a fairly intense level. According to Reuters, Greek ports were blocked by seamen at the start of the Greek tourist season and truckers caused disruption to fuel supplies and the flow of goods when they went on strike recently. However, so far the Government has stood its ground and stayed with the austerity programme. It’s reward will be that the IMF and the EU will vote through the next nine billion euro tranche from the EU/IMF Greek bail out fund, which is now an absolutely vital lifeline for the Government. To this extent, at least Papandreou’s government has something positive to show for all the pain that is going around. As the IMF’s report of its latest review says, “Our overall assessment is that the (Greek government’s austerity) programme has made a strong start. The end-June quantitative performance criteria have all been met, led by a vigorous implementation of the fiscal program, and important reforms are ahead of schedule.” This is an excellent report.

However, as the IMF itself notes, the Greek economy is far from out the woods. The forecast is for GDP to decline by 4% in 2010 and by a further 2.5% by 2011. Some market commentators think this is far too optimistic and that the Greek economy will actually shrink by 8% or more this year. Staying the course prescribed by the IMF when things get as harsh as that will be unbelievably tough for the average Greek citizen. It remains to be seen whether the Greek economy can actually pull out of a nosedive as steep as that. The prognosis for the mid to long term, therefore, still looks extremely grim.

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Further reading on the European sovereign debt crisis

•Greek bailout rewrites rulebook for EU sovereign debt, by Ian Fraser [blog post]
http://www.qfinance.com/blogs/ian-fraser/2010/05/04/greek-bailout-rewrites-rulebook-for-eu-sovereign-debt

•Sovereign debt—Harder to judge than you'd think, by Anthony Harrington [blog post]
http://www.qfinance.com/blogs/anthony-harrington/2010/08/04/sovereign-debt-harder-to-judge-than-youd-think

•The Europe wide web of debt, by Anthony Harrington [blog post]
http://www.qfinance.com/blogs/anthony-harrington/2010/05/20/the-europe-wide-web-of-debt

•Measuring Country Risk, by Aswath Damodaran
http://www.qfinance.com/asset-management-best-practice/measuring-country-risk [ http://www.qfinance.com/asset-management-best-practice/measuring-country-risk?full ]

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© 2010 Bloomsbury Information Ltd.

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