Friday, May 7, 2010

Greek lesson in the perils of overspending

THE fatal riots in Athens reflect the vast gulf in how the Greek financial crisis is seen at home, and in the world. Greeks, by and large, are outraged by the cuts and reforms thrust on them by their government, the European Community and the International Monetary Fund. "It's not fair!" they insist. "Why are they doing this to us?"

To outsiders, it's all too clear. Greece has been living beyond its means for years, borrowing heavily from the rest of the world and, until recently, fudging its books to hide the reality. The financial markets no longer trust it, and will not lend to it or roll over debt, except at prohibitive prices. That's what happens when you push your luck too far.

The facts are simple. Last year, Greece ran a budget deficit equivalent to 13.5 per cent of its gross domestic product (compared with 4.1 per cent in Australia). Its gross public debt was 115 per cent of GDP (as against 16 per cent in Australia), and rising rapidly. And the banks would not lend more.

How did it get there? Take its pension system. Greeks can retire early on a lifetime pension equivalent to 80 per cent of their final salary, and indexed to match wage growth. They receive 14 months a year of pension payments, with bonuses at Christmas and Easter. The OECD estimates that some Greeks actually receive more on the pension than they did when they were working.

In Germany, which underwent bruising pension reforms in the mid-2000s and now finds itself unwillingly funding 30 per cent of the EU's bailout for Greece, top-selling tabloid Bild went to town. "Why do we have to pay Greece's luxury pensions?" its front-page headline demanded last week, alongside a photo of an elderly Greek pensioner it said was paid $A5000 a month.

Greece, it told readers, is "the land of bankrupts and luxury pensions, tax dodgers and rip-offs. It's a country where the authorities use satellites to search for houses with swimming pools, in order to send the owners a tax bill." It reported that Greeks on average paid almost $A2000 a year in bribes, and shops routinely refused to provide tax receipts for purchases.

And that is part of the story. Greece joined the European Union, joined the euro, but never became part of that northern European culture in which officials, taxpayers and citizens obey the law because they see the state as theirs. In Greece, tax evasion and corruption are rife. Transparency International's annual index finds investors rate it the most corrupt country in the developed world, worse even than Saudi Arabia and Ghana.

And change is not coming easy. American-born Prime Minister George Papandreou, elected last October, has taken a series of courageous decisions to admit the true state of Greece's finances, and impose cuts and reforms across the board to reduce the deficit from 13.5 per cent of GDP to 3 per cent within three years.

Pensions have been frozen, and in some cases cut. Early retirement has been abolished. The public sector will hire no new staff in 2010, except for essential positions. Some 10,000 qualified applicants have been turned away. From 2011, hiring will resume, but only at the rate of one public servant hired for every five who leave. Contract employees will be terminated, overtime payments have been cut by 30 per cent, bonus payments and salaries have been cut, and public sector wages reduced overall by 10 per cent in the government itself and by 13 per cent in its enterprises.

But Greeks have rebelled, with a poll finding 51 per cent vowing to fight the cuts. At one end of society, the Athens rioters demand that the rich should pay, not them. At the other, London real estate agents Knight Frank report that 6 per cent of all purchases of London properties for more than £2 million ($A3.2 million) in recent months have been by Greeks shipping their money out of the country.

The biggest risk is that nervous markets are now losing confidence in the other heavily indebted, high-deficit countries of western Europe. Spain, Portugal and Ireland form the new frontline of countries that could be forced to replay the Greek tragedy.

It's a great case study for fiscal prudence.