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Greek debt: Bailout concessions not nearly Spartan enough

ATHENS, GREECE - DECEMBER 10:  Youths clash wi...

Image by Getty Images via Daylife

Greece has announced the austerity measures -- actually, I should make that "austerity measures" -- that the nation is willing to commit to in order to secure $146 billion in bailout money from the IMF, the European Central Bank and a very generous rest of Europe.

I'll share some of the key steps Greece plans to take, but, honestly, they really say more about how profligate the tiny nation has been than about the goals it is trying to achieve. Let's take a look, first, at Greece's economy in 2009:

  • Government spending accounted for 50 percent of GDP. This is shocking, frankly. Here in the United States, we have loaded our economy with tons of new debt, thanks to bailouts and stimulus plans. But even with all that, spending by state, local and federal government agencies accounts for no more than 35 percent of U.S. GDP.

  • The bailout is predicted to bring down Greece's deficit-to-GDP ratio from 8.1 percent to 2.6 percent by 2014, putting it under the Euro zone's recommendation. But the bailout will do nothing for the debt-to-GDP ratio -- except raise it, from 133 percent this year to 144 percent in 2014.

  • Government revenue is going the wrong way. Income was only 37 percent of Greek GDP last year, and that was down more than 10 percent from 2008.

  • Greece is in a recession and inflation is already high.

    So, Greece is in a pickle. So let's take a look at what the nation is willing to do to get the European bailout. Greece has been one of Europe's premier entitlement states for decades. I'm sure the Greeks think they're being asked to take deep cuts -- indeed, they're rioting because of it (pictured above) -- but compared with they way much of the rest of the developed world lives, they're not giving back a lot.

    For instance:

  • Greek government workers have received what are called "13th- and 14th-month salaries." That means they work for 12 months, but get paid for 14. Sweet deal, if it doesn't wreck your economy. Oh, wait. It does. So, Greece's back-breaking concession to get the European bailout is not to actually eliminate the 13th- and 14th-month salaries. Oh, no: These will not be Draconian cuts, despite the fact that Draco was Athens's original lawgiver -- they will merely be capped at a flat rate. Henceforth, government workers will get a flat 250 euro ($331) Easter bonus, a 500 euro ($662) Christmas bonus and an additional 250 euro "subsidy leave."

  • Under the bailout, Greeks must now work until they are 67 years old. Up until now, they have been able to retire with pensions at -- take a guess -- 65? Nope. 62? Lower. 57? Keep going! 53? Bingo!

  • Greek government workers will get a three-year wage freeze. As long as the government can keep inflation in check -- no sure thing -- this is not so painful. If, however, inflation shoots up, expect more rioting.

    Okay. So much for the big cost-cutting. Now, how does Greece plan to raise revenue from its demoralized, stuck-in-recession, rioting people? That's right: raise taxes on everything! Among the proposed new taxes/tax hikes:

  • Taxes on luxury items -- whatever those may be -- will go up.

  • Excise taxes on fuel, cigarettes and alcohol will increase.

  • Buildings that are erected without a permit will get taxed. (You can do that in Greece?) And "semi-outdoor areas of buildings" will be "subject to a preservation fee." Sly!

  • The VAT rates will increase.

  • And here's my favorite: "Highly profitable businesses will be subject to an ad hoc tax." What better way to reward a successful business that's actually producing a product, employing people and providing prosperity than to hit it with a random tax whammy?

    You've probably seen lots of headlines echoing a similar theme: "Greek bailout won't work." Now you know why.

    Follow me on Twitter at @theticker.

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    By Frank Ahrens  |  May 3, 2010; 3:52 PM ET
    Categories:  Deficit/debt , The Ticker  | Tags: European Central Bank, Government, Greece, Gross domestic product, International Monetary Fund, Maps and Views, Travel and Tourism, United States, greece bailout, greek bailout, greek debt  
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    WOW. That's an eye-opener.

    One comment, though. If you have a culture with whatever life expectancy (I am guessing it may be less than in US?) where people can retire at age 53, changing that number to 67 is really a huge deal. Whether it should ever have been 53 is another question. Making that big a jump takes away a lot of healthy, active years, which may be used for childcare (grandparenting) and caregiving in some cases.

    I'd like to know more about how this retirement age deal actually works now for the average middle-class Greek family -- whether they really drop out of all productive labor at age 53 and what they do then -- before mocking that particular change so blithely.

    Posted by: fairfaxvoter | May 3, 2010 5:30 PM | Report abuse

    It's their problem and they are married to it. I'll buy your 100's for 50's. You'll get 2 bills for 1. Give your wife a 100 and she'll give you back a 50. MV=PT. V=speed at which money is being spent. The quantity theory rarely, if ever, works out with mathematical exactness. The quality theory is always right on the money. It's rare and we get older. Have a V0!

    Posted by: tossnokia | May 3, 2010 6:33 PM | Report abuse

    It's their problem and they are married to it. I'll buy your 100's for 50's. You'll get 2 bills for 1. Give your wife a 100 and she'll give you back a 50. MV=PT. V=speed at which money is being spent. The quantity theory rarely, if ever, works out with mathematical exactness. The quality theory is always right on the money. It's rare and we get older. Have a V0!

    Posted by: tossnokia | May 3, 2010 6:34 PM | Report abuse

    I cannot agree more with the author.
    The current prime-minister, George Papandreou, son of Greece's male Eva Duarte Peron-equivalent, Andreas Papandreou, is adopting his father's populistic approach which led to a notorious stagflation in the 1980s with rising unemployement and inflation in the 20%+.

    Amidst crisis, Mr. Papandreou increased excise tax and VAT in the hopes of raising around 1.3 billion euros in State Revenue. In fact, because of these increases and the psychological factor, it is expected that State income will remain unchanged, at best, or may decrease by as much as 5-10%.

    Mr. Papandreou must raise at least 10 billion euros and this may only be achieved by:
    1) TAXING THE INCOME. In Greece, only 450,000 citizens (4% of the population) pay direct taxes, while the rest evade illegally. Further, only 37,000 homeowners (0.34%) pay property taxes. Greek IRS employees are corrupt, State Customs employees are corrupt, Department of Buildings and Urban Development employees are corrupt and yet Mr. Papandreou keeps telling them, "You are good, hard-working people undergoing sacrifices because foreign profiteers won't loan you money at 'decent' interest rates". Over 75% of Greek households declare income of ~ 10,000 euros, when their actual one varies from 20,000 to 50,000 per annum and Mr. Papandreou, instead of devising sincerely means to catch the tax evaders, chose to impose futrther increases in indirect taxation, thereby enhancing inflation!
    Frankly, Mr. Papandreou is refusing to apply the Law of the Land and goes along with the lawlessness of the populus and the powerful Trade Unions that have paralyzed the State. By applying the existing law onto the 2-3 million household that defraud the State, the Government could easily raise a minimum of 3-5 billion.

    2) DECREASING PUBLIC SPENDING. By eliminating alogether the ridiculous 13th and 14th salaries, the gvt. could save another 2.5 billion annually (please note that Parliament employees and Members of Parliament have beem receiving, in addition to the 13th and 14th salaries, a 15th and a 16th, tax-exempt, salary, upon opening and closing of Parliament!)

    It is ironic that the American citizen as well as that of any IMF member state, is called upon to fund "Argentina of Europe"
    when the average Greek poorly educated, unproductive and often parasitic State employee takes home, after taxes, 50% more than his American counterpart!

    Posted by: CAHassapoyannes | May 4, 2010 3:43 AM | Report abuse

    So much of this article is outright wrong.

    1. Greek retirement age is 65, higher than the USA where you can retire at 62:

    2. Greek gov't spending at 50% of GDP? No. Greek GDP is at 250 billion. Spending last year was 145 billion. Gov't revenues was at 110 billion. Why the big deficit? Could be the 30 billion they took on from toxic bank debt due to its banks dabbling in Wall Street derivatives. Let's do some honest math, Mr. Ahrens.

    3. Getting paid 14 times for 12 months work? What does it matter if your salary is 15k? If I work at McDonald's, I have 52 paychecks a year! That must mean I am rich!!! Good heavens. Look at salaries, not the number of times people get paid. You'd think an American would understand this since we have variable pay schedules here.

    4. The increase in taxes are the IMF's idea. You blame this on the Greek people as though it's there. Sigh all you want, but this article is just filled with shoddy research.

    Posted by: Dan25 | May 4, 2010 12:13 PM | Report abuse

    Dan, you are so full of BS.

    1. Yes officialy it is 62 however we are talking aboout REAL AVERAGE retirement age. And the fact is that most Greeks choose to retire before 62 - in average age of 53. And can you guess why? Because they can continue to work illegally and in addition get the pension of EUR 1.600. Very good don't you agree?

    2. What drugs are you on man? If so why is the next year deficit planned for 12%? Another bank bailout?

    3. the article was actually wrong. You only work 10,5 months because of 6 weeks of paid vacation (in US you get 2-4 weeks). And with state sector salaries in average 2.5 higher than public sector you have no right to advocate the paycheck.

    4. The increases in taxes are laughable. 10% TAX increase for Alcohol, Cigarettes and Gas and 2% increase in VAT? - in country notoriously known for tax evasion:

    You are unreal man.

    Just to add some other things. Greek governments owns 76 companies - why don't you privatize those to finance your debt? All eastern european countries did so (Poland, Czech, Hungary, Slovakia...). Wait - privatization would probably trigger 1 year long general strike ending in communists overthrowing the government.

    Do you know what are minimum compansation fees upon leaving state job? By law it is 24 months of salary minimum. Yes 2 years for god sake. And there were cases when these fees reached as much as 100 monthly salaries. That is more than 8 years of salary just to leave the job. It's insane !!!

    Overemployment in state sectors. Just hear this - there was a case on Agios Efstratios island where they found a school with 10 students and 40 teachers. And everybody thought that it is OK.

    An I'm not menationing other things like 10 million nation fielding 5th largest army in Europe consuming 4,3% of GDP (average in Europe 1,7%)

    Greece is far beyond saving point. You guys are living in some dreamworld but rest assured that it will not take too long to end in a nightmare.

    Posted by: Georgioz | May 5, 2010 9:34 AM | Report abuse

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