Greek Stoicism

Zeno of Citium, the founder of Stoicism, promoted maintaining a balance of the mind so that errors of judgment did not occur and consequently manifest destructive emotions. After six straight years of recession, Greece is in need of just such stoicism to walk the tightrope between withdrawal from the Eurozone and staying within the monetary union’s relative prosperity.

Greece were the recipient of the biggest bailout in world history, a massive €240 billion from the troika of the EU, IMF and ECB. Continued funding from the Troika has built credibility.

However, Greece faces many challenges this year which could still result in a Greek default on its debt. If not that drastic an ending, such challenges will ensure ample opportunities to buy Greek bonds at high yields that could net profits like $500 million of US hedge fund Third Point last year.

Greece’s economy has wobbly foundations. Unemployment is at 26% and projected to hit 30% by June this year. 33% are living below the relative poverty line in Greece – meaning they earn less than €7,100 per annum. Greek GDP is also set to shrink by 4.5% this year, meaning that it has shrunk by 25% cumulatively since 2007. In addition, even after billions of euros in cuts, the Greek economy is in such a dire state that it is unable to absorb long-term reforms to kickstart economic growth. In order for the economy to function again, it is estimated that Greece will have to be absolved of at least 50% of its debt. Their current debt is 180% of its GDP. Despite these worrying signs, Greece will need to meet the expectations of international creditors who are keeping insolvency at bay.

Greece recently received €34 billion of rescue loans in December 2012. However, the trickledown effect will ensure that it takes a long time to reach the people. Critical steps to ensure Greece remains within the eurozone and on the pathway to recovery are:

·         There is a risk that the fragile Greek government coalition will not survive social rest in 2013 that could be exacerbated by the inevitable implementation of €9.2 billion in cuts this year. They will have to survive if Greece is to remain within the Eurozone.

·         Germany is set to elect its new government in September. Once a new government has been elected, they will be able to set the tone on whether an official writedown of Greece’s immense €340 billion debt burden is endorsed.

·         Clampdown on tax evasion – this is a major problem, particularly the ability of the wealthy elite to use their political influence to evade taxes. Tax evasion is estimated to cost the Greek government €30 billion annually in lost revenues.

Contemporary Greece - An Athens or Sparta?

·         Overhaul its current tax administration (condition of Troika funding) -  Greece attempted to collect overdue tax had a target of €2 billion in 2012, yet the government only raised €1.1 billion. It is also estimated that Greece has unpaid taxes of €55 billion, roughly 30% of their GDP. Tax reforms were announced in February 2013 that will further squeeze middle-class taxpayers by expunging tax exemptions for insurance premiums and interest on mortgage payments, increasing annual property taxes, and introducing a 20% capital gains tax for stock trading. Annual incomes of up to €25,000 will be taxed at 22%, whilst incomes over €40,000 will be taxed at 42%.  The corporate tax rate will increase from 20% to 26%.

·         Successfully complete privatisations – The government needs to raise €2.6 billion this year from sales of state-controlled companies. If revenues fall behind the target set by the Troika, the shortfall will have to be made up through immediate spending cuts. State-owned gas trader DEPA has been the subject of a €1.5 billion bid from Gazprom.

·         Attract foreign direct investment – in particular the Troika made it a condition of funding that the big four banks – National Bank of Greece, Eurobank, Alpha Bank, Piraeus Bank – attain foreign investment in them. However, they together hold negative equity of about €8 billion, which is a disincentive for investors to inject fresh capital as they are not willing to pay for pre-existing losses. Thus far, few fund managers and hedge funds have shown interest in buying shares in Greece’s big four banks. Without investment from foreign investors, the banks will be fully nationalised by the Hellenic Financial Stability Fund (the administrators of the Troika’s bailout money).

·         Tourist season begins in June – income is badly needed to be brought into the ailing economy.

To date Greece has managed to rein in its government spending and the Greek citizens must now also accept the pain of these cuts to allow a government to have the longevity to see out this period of recession. Private companies have cut monthly salaries to the minimum wage of €580 per month by renegotiating contracts with their employees. Meanwhile the government has capped the majority of public sector salaries at €5,000 per month. However the upside to the approximately 35% decrease in Greek wages over the past two years is that several multinational companies see Greece’s labour as highly competitive relative to other European countries. Companies such as Coca Cola Hellenic, Unilever and Procter & Gamble are either transferring production from other countries to Greece or planning increased output this year. Furthermore, the 10-year Greek government bond yield dropped below 10% for the first time in more than two years in February 2013, whilst Athen’s stock market has rallied 120% since June 2012. These are signs that, with some Greek stoicism, the Greek government can navigate through these difficult terms and chart the path towards economic recovery within the Eurozone.