Canadian Taxpayers’ Federation – Summer 2010
How Canadians are on the hook for Greece and maybe more
By Mark Milke
Canadians, especially those in the more productive and prosperous provinces, should now get used to bailing out not only profligate governments at home – think equalization payments to Quebec and the Atlantic provinces – but abroad.
… Apparently some Greeks, mostly those employed by the government and who waved Marxist flags, thought they were entitled to mid-50s retirement, lavish benefits, long paid holidays, low productivity and that the rest of Europe and debt-holders should continue to pay for that lifestyle indefinitely, without any bills ever coming due.
That was never sustainable. For example, the German newspaper, Der Spiegel, reported the following about a new investigation into Greece’s spending habits by a newly hired “general inspector of public administration,” a sort of auditor akin to Canada’s auditor general. He found the following:
. On weekends, hospitals admit elderly people who require nursing care or are confused because their children bring them there so that they can take a few days of vacation;
. An administrative office called Kopais, named after the lake of the same name, was established in 1957 to prepare for the draining of the lake so that roads could be built in the lakebed. That lake disappeared in 1957, forever, but 53 years later, there are still 30 employees working at Kopais. When employees retire or are let go, their positions are filled with new employees, who are paid monthly salaries of up to the equivalent of $3,225 Canadian; and
. Greece has more than five times as many civil servants per capita as the United Kingdom.
Der Spiegel noted other problems with Greece:
. 450 doctors report annual salaries of only $13,000 Canadian on their tax returns;
. So many people in Greece are in the underground economy that their combined earnings make up 25% of GDP; and
. The IMF found that just 8,401 Greeks owe their own country a total of over $26 billion Canadian in back taxes.
… what most Canadians may not realize is that we too are on the hook for Greek overspending. Canada is a member of the IMF [International Monetary Fund] and, as such, has obligations in crises such as the one unfolding in Europe. … It is in this latter scenario that the IMF must step in, when others refuse to lend. …
So how much are Canadians on the hook for? Normally, Canada has $10 billion in credit that the IMF can draw upon but during the 2008 financial crisis that amount was upped by another $12 billion. Thus, Canada’s own “line of credit” to the IMF is $22 billion. So far, the IMF has drawn “just” $200 million out of that account for Greece (with another $2 billion for other IMF commitments), though the federal department of finance expects that figure to rise as the Greek bailout is a three-year deal.
Mark Milke is research director for the Frontier Centre for Public Policy
Gary North‘s Reality Check – September 14, 2010 * Issue 996
Europe’s Banking Crisis: Next Phase
The European banks are still in deep trouble. They are being protected only by the ability of the politicians of the PIIGS to persuade the public that they will be able to maintain interest payments in the near term. Investors care nothing about long-term prospects. They assume that they can sell bad bonds to the next group of naive investors. Each group assumes that those who follow will be suckers. They regard themselves as sophisticated investors who know what will happen and who will be able to unload the bonds on really stupid investors. This is known historically as greater-fool investing. It always prevails in the final stages of a bubble. Last May, I wrote of the crisis in Greek government financing that we should not expect much from the Prime Minister’s assurances that there would be tight austerity measures imposed on the nation, especially its government sector. In an article titled, “PIIGS Win. Bankers Win. Voters Lose,” I wrote:
As for cutbacks in Greek spending, ho, ho, ho. As
for austerity in Southern Europe, ha, ha, ha.
Once you owe the banks up north a trillion
dollars, you will get the politicians up north to
sell more debt, so that you can meet your
interest payments to their banks, and then sell
more debt at low rates.
Debt will rise. That is the inescapable reality
of moral hazard. Bank profits will go on, because
bank losses are transferred to sovereign
governments. Nothing has changed. The same old
system rolls on.
http://www.lewrockwell.com/north/north842.html
On September 10, Greek trade unions began organizing another wave of riots in preparation for a speech by the Prime Minister. On September 11, the riots began – a Saturday. One British source recorded that at least 20,000 demonstrators marched to the conference center where the PM was giving his speech. The police used tear gas against the crowd. The Prime Minister announced a reduction in the tax rate for businesses from 24% to 20%. He also promised to privatize the electricity company.
http://bit.ly/GreekRiotsSeptember
The country must reduce its deficit from almost 14% of GDP in 2009 to 8% this year. This, to put it bluntly, is impossible. Everyone knows it’s impossible. Nevertheless, he announced: “I have every confidence that, by the end of the year … we will have achieved the 40% reduction of deficit.”
“The [shortfall] in revenues is about 1.5 billion
euros,” he said. “But with the pace at which we
are advancing and with the measures we have
already taken, we are confident we will reach the
goal we have set for 2010.”
Budget figures released on Friday suggest that,
despite various measures taken by authorities,
tax revenues increased by only 3.3% in the eight
months to August, well behind the 13.7% target
for this year. On the positive side, however,
public spending for that period fell by 12%, more
than double the 5.8% target for end-2010.
He also assured his listeners that there is no need for further austerity measures. He also assured them that the measures already taken will produce a positive response from Western lenders.
Not if they have read Michael Lewis’s article in “Vanity Fair” (Oct. 1), “Beware of Greeks Bearing Bonds.”
PHONY FIGURES
Lewis became famous for his book on Wall Street, “Liar’s Poker.” His book, “The Blind Side,” told the story of a Memphis youth who was taken in by a Christian family, and from there made it into the National Football League. The movie pulled in a quarter of a billion dollars in American theaters, and won Sandra Bullock an Oscar. Now he goes after Greek government finances. It is a story like nothing I have ever read about chicanery. The are 11 million people in Greece. The nation has run up an operational deficit of $400 billion, plus a government pension fund obligation of $800 billion. That’s $1.2 trillion. This, for a nation with a population smaller than Los Angeles. This is a debt of $250,000 for every Greek.
“Our people went in and couldn’t believe what
they found,” a senior I.M.F. official told me,
not long after he’d returned from the I.M.F.’s
first Greek mission. “The way they were keeping
track of their finances – they knew how much
they had agreed to spend, but no one was keeping
track of what he had actually spent. It wasn’t
even what you would call an emerging economy. It
was a Third World country.”
This is a nation that entered the European Currency Union as an equal a decade ago. This means that banks around the world have bought the bonds of a nation that cannot possibly repay the loans. This week, an IMF commission is in Greece to look over the books. There seems to be no concern in international markets. His summary of the degree of mismanagement and universal corruption leaves the reader stunned.
The national railroad system generates revenues of 100 million euros. Its wage bill is 400 million, plus 300 million in other expenses. The average railway employee earns 65,000 euros a year.
The public school system is among the worst in Europe, but it employs four times as many teachers per student as Finland, the nation with the best system.
Then there is retirement. For arduous occupations, the retirement age is 55 for men; it is 50 for women. “As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”
Then there is the tax collection system. Almost no self-employed worker pays income taxes. Physicians accept cash only. Two-thirds of them report only 12,000 euros per year, on which no taxes are owed. One whistle-blower told Lewis that if the law were enforced, every physician in Greece would go to jail.
The easiest way to launder cash was to buy real
estate. Conveniently for the black market – and
alone among European countries – Greece has no
working national land registry. “You have to know
where the guy bought the land – the address -
to trace it back to him,” says the collector.
“And even then it’s all handwritten and hard to
decipher.” But, I say, if some plastic surgeon
takes a million in cash, buys a plot on a Greek
island, and builds himself a villa, there would
be other records – say, building permits. “The
people who give the building permits don’t inform
the Treasury,” says the tax collector.
And so it goes, in every field. Only salaried people pay the income tax.
As for bribery, it is universal. If someone gets caught cheating, he pays a small fine. One of the two whistle-blowers who spoke with him turned in a company that had earned 15 million euros. It paid no taxes. The whistle-blower was demoted. The firm paid a fine of 2,000 euros. The man had evidence of so many similar cases that Lewis stopped him. It would take all night to view them.
In Athens, I several times had a feeling new to
me as a journalist: a complete lack of interest
in what was obviously shocking material. I’d sit
down with someone who knew the inner workings of
the Greek government: a big-time banker, a tax
collector, a deputy finance minister, a former
M.P. I’d take out my notepad and start writing
down the stories that spilled out of them.
Scandal after scandal poured forth. Twenty
minutes into it I’d lose interest. There were
simply too many: they could fill libraries, never
mind a magazine article.
This is the nation that persuaded the world’s most sophisticated investors to lend it hundreds of billions of dollars worth of Greek government bonds at Germany’s interest rates. Nobody bothered to check the books. There were no books to check. The man in charge of totaling up the bill last fall, when the new government came into power, could not get the accounts for a week. Every day, there were new revelations. One government pension fund was running a deficit of a $1 billion a year. There was no record of it. It was off-budget. In one week, the annual deficit went from 7 billion euros to 30 billion. No one had ever counted it before. Lewis’s summary is persuasive.
The structure of the Greek economy is
collectivist, but the country, in spirit, is the
opposite of a collective. Its real structure is
every man for himself. Into this system investors
had poured hundreds of billions of dollars. And
the credit boom had pushed the country over the
edge, into total moral collapse.
Will the Greek government default? He doesn’t answer directly, but indirectly, it is clear that he thinks it will. He sees this as a moral collapse. He does not try to argue that it is possible for the government to avoid default. The more interesting question, he says, is whether the Greeks can reform themselves. He ends his article with this.
It behaves as a collection of atomized particles,
each of which has grown accustomed to pursuing
its own interest at the expense of the common
good. There’s no question that the government is
resolved to at least try to re-create Greek civic
life. The only question is: Can such a thing,
once lost, ever be re-created?
The moral collapse is only marginally related to the willingness of voters to look out for their own interests. The moral collapse came when voters trusted governments to tell them the truth. Voters trusted government promises to fund the majority in old age at the expense of the rich. This is a widespread moral collapse. Default will follow. “The wicked borroweth and payeth not again” (Psalm 37:21). …
CONCLUSION
Greece is the tip of the iceberg – a Mediterranean iceberg. There is no way that the government will not default. But investors want to believe obvious lies today and face reality tomorrow. They are just like voters and politicians.
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