Greek Pension Scheme in turmoil

  • J Mulraj, Hindustan Times
  • Updated: Jun 26, 2015 23:41 IST

Whether or not Greece succeeds in renegotiating a deal with its creditors before the Saturday deadline, there will be a Greek tragedy.

If there is a deal, it will come with strict conditionalities that will create political problems for Greek Prime Minister Alexis Tsipras and his party and may see some revolt in the country. One of the demands of creditors is to cut pensions. But pensions are the only source of income for half of the Mediterranean nation’s residents!

The Greek pension scheme also includes its safety net. It has had a youth unemployment rate of over 50% for five years now, a tragic consequence of austerity. The benefit these youth get is 10 euros per day. How can the Greek government agree to pull a plug on this without running into social problems as there are no prospects for job creation?

If there is no deal, as it seems plausible and likely now, Greece would default and probably leave the euro zone. If this happens, it will find it difficult, and expensive, to raise money to rebuild its economy. Rebuilding would mean stricter governance (Greeks are notorious for tax evasion), and a lot of pain, although, according to a Bloomberg article ‘How Greece can fix itself’, it can be done over a decade.

The worry for Europe, and for the world, is whether the problem will spread to other weaker countries. After the Greek canary in the coalmine, there are the Portugese, Spanish and Italian canaries tweeting in the backyard too.

A Grexit would raise borrowing costs for these countries. Bond yields for these countries have already started rising. The Greek debt of over 300 billion euros (`21 lakh crore) on the books of European banks, mainly German, would cause problems for these banks.

Reports are already asking ‘Is Deutsche Bank the next Lehman’. Deutsche Bank has a large holding in Greek sovereign bonds.

It is basically to avoid such a situation that Angela Merkel has shown forbearance towards Greece so far.

On its own, Greece is too small an economy, and its debt is too insignificant an amount in the global context (global debt stands at $200 trillion).

Yet the same was thought about Lehman Brothers, whose bankruptcy triggered the 2008 global financial crisis. This fear of the black swan is why Merkel and others are trying to feed the canary.

What Greece needs is good governance, a clamp down on tax evasion and concentration on areas of its competence such as tourism and shipping/logistics.

What India, too, needs, is good governance, and one believes this government is attempting it. Consider black money. A two-month window for disclosure of offshore money will open soon, permitting a stress-free life after payment of 60% tax on the disclosed funds held abroad.

After two months, if caught, the assessee would pay 120% plus face a prison term of upto 10 years. Game Theory (the prisoner’s dilemma) suggests the carrot and stick approach will work and the government can look forward to collecting a large sum in taxes through disclosure.

Good governance can improve performance in several areas, not the least in how banks direct capital. Indian banks have bad loans worth `4 lakh crores, including `53,000 crore from electricity boards, primarily because of theft of power. This can be stopped, given the will.

One of the steps this Government is taking is to have better heads for public sector banks, which account for 70% of the loans and deposits. It is also acting tough on recalcitrant borrowers, and needs to get even more so.

It also needs to speed up the judicial process and strengthen the investigation process, which often lets scamsters off the hook because of shoddy evidence (sometimes deliberately so). This lack of protection deters investors.

The market would react if there is a Grexit, though it does not seem too worried about the consequences. The India story per se, remains good, especially if the two-month window results in a huge tax windfall for the government.

(J Mulraj is a stock market commentator and India head for Euromoney Conferences. Views are personal)

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