Greece’s austerity measures collide with reform hopes

Europe’s plans to help Greece avoid piling up another mountain of debt are straightforward enough on paper: Get the government to cut its spending, mainly by trimming the large public sector, and increase its revenue, mainly by collecting the taxes it already has in place.

In practice, those goals require a fundamental overhaul of the Greek system, which would be difficult in the best of times and is proving torturous now. Plans to raise money by selling off state property have collided with a new tax on land that makes investors less interested in buying it. Efforts to curb rampant tax evasion are hampered by deep pay cuts for tax collectors. In the meantime, the country is close to running out of money.

On Tuesday, after more than a month of uncertainty, an inspection team sent by the administrators of Greece’s bailout recommended that the country receive an additional $11 billion installment in early November, subject to the approval of the International Monetary Fund’s executive board and euro zone finance ministers. But they said the country had missed its bailout targets and would need to make even more painful cuts in 2013 and 2014.

The officials said in a statement that the country’s budget targets were beyond reach for 2011, and that the economy will continue contracting for at least another year. A longer-term bailout remains under negotiation and may now mean deeper-than-expected losses for the banks and other private investors that hold Greek bonds.

Europe is increasingly inclined to give up on much of Greece’s debt, which would relieve the pressure to reform but would have uncertain consequences for all the European economies.

German Chancellor Angela Merkel and French President Nicolas Sarkozy announced Sunday that they would support a plan to shore up banks to guard against a major financial crisis, and they said they would also support fundamental changes to the way the European economy is run.

Ordinary Greeks, meanwhile, feel that neither their leaders nor Europe’s are up to the challenge.

“You cannot every three months come waving the flag of catastrophe and ask for more money,” said George Moraitis, 62, a photographer, referring to both the Greek government and the European administrators of the country’s $150 billion bailout.

In the spring, Greek leaders announced an ambitious plan to raise $67 billion by 2015 by privatizing a long list of state-owned companies and properties, a major change for a government that had long run the companies as patronage machines. The IMF and other creditors have called the privatizations crucial if Greece is to make its economy more competitive and if the government is to reduce its financial obligations.

But the plan faces major hurdles. Attracting investors is hard because credit inside Greece has frozen and banks outside the country are cautious about what would happen if the economy plunges further. And those in charge of setting prices face the politically unpopular task of selling off assets at values far below what they could make under more favorable economic conditions.

“The global conditions are likely to be an impediment,” said Costas Mitropoulos, the head of the privatization office, which is so new that it does not yet have a Web site. Nor does he expect to be applauded by politicians every time he pulls off a deal.

“Everybody is asking: ‘Are you selling too cheaply? Could you get more?’ ” he said.

At first, the government said it would raise $6.7 billion by year’s end. Then it dropped its 2011 target to $5.4 billion. But so far, only two deals have closed: a 10 percent stake in the telephone company, OTE, sold for $540 million to Deutsche Telekom; and a 10-year, $1.3 billion concession to Greek betting operator OPAP.

There are 22 other privatization targets for this year alone. But other deals might be harder.

Mitropoulos said that there had been interest in most of the big targets on the privatization list and that he was including claw-back clauses to help the government recover money if the value of the properties increases after they have been sold.

The question is: Who would want companies whose balance sheets have swelled with political hiring and debt?

“These companies have been operating not on economic terms, but on political terms,” said Leandros Rakintzis, Greece’s auditor general. “And if they are privatized, it’s going to be the public sector that’s going to pay for them, because no investor is going to take on those debts.”

Some of the government’s actions appear to depress the value of some of its properties, not increase them. A property tax was introduced last month, which won quiet praise from Greece’s European creditors for targeting people rich enough to own property while leaving alone poorer renters. But the tax will make it hard to raise top dollar for the government’s extensive land holdings, which are also on the list of privatizations.

Whether the tax will raise as much money as hoped — the Greek government forecasts $2.7 billion this year alone — is yet another question. Even a deputy prime minister, Theodoros Pangalos, said he would not be able to afford to pay the tax, telling a Greek television station that he would have to sell a property to raise the money to do so.

Meanwhile, efforts to reduce Greece’s famously sky-high tax evasion rate also appear imperiled. The property tax is being levied through electricity bills to make it more difficult to avoid. Income taxes, however, remain in the hands of tax collectors, who are notoriously easy to bribe. Some estimates have put the amount of money lost to evasion at $30 billion a year.

“If you go to the tax man, he usually has a drawer that he opens up, and it has money in it and you drop yours in,” said Stefanos Manos, a former finance minister.

Now the tax collectors’ salaries have been cut along with those of other civil servants. Their own taxes have gone up with everyone else’s. A system that didn’t work before is unlikely to start working now, many Greeks say, as faith in the government drops to new lows.

“We lack trust between citizens and the state,” said Yiannis Diotis, a former terrorism prosecutor who was recently appointed the head of Greece’s financial crimes squad. The crackdown on tax evasion has been speeded to “a sprint,” Diotis said. But he is hampered by having the same staff of 705 inspectors under whose watch the tax evasion occurred in the first place.

Reforms will be slow, Diotis said. Eventually he plans to give bonuses to inspectors who bring in more money.

The inspection team that Greece’s creditors sent to see whether the country has met the conditions of the bailout stayed long past expectations, after cutting short an earlier trip in September because the government had failed to meet targets.

“This is a vicious circle,” said Giota Velana, who runs an advertising company and laid off most of her employees last year. The new property tax might push her finances over the brink, she said. “The taxes have gone up so much that most people can’t pay. I don’t intend to pay unfair taxes like that.”

Special correspondent Elinda Labropoulou and staff writer Howard Schneider contributed to this report.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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