The new Greek Government pledged a whole range of structural reforms

Today, the government and much of the Greek society sense that they can get away with all sorts of things because the euro zone partners are petrified of default, said Mr. Economides of the London School of Economics. They also sense that at every turn, some form of bailout will be found. A look closer to this troubled state reveals clearly that in the year since Greece received the first financial rescue package, many things have changed, and not for the better. The government reduced its budget deficit by almost 5 percent of its gross domestic product, workers have been hit by wage freezes and pension cuts all of that prompting a growing popular unrest and frustration. The Papandreou government revealed for the first time how many people it employs, and tax collectors can now cross-reference vacation homes ownership with declared income to help determine wealth and cut down on rampant tax dodgers. A year ago, Prime Minister George Papandreou managed to get a $155 billion loan from the European Union, European Central Bank and the International Monetary Fund and return, his government pledged a whole range of structural reforms, such as, cracking down on tax evasion, raising the retirement age to 63 and a half from 61 and a half, limiting early retirement and opening the so-called closed professions whose guilds grant limited until now the access to newcomers. Well, as he comes back to Greeces foreign creditors asking for the next $16.8 billion installment of aid , he is firm on persuading the Greeks to accept more tax hikes, wage cuts as well as the privatization of more than $71 billion in state assets before 2015 . Doubts though have emerged about his government ability to implement and enforce the measures it has already passed, persist even after a reshuffeling of the ministers portfolios. The main problem is that hes only been able to deliver on the parts of the austerity package that are easily enforceable and transparent and irrevocable, such as cuts to public sector salaries and pensions, said Spyros Economides, a political scientist who co-directs the Hellenic Observatory at the London School of Economics. Unfortunately, the rest of it is a complete mess. Its very easy to legislate, Mr. Economides added. The problem is to enforce legislation. Theres no enforcement mechanism. Its all done for the eyes of the public.

The finance ministers from the euro zone met in Luxembourg, expected to approve the next disbursement of funds, but if Mr. Papandreou fails to push through the new austerity measures that the Greek Parliament is expected to begin debating shortly, he could jeopardize the second rescue package that Greece needs in order to carry it through next year. It is clear that a default would send the euro zone and world markets into a tailspin. So far, the country failed to collect on another 40 billion euros in back taxes owed in 2010, Ms. Stavraki said. The problem is that most usually pay 20 percent of what they owe, and then they disappear. Adding to the difficulties, as the panic and uncertainty spreads, Greeks continue to take their money out of local banks. According to data from the European Central Bank, Greek banks lost 4 billion euros in deposits in May, following 2.4 billion in losses in April part of a bank run that has seen an estimated 60 billion euros, a quarter of Greeces gross domestic product, leave the country since the crisis began. Last february, the Greek government passed a much-publicized law that removed the barriers to some of the so-called closed professions, which range from truck drivers to pharmacists to engineers. There are powerful organizations controlling who can get a license to practice in those professions, a system critics say, rewards connections over merit. In late May, the Finance Ministry listed the 136 professions to be opened up starting in July. It includes taxi drivers and beauticians, but does not include three of the most powerful groups in Greece notaries, lawyers and civil engineers. Their guilds are slated for liberalization at a later date, the ministry said, without specifying when. In the meantime, Greeces public power company union has called for rolling power cutoffs starting this month to protest the governments plan to sell 17 percent of the states stake in the Public Power Corporation, which is listed on the Athens stock exchange. Its a prefixed game, and its being played at the expense of the biggest state enterprises in Greece Costas Koutsodimas, the vice president of the union, known as Genop, called the plan a win for the banks and a loss to Greek patrimony, questioning how selling state assets, perhaps to foreign utilities that are reportedly interested in buying stakes, would be good for Greece. Its a prefixed game, and its being played at the expense of the biggest state enterprises in Greece, he said in an interview.

Yet even as austerity measures have brought pain to thousands of state workers, many Greeks, especially those working in the private sector, remain angry at a public sector workforce they view as an untouchable caste with the luxury of a guaranteed salary. Some things though are harder to change. Asked if the state had the enough resources and means, let alone the will, to fully collect taxes, the head of the collectors union, took a long drag from a cigarette keeping quiet . Later she said : Huge efforts have been made I dont think people are afraid of us. Analysts at large, say it is unrealistic to expect Greece to transform the entrenched parts of its social fabric in such a short a time, with the financial markets spinning far more quickly than the wheels of government or society. Eastern Europe would find it hard to avoid contagion Eastern Europes economic recovery may be scuttled by any Greek debt restructuring, which would curb lending by western banks and undermine investor bets that have propelled the regions stocks, bonds and currencies. While the region has three of this years 10 best- performing currencies and five of the 10 equity indexes that rose the most, 76 percent of its banking market is controlled by western European lenders still threatened by the euros debt crisis. You would expect that the Greek troubles now would have a bigger impact on emerging Europe, said Neil Shearing, senior emerging-market analyst at Capital Economics in London. Its a puzzle. I suspect it might just be the calm before the storm. The risk is that a new round of Europes sovereign debt turmoil will prompt lenders including UniCredit SpA (UCG), Erste Group Bank AG (EBS) and Societe Generale (GLE) SA to rein back lending just as the region recovers from a credit crunch that contributed to recessions three years ago. The European Union forecasted on May 13/ 2011 that every eastern economy will grow this year for the first time since 2008. What puts a constant strain on the banking system is the recovery lagging and that in turn, puts tremendous pressure on capital and capitalization rates and therefore, it delays more buoyant credit growth. This pressure on the capital base continues until the pre-crisis credit booms have unwound themselves, but how and when, nobody knows.

Mircea Halaciuga, Esq. 0040724581078

Financial news - Eastern Europe

Date: 6/20/2011