Sick of Greece yet? If you’re not already, then believe me, you’re soon going to be. You see, this crisis isn’t over yet.
The burning issue over the last few weeks was whether Greece and the European Union could agree a new deal to keep the stricken country in the euro.
Athens blinked first. The new deal extends the bailout until the summer, keeping the supervision and most of the conditions in place. Greece also agreed to pay its debts in full and on time, dashing hopes that it would be granted debt relief.
Proof that the Germans ‘won’ came when the German parliament voted to ratify the deal by a huge majority last Friday.
Problem solved?
Not a bit of it.
Greece is just terrible at collecting taxes
Why isn’t the Greek crisis over? Because there’s a good chance that Greece won’t even make it as far as June before it needs a new bailout.
One of Greece’s biggest problems is that many people, especially the wealthy, don’t pay their taxes. The Greek tax code makes it easy to dodge taxes. And the tax office is terrible at getting people to cough up those taxes that they actually owe. One estimate reckons unpaid taxes are worth 90% of annual tax revenues.
So, better tax collection is vital if Athens is to be able to balance the budget. The finance minister has even hinted that a ‘one-off’ tax could be levied to raise immediate cash.
However, things seem to be getting worse, not better. The economy is starting to recover, so you’d expect the tax take to be rising. But revenue actually fell by nearly 8% of GDP last year, compared with 2013.
And since December, it has reportedly fallen by a further 22%. In January alone, revenue was €1bn below target, with income tax and VAT the main problems.
It looks like this is a classic case of ‘can’t pay, won’t pay’. Over the past few years, Greeks have seen their standard of living crater as wages collapsed to make Greece more competitive (this is known as an ‘internal devaluation’ and it’s even more painful than that makes it sound).
So it seems as though a growing number of people and companies (mainly the self-employed) have simply decided not to pay up, betting that the Athens government simply won’t be able to punish them.
Athens is running out of money
These fiscal problems suggest that Greece may struggle to meet its obligations from maturing bonds. It’s due to repay €2.5bn this month, then a total of €5.2bn in the three months after that.
Capital Economics notes that Greece has remained tight-lipped about how much cash it actually has right now. That suggests the situation is pretty grim. The government has committed to repaying this month’s tranche – but it has refused to make a similar pledge about what it can do after that.
This cash squeeze is complicated by the fact that there is growing pressure on the new government from within its own party to start delivering on its election promises to end austerity – which will inevitably involve extra spending.
For instance, in the last few days, the government has said that it will restore electricity for those who’ve had it cut off. It also pledged to give 300,000 people food stamps.
Normally, the solution would be for the Greek government to simply issue more short-term debt (called bills). But European Central Bank rules limit such debt to €15bn – and Greece has already hit its limit.
In any case, even if Greece manages to struggle through the next few months, repaying its debts (which stand at around 170% of GDP) in the long run looks nigh on impossible.
In short, the latest ‘deal’, like all previous measures, is only a stopgap measure until a long-term solution can be found. That brings us back to the same place we’ve been at what feels like a hundred times already.
A lasting solution would involve some form of debt relief for Greece. But Germany (and much of the rest of Europe) remains opposed to letting Athens off the hook. Spain has said that it opposes any special concessions for Greece (though if protest party Podemos gets in, it may change its tune), while Ireland has said that if there is any write-down, it will expect similar treatment.
In other words ‘Grexit’ is still very much an option.
Time to buy into Greece
So why on earth would you want to buy Greek shares if a Grexit might still be on the cards? Well, the thing is, a managed default which involved leaving the single currency, would be the best long-term solution for both Greeks as a whole and for shareholders.
While wages have fallen, they are still about 20% too high on some estimates, relative to a level that would make Greece genuinely competitive again. A devaluation would quickly close this gap and set off a tourism boom. Despite its fiscal problems, Greece still runs a primary surplus (or at least, it says it does) when debt payments are excluded, so it wouldn’t have to rely on the debt markets.
That might not be much of an argument – but the clincher is that Greek shares remain cheap on a cyclically-adjusted price/earnings (Cape) ratio of less than three. This makes them wildly cheaper than the US stock market, with a Cape of 23.6.
Now, obviously, it’s a bit of a gamble, so we’d suggest that you put it in the high risk part of your portfolio. If Greece did exit the eurozone (by no means certain, of course), any shareholders would face a sliding currency and possible short-term chaos and the imposition of capital controls.
But in the long run, history suggests that buying stock markets when they reach these sorts of levels tends to pay off. And they don’t reach these levels unless the outlook is scary. If you fancy having a bit of a punt, then the best way to invest in the Greek stock market is through Paris-listed Lyxor Athens ETF (Paris: GRE).
Of course, the contradictions inherent in the eurozone could still cause a great deal of upheaval. My colleague Tim Price is a lot less sanguine about the situation than I am. You can read his take on the threat from Europe here.
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