Interview: Greek finance minister sees economic recovery on the way
Finance Minister Yiannis Stournaras has been at the center of negotiations between Greece, the troika and eurozone finance ministers over the last few weeks, culminating in an agreement at a Eurogroup meeting on November 27 to take steps to reduce Greece's public debt.
On Tuesday, Stournaras spoke live to Kathimerini editor-in-chief Alexis Papachelas on Skai's New Files program about those talks and Greece's prospects for the future.
Given that you've been in office for four months, there's a feeling that you have delayed preparing this draft tax law and showing it to the parties. Is this accurate?
I don't think so. This is the mini tax bill because we have until June to prepare the main tax legislation and that will require an extended dialogue. For the mini tax bill, which is needed for us to meet our fiscal targets, we gave our proposals to the parties before the multi-bill [last month] and it doesn't have to be voted on until December 11 as a prior action for the next bailout tranche.
We heard the prime minister say there will be no tax rate of 45 percent for incomes above 26,000 euros. But that was included in the proposal that went to the parties. What happened?
We voted and agreed with the Eurogroup and the troika that in 2013 and 2014, Greece will have to save 13.5 billion euros in total. About 3 billion euros is to come from revenues. This means we need revenues and the troika does not accept the argument that we will overcome large tax evasion to achieve these revenues. They say that we can try to achieve this and if we manage it then we can look at relaxing demands. So we've submitted proposals that attempt to simplify the tax scale, to include self-employed professionals and farmers, to increase tax on savings and on cigarettes, all of which should bring in 3 billion euros. Whether we like it or not, we have to bring in new revenues.
A year ago, on this show, you said that if you were finance minister, you would focus more on reducing spending and lessening the increases in taxation. Now that you're in the position, why can't you do it?
That's what we're doing: 10.5 billion [of savings] are coming from spending and 3 billion from taxes.
Don't you feel that Greek society has reached its limits in terms of taxation?
Yes, but we're talking about an economy that's on the edge of a fiscal cliff and in a huge debt crisis. When all Europeans are being taxed in order to save Greece, unfortunately, we have to carry part of this burden. I know these measures are very painful but I have not seen any other proposal. We never suggested a 45 percent tax bracket, though. The proposal we made to the troika to simplify the tax system, which until now had eight brackets, was to create three brackets: 21 percent for up to 25,000 euros, 36 percent for 25,000 to 48,000 and 45 percent for 48,000 and above. That's the proposal we gave to the parties. The troika agreed but calculations we made showed that the tax for some incomes on the borderline of brackets was very high, so they proposed a similar scheme where a 45 percent bracket for incomes over 26,000 would be introduced but with a tax discount of 1,950 euros for everyone. The two proposals are exactly the same. I can't understand those who would accept one but not the other.
It appears there is a communication problem, because your side did not explain what you have just told me.
We explained this to the parties last Friday. The two proposals have the same effect. There are differences of just 10 or 20 euros in what people will pay. There is no 45 percent tax bracket since you have to take into account the large discount. This tax system benefits the lower incomes against the higher-end ones. I hope this will be accepted.
I suppose you've seen PASOK's statement, in which it says it has red lines with regard to the bill?
Everyone has red lines. I have to balance three things, though. Firstly, I have to respect the fact that there is a three-party coalition in which everyone has an opinion. I have to listen to what they say carefully. Secondly, there's the troika, who are our lenders and who have their demands before they disburse loans. Thirdly, my conscience and the oath I took as finance minister and the member of a government that has to succeed. This is not an easy task. Results suggest that we've succeeded.
We have to protect the new trust others have in us like the apple of our eye. When I went to the Eurogroup in July, everyone regarded me with skepticism. We had only done 20 percent of the prior actions that had been demanded at that time. During the four months that have elapsed and following some very hard work and negotiations, we achieved all the targets on the table. Greece implemented all the prior actions and received congratulations not just from friends but also from ministers that had a more hostile stance. I'm not going to be the guy that saves the day at the Eurogroup and then says other things at home.
I'm sure you appreciate that there is an unfairness in salaried employees paying all their taxes and having to see self-employed professionals or others evading taxes.
That's exactly why part of this mini tax bill foresees that self-employed professionals will be taxed as business owners; they will be taxed from the first euro they earn at a rate of 26 percent up to 50,000 euros.
Do you truly believe that you will be able to catch all of [those who cheat the system], such as those who don't issue receipts and so on?
The tax system cannot do this on its own. There will have to be checks and we are examining the justice system so that in cases of major tax evasion, sentences cannot be suspended. In the USA, if someone is arrested for tax evasion, he either has to pay straight away or he goes to jail. In Greece, these sentences are suspended for a long time and that's why few people pay. This will change now and will be the most important motive against tax evasion. We will do lots of other things but this will be the most important.
Looking at the measure to abolish tax breaks for families with children, it seems that some taxpayers have a genuine reason to feel they are being treated unfairly.
I disagree. We are trying to mold the tax system so it's similar to the ones used in advanced countries, where social policy is based on targets. In Greece, there is a lot of waste in welfare policy. Although we pay more than the eurozone average, poverty is not being reduced. Poverty has been at the same level for over 10 years but welfare spending has risen to about 23 percent of GDP.
The way we dealt with tax breaks for [families with] children in this country was illogical. Instead, we will have targeted benefits for families that need them. You know 70 percent of the poor families in need have one or two children. Until now, they hardly saw any benefits. We are trying to correct this so it is based on people's incomes, which will be checked every few months.
Have you exhausted every possibility of taxing the very rich in this country? There is a lot of criticism from abroad, as well, that the elite in Greece do not pay enough.
No, we haven't exhausted all possibilities at all. We are already using new tools, which include tax authorities not being restricted by privacy rules with respect to bank details. We've already sent letters to some of the 54,000 people who transferred money abroad since the crisis began in cases where the amounts did not reflect what they had declared to the tax office. They have been asked to explain the discrepancy or to pay the tax they owe. Tackling this issue is a big challenge.
How sure are you that the authorities, with the tools they have at their disposal, get the job done? Last year, you suggested the only answer was to outsource many of these services.
There has been some outsourcing to auditing companies. The merging of tax offices which is taking place also allows us to allocate extra staff for inspections. We are trying.
One of the important things we're doing is accepting applications for the position of general secretary for revenues, who will have independence, like the governor of the Bank of Greece. He will be responsible for applying the law, regardless of party politics. We have already received a lot of applications for this position.
There have been some changes to taxation over the past few years, such as the rise in VAT at restaurants or tax on cigarettes, that have probably done more harm than good, especially with regard to the black market. Don't you see this danger?
I do. We tried to negotiate a reduction with the troika but they would not accept it. But we achieved something else, which is that if we beat our target – the troika is expecting us to wipe out our primary deficit next year but I think we can do better – we can ask for more social spending or tax cuts. If we find ourselves in this happy position, then we'll have to decide what social criteria to apply.
I hear from a lot of people that they won't have money to pay taxes in January. Doesn't this scare you?
It scares me but I think that if we receive the next tranche, then the Greek economy will begin its recovery as the fear of a return to the drachma will disappear. The huge production gap that we have today will begin to close slowly. I think this will trigger positive growth rates, providing hope for the future. What we're doing now is building a bridge for our children, we shouldn't forget that. Our generation is making an investment for the next generation because we got things wrong over the last 10 years, when we behaved irresponsibly and in a manner that was not befitting of a country that was part of a monetary union. We increased the average wage by 100 percent when it rose by 50 percent in the rest of Europe. We increased the average pension by 80 percent, we took on another 100,000 civil servants. We are all to blame, including myself.
A court ruled today that the Public Power Corporation cannot collect the emergency property tax. What are you going to do?
It's a first instance decision. There are more stages and we'll exhaust our options. We'll see what legal tools we have at our disposable. But we have to realize that we have just taken a small step back from the cliff, so we have to be very careful.
We have a situation where on the one hand judges are upset because of their wage cuts and on the other the constitution says the judiciary is independent. So what can you do when you come up against decisions like this?
We'll use our entire legal arsenal. Also, there is the issue of patriotic duty. I have spoken to the judges but so far it doesn't seem to have had any effect. I showed them charts that show that in comparison to other civil servants, judges have benefited very much due to wage increases. We all have to accept a lower wage so that we can have wages and pensions in the future. If we want to shoot ourselves in the foot, we're free to do it.
One of the ideas that's been suggested recently is a tax amnesty. Have you considered this?
Personally, I don't believe in tax amnesties. I don't believe they've worked anywhere in the world and on top of that they create a sense of injustice.
How are you going to convince people who have moved wealth abroad to return it?
The number one issue is removing the uncertainty about a return to the drachma. Once that goes, the money will return.
Will the tax agreement with Switzerland be completed by the end of the year, as had been planned?
We are trying. I am in contact with my Swiss counterpart. There is a negotiating team and we're trying to produce a result. I can't say too much as there is a confidentiality agreement but we are hoping to get a similar agreement with Switzerland to the ones Germany and Austria have.
What about the Lagarde list? Are you expecting that soon?
I have been assured by the French authorities that we will get it soon. There was a technical issue over who would receive the list but that has been settled.
Is the list that was purported to be the Lagarde list being investigated?
I imagine that it is being investigated by the Financial Crimes Squad (SDOE). It's not the finance minister's job, there are departments that do this job, there are financial prosecutors, there is SDOE.
Let's move on to the issue of the bond buyback. We all appreciate that the disbursal of the next loan installment depends on the success of this scheme. If it doesn't work, is there a plan B?
The Eurogroup will meet again on December 13 to evaluate the situation. But the scheme has to succeed. First of all, it was something that we asked for. Don't forget that all the parties asked for the [European Financial Stability Facility] to give us money so that we could buy back our bonds. Well, that is what's happening now.
Am I correct in saying Greek social security funds won't take part in this buyback?
It's not my intention to say who will take part or not. It's a voluntary scheme. There will be no political order given to them. It is up to their boards to evaluate the offer we've made. We have a limited amount of money for this buyback and we're trying to maximize the participation.
There has been a reaction from the Greek banks, which feel they are suffering a second haircut [after the PSI].
Why are they suffering a second haircut? I don't understand this. The bonds are recorded on their books at a substantially lower value than the offers we've made.
But the buyback will increase the recapitalization needs, won't it?
No. The recapitalization needs are fixed. Bear in mind something else: If the banks don't take part and the buyback doesn't go well, who knows what will happen on December 13? The International Monetary Fund has said it will take part in the bailout program as long as the buyback is successful. I have no doubts about the efforts that Europe will make, but if the IMF doesn't take part this could cause some European powers to want to abandon the program as well.
What will happen to the hedge funds that don't take part in the scheme?
They won't join. At this stage, nothing will happen to them. I can't say much more because at the Eurogroup we agreed that the ministers would be very careful about what they say while the buyback is taking place.
At the moment, though, do you believe it will be a success?
I am by nature an optimist.
Do you think there will be a need for an extension to the deadline?
We'll see. We'll see.
Official sector writedown
I'd like to ask you about the penultimate Eurogroup. Was a taboo broken there with regard to an official sector debt haircut for Greece?
The IMF helped Greece in the sense that it pushed for a solution through a big reduction of Greek debt. I had told Mrs Lagarde that I was thankful for her help but worried that the Europeans were not ready and we might not get a decision. In fact, at the previous Eurogroup we broke up at 5.30 a.m. without a decision. We were very close to the same thing happening at the penultimate Eurogroup.
As Greek finance minister, I could see the dangers and spoke in dramatic terms – no longer as an economist. Several other colleagues did the same. I won't say who.
What do you mean by dramatic terms?
I said: “If we leave this room without an agreement, I can honestly say that within a few months, Greece will no longer belong to the West in the sense that it will have to turn elsewhere for funds. You can't congratulate us in the morning for achieving all our targets and at night not reach an agreement despite 12 hours of talks.” We went through a protracted process. One country objected to the initial agreement, then another said it was poorer than Greece and would not accept central banks returning the profits they made on Greek bonds. National interests and strategies were obstacles to a solution. So I asked them to consider the cost of not finding a solution, what it would mean for Greece and its social cohesion, what it would mean for the eurozone, what it would mean for the markets.
I have to single out one person: Mr [Jean-Claude] Juncker, who said that we would not leave that room unless there was an agreement.
Have you ever thought what effect a threat of a unilateral default would have on negotiations?
I can tell you that we achieved all the targets we put on the table. Fiscal extension? We got it. Debt reduction? We're getting it. Reduction in interest rates? We got it. Extension of maturities? We got it. That's for all those who say we didn't negotiate.
Yes, but all this is coming with tough measures.
Yes, the tough part is not that Greece shouldn't be adopting these measures but that the program is too front-loaded. I objected to this but unfortunately, the IMF, which was the only one that was insistent on this at the start, managed to sway the European Central Bank and the European Commission. I came up against a wall.
I told them that I did not have a problem with their targets. Wiping out the primary deficit next year, for instance, is something I agree with. Larger surpluses for the following years are also logical targets. But the measures we are taking for 2013 are more than is needed to achieve the targets. If everything goes well, I think we'll have a primary surplus next year and the agreement we have struck allows us to use part of this surplus so that the measures in 2014 are softer.
Do they not understand the never-ending cycle created by austerity and recession?
They do understand. But their thinking – mainly the IMF's – is that they look at countries like Portugal and Ireland, which had difficulties initially but are experiencing success and are returning to the markets. They say the difference in Greece is that we failed with structural reforms. My response to them is that the emphasis on structural reforms in the first Greek program was almost nonexistent. There was no reference to privatizations in the first program. There was no reference to opening closed professions in the first program. These have only been placed on the table now.
The theory is that the gap created in domestic demand will be covered by the opening of markets, more exports and a big improvement in competitiveness and from the EU structural funds, which we have not been absorbing.
Also, one of the reasons the economy is not recovering is because of the fear of a return to the drachma. I hope that this drachmaphobia will disappear when the next tranche is disbursed and we will attract investment as part of the very ambitious privatization program we have.
But to return to your question about the threat of a unilateral default: In negotiations like these, you have to display realism and flexibility. If we really threatened to blow the whole process, it would have been like a team of Greek Taliban going to Brussels and causing an explosion. It would cause some damage there but Greece would collapse completely. The funding of Greek banks through the Emergency Liquidity Assistance would stop the next day. There would be no money in ATMs, no food on shelves, we wouldn't be able to buy fuel and medicines from abroad.
The flip side is that when Mr [Wolfgang] Schaeuble tells the German Parliament that Germany could not handle a Greek euro exit, this gives us some negotiating strength.
When did Mr Schaeuble say this, though? He said this after we had behaved responsibly and did what we had promised.
I don't think this [German fear] would have been the case no matter what. If we'd threatened to self-destruct, they would have created a firewall to protect their banks and we would have become an Ipheginia. With the sacrifice of Greece, Europe would have moved quicker to a federal model. Greece would be destroyed. I will never agree to this.
Do you think there will be a definitive solution to the debt problem, via a official sector haircut, after the German elections?
I wouldn't like to comment on that because at the moment the German government has rejected it.
Reducing our debt by 20 percentage points, from a projected 144 percent of GDP to 124 percent [in 2020], is a substantial reduction and a major achievement for Greece.
What level does debt have to reach for you to believe that we can put the worst behind us?
When it falls below 100 percent of GDP, when we are at the eurozone average. That's why I'm so insistent on privatizations. Greece has a huge advantage, which is that public assets are worth more as a percentage of GDP than in other eurozone countries. That is for historic reasons. When we were part of the Ottoman Empire, the Ottomans did not want Greeks who were private citizens to amass lots of land. That's why Greeks were traders, shipping tycoons, but not landowners. It wasn't like France, where 500 families own half of the country. In Greece, the assets are mostly in the hands of the state and the Church.
That's why we have a big advantage and I trust the management of TAIPED [privatization fund] to achieve success.
Aren't you afraid that the sale prices of assets will be very low?
The prices are low but the cost of buying back bonds is also low and the troika now accepts that we can use privatization revenues to buy back our debt.
In the agreement, there is an automatic mechanism that will enforce new austerity measures if Greece misses its targets next year. Can you assure people there will be no more reductions to wages and pensions?
The mechanism you mention is symmetrical, which means that if we are ahead of our targets, we'll be able to take softer measures in 2014. It's important to note this – Democratic Left insisted on it. Mr Kouvelis is maintaining a very responsible position.
I can assure people there will be no further cuts, unless we don't meet our targets. If we don't meet our targets and don't do what we have to do then there will be pressure for more measures.
Do you appreciate, though, that politically and socially there is no more room for further measures?
I understand that. We have no other option than to succeed. When we are determined to succeed, we do so. I have to offer my congratulations to the prime minister on this: When he saw that we were in danger of not completing all the prior actions because of objections by ministers, he took on the responsibility of resolving the matter. That was very pleasing.
How much do you think other ministers are standing by you in your efforts?
It's really for the prime minister to judge, although I have added responsibility as the country's representative at the Eurogroup. [European Commission] President [Jose Manuel] Barroso warned us recently that the Eurogroup has become autonomous and it is dangerous for a finance minister to lose his trustworthiness. He said that if we say one thing and do another, then it would be best for me to quit my position.
I assume the thought has crossed your mind a lot?
Yes, but I have no intention of leaving. I'm not a career politician. I'm doing this job out of patriotic duty and will do what I have to do and what my conscience and the salvation of the country dictate.
What kind of change will these structural reforms have on the life of average Greeks?
They'll have a huge impact. You can't imagine. Greece has restrictions, such as closed professions, that you won't even find in Cuba. When I arrived at the ministry, I thought we'd opened them but then I found out that the ministerial decisions had not been issued. They're only opening now.
This country never ceases to amaze me. Any rock you lift up, you'll find some kind of protection offered to a particular interest group. We have to end this. These are socially just measures. They will help growth as well.
Look at the lifting of cabotage restrictions, which didn't allow foreign-flagged cruise ships to home port in Greece. This led to us losing 0.5 percent of GDP each year. Now, companies are asking us to let them invest in our ports so they can start cruises from places like Rhodes and Crete.
Will you be able to avoid sackings in the public sector?
There will have to be an evaluation and if it finds that someone should no longer be a civil servant, then they will be fired. It has to start in 2013.
Do you know in real time what the public sector spends?
We have a better idea. The General Accounting Office is now considered one of the best in Europe. The recent multi-bill we passed allows us to monitor the expenditure of all government departments month by month.
In the recent talks with the troika, the agreement was almost scuppered when I found out at the last minute that the EOPPY healthcare fund had a deficit that was 1 billion euros larger than we thought. If we had then an early warning system we would have known.
Prices & unemployment
One of the things people complain about is that their wages are being reduced but prices are rising. Are you doing anything about this?
We are. Inflation in Greece was lower than the eurozone this year and will be zero next year. The fact that prices rose in previous years shows the lack of competition we had, and we are addressing this.
We have to explain to people that the political economy over the last few decades was focused on protecting interests. When we were trying to pass the multi-bill, ministers from all parties were coming up to me and giving me amendments – for judges, security forces, priests, disabled people and so on. I thought to myself: “Christ! What's going on in here?” We have to change.
Neverthless, the process of finding solutions within a coalition is proving cathartic.
There are a lot of people who fear that unemployment will reach 30 percent before it begins to fall. Is this something that you fear?
If the program doesn't work, yes. I think that around Christmas, when the next tranche is released, intensity and fear will dissipate. The recapitalization of banks will bring in new money. People will feel greater security and will bring their deposits back, not necessarily from abroad – this might take more time. Another 10.6 billion will go toward the budget and paying arrears. Don't forget, there are EU structural funds. We have also signed an agreement with the European Investment Bank for funding for small and medium-sized enterprises, road construction and major projects.
There is a lot of criticism from abroad that this crisis is a failure of the country's elite. Are you disappointed by its role?
I didn't like at all the fact that people who belong to the elite transferred their money out of the country. I condemn this and would never do it.
My daughter lives abroad and asked me before I became minister if she could buy a house with her husband. I told her that it was impossible for money to leave the country to buy a house in another country. I told her she would have to rent until the crisis is over.
I would like Greeks who moved their money abroad to invest in their country and give a vote of confidence to the effort that we have undertaken.
Did it ever cross your mind during the negotiations with the troika that you were being put under so much pressure because someone wanted you to accept that Greece should leave the euro?
Yes, I know there is a business elite in Germany that pressed, through a well-known institute, for Greece to return to the drachma, but that is over now. At the recent ECOFIN, even ministers of countries that showed hostility toward Greece were congratulating us on the efforts we've made. They didn't believe we could do it.