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The formula for success in Greece is a 70% haircut of the foreign debt and a flat tax rate

18 July 2011 / 22:07:10  GRReporter
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Victoria Mindova

This is the opinion is the Greek businessman Christos Mouroutis who has been living in Bulgaria since 1999. He was born in Athens and graduated in law in Greece. In Bulgaria, he is the founder and manager of the fund and asset management ARCELAND and is the chairman of the Bulgaria Land and Property Owners Association - BULLPOA. He believes that the selective default should happen as soon as possible. Then, the government should reduce the public sector from almost 800,000 to 150,000 people, introduce a flat tax rate of 15% and undertake the recovery of the economic growth.

What made you go to Bulgaria?

I went to Bulgaria by accident in connection with a project that was linked to the development of information technologies throughout the region. There was a crisis around September 2001, if you remember, that made me change my mind – we gave up the investments in other Balkan countries and developed the project only in Bulgaria. This company was Bitex, which was active in Internet and telephone communications at that time. Its development was successful and later we sold it to another larger company. I sould say I had a good career in Greece and the USA before that. Even as I came to Bulgaria in 1999, I got into the new reality quickly and found out that Bulgaria is a very good country for investment and offers many development opportunities. Many people did not believe me, but I saw prospects.

When a country is at the bottom, there are tremendous opportunities for growth and I was sure that this is the right place for development of activities. Now after almost 12 years of activity here, I could say that my assessment was correct. In 2002, I started my investment activity in Bulgaria, which proved very successful.

It is investing in two key sectors of the economy - real estate and energy projects. Tell us more about them.

It all started with real estate. My work consisted in organizing a professional, well-structured management team, which manages funds and projects in the field of real estate. These companies operate mainly in London, in some cities in Switzerland, a few in Athens, there was no such a company in Bulgaria at that time. There are three such companies in Sofia now, but then we were the first.
From the beginning, we started to deal with large projects. We attracted strategic investors - large investment houses and hedge funds mainly from the USA. I believed in the real estate sector before its big boom and its strong growth. When the boom came, we already had established market positions and the idea proved successful. In 2010, we decided with the same team to draw our attention to energy. We made a new investment package from the foreign markets and we are currently working mainly with projects related to solar energy and photovoltaic systems and biomass. These projects are related and consistent with the plan for reduction of harmful gases in the atmosphere of the European Union - 20/2020. Therefore, some projects receive EU funding, but not in the full amount. We are planning to invest 200 million Euros in the next two years in the form of mixed capital from the private sector, banks and other financial institutions. In other words, these investments will be a combination of equity and funds from the banking sector.

As an expert in the real estate market, I would like to draw your attention to Greece and more precisely to the fact that real estate prices remained high here, despite the lack of market liquidity and lower demand. What is the reason for this in your opinion?
First, it is important to understand that there is a deeply rooted belief in Greece that real estate prices never fall – they only grow. The prices in Athens and other major cities in Greece are artificially high. The demand determines the actual prices, not the supply. Usually, a property is sold at higher prices initially, but they very rarely remain unchanged and almost never in times of crisis.

The actual transactions are always at a much lower price than the initial. For example, a seller offers an initial price of 300,000 Euros, but sells the property for 150,000 Euros finally. I am saying it because I have spoken with people who are operating on the market. Those who sell and can not find buyers either withdraw their offers or reduce their price without giving much publicity to it.

Therefore, you think that the market is regulated by itself and does not "rely" on the money from the informal economy. I mean the law, which was adopted this year that it will not be necessary to prove the origin of the money when buying the first home.

There should always be accountability for the origin of money. Whether for first, second or third property, the market can not lie on the informal economy. I am saying that as the chairman of the Land and Property Owners Association.  There should be control over the origin of money.

The big difference between the Bulgarian and the Greek reality is that the tax rates for companies and individuals are extremely low in Bulgaria. Unfairness is not possible and tax control is better in these favourable conditions for business. Low taxes are important for economic growth and they help people to be creative and productive. After providing this opportunity, the state has the right to control strictly the citizens and the origin of money in the economy.
In Greece, however, there is a heavy burden on taxpayers - extremely heavy taxes and excise duties, which can reach 70% of the profits of companies and 60% of personal income, directly and indirectly. These high taxes and the unclear use by the private sector make the citizens “hide” in the informal economy. It is proven that it has the highest growth in countries with high taxes. Actually, people refuse to pay their taxes to be able to buy a property, because otherwise the state will impose a tax of 60% -70%.

Informal economy is not always a bad thing and it is important for the country when economic conditions are such as in Greece now. The bad thing, however, is when the state provides very serious privileges, but the taxpayer is not correct, as in Bulgaria. There is no lower corporate tax in Europe than in Bulgaria. Actually, if we compare the economic models of the two countries we will understand why Greece needs to release the measure for the control of the money for the first property and why Bulgaria does not need such a measure.

Currently, there is much talk about selective default in Greece and it seems that the country would not get away with it. What do you think about that and how do you think it would affect the citizens and the companies in the country?

This selective default is not the default Bulgaria has experienced in 1997. Then everything collapsed suddenly - almost the entire public sector, the banks, hundreds of enterprises, people lost their jobs, it was a national catastrophe in general. The selective default in the case of Greece is a procedure that will reduce the debt of Greece with the help of European institutions and banks. It will reach 360 billion Euros by the end of the year, which is an amount impossible to be repaid. I think there is not even one in a thousand a chance that this debt becomes manageable. The economy is in recession, there is a drop in production and the obligations are rising. The budget revenues from taxes are not sufficient to serve the debt, even in case of a reduced deficit.

As I have said before, the correct course of action is a selective default, which will reduce the debt by two-thirds of its current value or 70%. This means that it would fall from 360 billion to 120-150 billion. Of course, we should be aware that it would take decades before Greece returns to the capital markets after such an action. It takes time to convince the investors once again that the economy is stable, provides accurate numbers and statistics, and is properly managed. It would take at least ten years to restore this trust, but Greece will be released from the huge interest rates on the accumulated debt. This step will have a positive effect on the private sector because it will be made by agreement and not chaotically.

However, even if the Greek debt is zero, there remains the high budget deficit. At present, the country lacks around 10 billion Euros each year in order the revenues to cover costs. How this discrepancy could be fixed?

The debt will be reduced, which will enable the reduction of taxes in the country. It is logical in these conditions to reduce the corporate tax and that of individuals, because this will be the only way to stimulate economic growth. Therefore, I think that New Democracy's proposal for change to a flat tax of 15% is extremely important and together with the cancellation of part of the debt will rescue the Greek economy. Furthermore, a very small part of this haircut will be at the expense of some banks, because European countries and mainly the European Central Bank are holding the majority of Greek government bonds.

If Greece was still using the drachma, we should talk about devaluation. As we are using the common euro currency, there should be coordination for the selective default. In all cases, however, the other thing that should be done is to reduce the costs in public administration and public enterprises. They are the main culprits for the accumulated huge external debt.

Do you think the government's privatization program will succeed and will bring 50 billion Euros by 2015?

No, I do not think so. This is impossible. I would like to add something. In Greece, the state holds many public enterprises, which is a big mistake. It should sell them as Bulgaria did years ago. The state neither has the resource, nor is it its business to deal with these companies. Moreover, there is nothing in common with the modern western way of public management.

Your son is one of founders of the event of the movement of Discontented on Facebook. What do you think of the movement on Syntagma Square in front of the Parliament?

Yes, my son and two children registered the movement of discontented as an event on Facebook, but he has nothing to do with its political establishment. The reality is that people needed the opportunity to say in a peaceful manner that they disagree with this policy and the measures imposed. The problem lies there - the government of George Papandreou, the European Union, and the IMF had to impose a very different policy from the outset. The pursued economic policies led to a recession and a decline in the private sector, although the problems come mainly from the public sector. The result of this policy was that it significantly raised the costs of the firms that were forced to cut staff, which led to increased unemployment, etc. In other words, they offered a model that was not successful. From the beginning, they had to take a program focused only on public sector cuts but not on tax increases.

We saw no drastic reduction in the public sector in the first Memorandum. The only thing we saw was the severely negative effect on the private sector, which did not cause the debt and financial crisis of the country. Moreover, civil servants are almost a million in a country that does not require more than 150,000 civil servants. If the public administration was reduced by 350,000 people in 2010, there would be no budget deficit in Greece today.

I would like to go back to the issue of the movement of discontented, which changed a lot in the past two months of its existence. Many of the people who are now screaming and yelling in front of the Parliament are the same people who benefited from the system over the past 30 years in one way or another – civil servants with big salaries and short working time, retired at the age of 50, or even party members. Do you think that the people, who took advantage of this vicious system yesterday, should come to the streets to protest today?

They are the main discontented and they have a fundamental right to be. There is a real chance to lose their jobs. You just have to understand that the discontented inside the movement have different interests. For example, discontented are those who are now paying higher taxes in order to enable civil servants to continue to receive salaries. Those people are protesting against the public sector and higher taxes. Then, we have the other side. These are the state officials who do not want to lose their job and want to continue to be part of the public administration. Discontented are the people who lost their jobs in the private sector to enable civil servants to remain in employment. Therefore, there is a serious conflict of interest within the movement in fact which is not noticeable at first glance.


Tags: EconomyMarketsGreeceChristos MouroutisForeign debtCrisisSelective dafault
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