Sacha Imbert (Portfolio Manager at RBC): Hey Kuppy, this receipt says we’ve just used a Bulgarian POS to pay for lunch!!!
Me: Whoa!!! That can’t be right.
Waiter: Don’t worry, it’s a famous Greek trick. Revenues go to Bulgaria, expenses stay in Athens. We also get around the exchange controls.
Me: Won’t the Greek government get upset?
Waiter: Actually, they’re pretty happy we’re screwing the Germans… How else will the economy grow?
Sacha: No wonder the Greek Banks have such profitable Bulgarian subsidiaries… haha
Yup, everything you’ve heard about Greek tax scams is true. Then again, how can you blame the Greeks. Based on all the new taxes enacted by the Troika, effective tax rates are well over 100%. If Greeks actually paid them all, there would be nothing left—so when Greeks say, “We are Greek, cheating taxes is patriotic,” they tend to mean that.
At the same time, this creates all sorts of distortions in the economy. Greek corporates are issuing bonds at a 200bps tighter spread than the Greek sovereign, Greek banks are starved of liquidity as Greeks shift capital overseas or into mattresses and government economic data is questionable at best. In fact, quite a few Greeks attributed the recent economic recovery to an increased use of credit cards which government statistics do a better job of capturing—as opposed to a true recovery.
During my dozens of meetings with Greeks, I always asked the same questions;
“What percentage of Greece’s economy is off the books?” 20 to 30%
“Are you hiding money offshore?” Of course
“How many secret Cypriot companies do you control?” At least 2
Is it any wonder that the economy has struggled recover? When you enact excessive taxes and regulations, people will always sidestep them with high frictional costs and losses for the overall economy—particularly if the enforcement policy wavers between lax and corrupt. How Greece eventually solves these problems will tell you a lot about how far the economic recovery can actually go.
In the interim, it’s always helpful to know that paying with cash gets you a free glass of wine and when you have run out of cash; the “broken” credit card-reader will miraculously work…