Rampant corruption behind Greek tragedy

When Aris Kefalogiannis started his olive oil company in Athens more than a decade ago, bureaucrats in crowded offices demanded bribes to approve long lists of permits, he says.

After a year of dodging shakedowns, Kefalogiannis moved the legal seat of his company, Gaea Products, to the small city of Agrinion.

Government outposts there had fewer functionaries looking for payoffs, he says.

"Bribery is a result of the bureaucracy," says Kefalogiannis, the company's chief executive. "People get fed up and will pay anything not to waste more time. It leads to slower growth and less investment in Greece."

Greece's attempt to dig itself out of its worst financial crisis in about 16 years and avoid a bailout is hampered by rampant bribery and tax evasion, says Costas Bakouris, chairman of the Greek chapter of Transparency International.

Greece, alongside Bulgaria and Romania, is among the most corrupt countries in the 27-member European Union and comparable to cocaine-infested Colombia, says the research group.

"Greece's economic problems are exacerbated by corruption, which makes countries less competitive," says Bakouris, who was managing director of the organising committee of the Athens 2004 Olympic Games and European chairman of the former Ralston Purina Co.

Prime Minister George Papandreou, whose socialist government took power in October, pledged to crack down on financial crimes that have helped bury the nation in about €300 billion ($585 billion) of debt. In December, three rating firms cut the creditworthiness of the country's debt to the lowest grade among the 16 euro-zone nations.

As investors fled, the spread between Greek 10-year bonds and German bunds, Europe's benchmark government securities, widened to as much as 356 basis points on January 27, the most in more than 11 years. (A basis point is 0.01 percentage point.)

On January 25, Greece showed it had the ability to raise funds when it sold €8 billion of five-year notes in its first bond issue since being downgraded. Greece offered a yield that was a 0.3 percentage point more than on its existing debt with similar maturities.

Papandreou, the leader of the Panhellenic Socialist Movement, or Pasok, has assured investors that the country won't need a bailout. He has promised to slash the deficit by 2013 to less than 3 per cent of GDP - the EU limit - from 12.7 per cent last year.

To back up that pledge, the Government in January proposed boosting the tax on tobacco products to 70 per cent and the levy on alcohol by 20 per cent; it also plans to freeze hiring and cut state employee bonuses by 10 per cent.

Facing pressure from unions, which are in the midst of strikes, Papandreou stopped short of eliminating government positions: they constitute about 14 per cent of all jobs in an economy that had 9.8 per cent unemployment in October.

Bond investors encouraged by the Government's response to the crisis say Greek debt is now a bargain.

"It's a great opportunity," says Claus Meyer-Cording, head of euro-zone debt at DWS Investment in Frankfurt.

"European politicians wouldn't let countries like Greece go down that really try to solve their own problems."

Papandreou belongs to one of Greece's most prominent political families - and one that hasn't escaped the taint of corruption. His grandfather George was premier three times in the 1940s and 1960s, and his father, Andreas, held the post twice in the 1980s and 1990s. Parliament indicted Andreas and other ministers on bribery and embezzlement charges in 1989.

He was acquitted three years later.

The newly elected Papandreou isn't the first Greek leader to pledge to fight corruption. His predecessor, Kostas Karamanlis, took office in 2004 and aimed to curtail abuses partly by reducing government employment.

Karamanlis didn't succeed in shrinking the bureaucracy. Last year, Papandreou ran against Karamanlis on a platform including more pay for civil servants and won a national election by the widest margin in almost 30 years.

To clean up the pay-to-play economy, the new premier is relying on Finance Minister George Papaconstantinou, who has a PhD from the London School of Economics, and Louka Katseli, the minister of economy, shipping and competitiveness. She is a former Yale University economics professor with a doctorate from Princeton University in New Jersey.

A month after the Government took power, Papaconstantinou targeted doctors in Athens' hillside Kolonaki neighbourhood, where boutiques sell expensive Manolo Blahnik shoes and French cheese. So many Greek companies and employees cheat on their taxes that a third of all economic activity delivers no revenue to the Government, the Finance Ministry says.

The ministry examined the tax records of 150 doctors' offices and found that more than half had declared income of less than €30,000. That figure is a fraction of what a full-time physician in Kolonaki makes, Transparency International's Bakouris says.

Some Greeks say tax evasion is rooted in the Ottoman Empire's control of the country for centuries until the 1820s.

"We very much lack a tax conscience," says Ilias Plaskovitis, the Finance Ministry's general secretary. "Some trace it back to the Ottoman Empire, when tax evasion was resistance to foreign powers."

Papaconstantinou promised in November that his ministry would conduct full audits of the doctors in Kolonaki and other professionals across the country.

In December at an EU summit, Papandreou outlined plans to fight bribery, which he said is so pervasive that Greeks consider the crime to be normal behaviour.

"Investments can't come to Greece, our economy won't stand on its own feet, if we don't attack corruption mercilessly," Papandreou said at the summit.

Greek citizens made €900 million in payoffs in 2008, according to Transparency International. Its 2009 survey of 6000 Greek citizens found that €300 was the going rate for a bribe to pass a vehicle emission inspection.

The cost to jump to the top of a waiting list for an operation in a state hospital was about €2500.

The Prime Minister vowed to make officials post their expenditures on the internet. He said he also plans to start an economic police squad to nab crooked civil servants and tax evaders.

In Greece, Christmas is also an opportunity to give gifts to officials. On December 23, an employee of the Chinese Embassy dropped off three bags of presents at the Athens office of Culture and Tourism Minister Pavlos Yeroulanos.

Moments later, a courier deposited a basket filled with wine bottles. A ministry spokeswoman says Greece has no official rules about gifts for officials.

"I send back all the gifts except the books and the alcohol," says Yeroulanos. "Corruption and bureaucracy are strangling new efforts. Unless we deal with these phenomena, we will never manage to allow Greek talent to flourish."

The Government says graft in Greece goes back centuries and touches the nation's most enduring temple of antiquity: the Parthenon in Athens.

In the early 1800s, a British ambassador, the Earl of Elgin, paid Ottoman officials in Athens to help him spirit away marble friezes that decorated the perimeter of the Parthenon, Greek officials say.

The British Museum holds about half of the surviving marbles and has refused to return them, saying they were obtained lawfully. Lord Elgin's payments were presents given according to the customs of the times, the museum says.

The opening last June of the Acropolis Museum, which the Government built specifically to house the carvings, hasn't convinced the British to send them back to Greece. Yeroulanos, standing among marble statues at the museum, points to the walls where the carved panels would be displayed.

"It's a cultural deficit," he says.

Yeroulanos presides over the largest part of the Greek economy: tourism comprises about 18 per cent of GDP.

He says the luring of travellers beyond summer, when most visitors to Greece flock to its islands such as Mykonos, known for all-night beach parties, is the country's best hope for economic recovery.

He wants to attract investors to build theme parks and resorts infused with Greek culture. One proposal: an Olympics park near the site of the original games that took place at least as long ago as the eighth century BC.

The debt debacle has given Papandreou an opening to battle a crooked bureaucracy.

Investors are waiting to see if the Prime Minister will have any more success than his forebears in cleaning up the corruption that has dogged the economy for centuries.

- BLOOMBERG