Greek Prime Minister Tsipras Will Have to Choose Between Politics and Economics on Monday

by Rafi Farber, The Street, March 27/15

http://www.thestreet.com/story/13091775/1/greek-prime-minister-tsipras-will-have-to-choose-between-politics-and-economics-on-monday.html

NEW YORK (TheStreet) -- Greek Prime Minister Alexis Tsipras is in hot water.

In a few days, he's going to have to choose between betraying his political party and ideals, and possibly exiting the Eurozone, a move that could have disastrous economic consequences at home and abroad. Let me explain. 

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At the center of all the talk about "Grexit," reform proposals, and the endless back and forth between the new Greek government and the Troika (now "The Institutions") working to resolve the conflict, lays a simple mathematical truth: The Greek government spends nearly 22% of GDP on entitlements, but consistently collects less than 22% of GDP in tax revenues every year.

The graph below of revenue taken in by the Greek state as a percentage of GDP shows that it's almost always below 22%.

For 2013 and 2014, tax revenue was about €85 billion, which picked up the rate to about 35%, but that's been too little and too late.

What this means is that Greece cannot cover its entitlement spending even if it spent its entire budget on entitlements, let alone public sector salaries, pensions, and paying back debt.

Obviously, in order to spend 22% of GDP on entitlements every year, a government needs to collect much more than that in taxes, not less. At the core of the issue is that there is a culture of tax evasion in Greece. In fact, the Wall Street Journal reports that Greeks widely see taxes as outright theft.

Even former finance minister George Papaconstantinou was just convicted of removing the names of relatives from a government list of tax evaders.

Greek back taxes owed to the government since 2009 amount to €76 billion. If that were all theoretically collected in its entirety tomorrow (obviously unrealistic), it would bring Greek public debt down to €240 billion, or about 99% of GDP. Still very high, but below crisis levels. U.S. public debt is at about the same level relative to GDP.

Exacerbating the issue is that every time the government changes or is under threat of changing, which has been quite frequent since the crisis began, tax evasion increases on the assumption that the new government will change the rules again. Now that Greece's creditors have rejected its reform proposals, there is yet another deadline on Monday for yet another set of reforms, which will have to be voted on by the parliament even if approved by Greece's Eurozone creditors, and passage is not at all assured.

Greece's current Syriza administration itself has publicly embraced a grassroots antitax movement called "I won't pay."

When both a government and its people condone tax evasion and yet spend more than the entire tax revenue funding entitlements, you have a classic case of trying to have your cake and eat it, too. And that math just doesn't work out.

There is a serious problem plaguing Greece's current government that is based on simply ignoring reality. Syriza was elected on a mandate of rolling back austerity, but there simply is no money to do that. Either Greek Prime Minister Tsipras will have to cave on everything and convince all his fellow Syriza lawmakers to do the same, or he will be kicked out of the Eurozone by force. If that happens, he can at least tell his voters that he stood firm, and let the chips fall where they may.

In that case, the Greece Global X ETF (GREK) looks prime for a shorting.