Greek property tax a band-aid, no long term cure

By Dina Kyriakidou

ATHENS (Reuters) - A new property tax may pull Greece back from the brink of default by securing desperately needed EU/IMF cash but it also exposes the government's foot-dragging in curing chronic structural ills to exit its debt crisis.

EU officials cheered but markets gave a lukewarm reception to the new tax announced on Sunday, which aims to plug a 2 billion euro budget hole this year but will also plunge the economy into an even deeper recession.

"It's a desperate measure so that Greece can get the funds it needs now and avoid default in the short term," said Diego Iscaro of IHS Global Insight. "Whether this ensures that targets will be met, I have my doubts."

Economists said taxing private property worth an estimated 400 billion euros by an average 4 euros per square meter is expected to weigh on the economy, deepening the recession by up to half a percentage point.

"The measures, like a self-fulfilling Cassandra prophecy, will not be the last," said the Federation of Greek Commerce. "Really, how many times must we buy our shops and our homes?"

Officials say GDP will shrink by more than 5 percent this year, compared to an initial projection of 3.9 percent. Greece blames the worsening recession for missing its fiscal targets but IMF and EU inspectors -- known as the troika -- say this is only part of the problem.

They are due back in Athens to look at Greece's books before approving an before approving an 8-billion-euros loan tranche which is vital to avoid near-term default. Talks were suspended earlier this month after a row over the size of the budget shortfall and its cause.

The property tax, which will be collected through electricity bills, was bound to hit snags in a society that is buckling under the weight of austerity without a sense of social justice. Rampant tax evasion persists and big tax dodgers enjoy apparent immunity two years after the socialists came to power.

Unions on Monday threatened to fight the measure by instructing members to refuse to participate in its collection, despite warnings from government officials Greece will run out of cash next month.

"The government should get cash from those who are rich and who evade taxes," said the main GSEE labor union confederation.

Tax offices around the country shut down on Monday as employees disgruntled with pay cuts walked off the job for two days. Civil servants say their incomes have shrunk by about a fifth since the debt crisis gripped Greece.

TAX COLLECTION EXPOSED

Even if the measure rakes in the cash, it has exposed a weakness that threatens Greece's longer term goal of avoiding default and staying in the euro, a prospect clouded by increasing concern in European capitals.

Prime Minister George Papandreou and several of his ministers admitted over the weekend that tax offices and the public sector in general are inefficient.

"To be completely honest, we have fallen behind because we don't have an effective state mechanism and a tax administration that can produce results," Finance Minister Evangelos Venizelos told reporters on Sunday, explaining why the tax will be collected by the power company.

Another property tax announced last year and a "solidarity" tax on income decided in June have yet to deliver substantial results, derailing deficit targets and leading to a row with the "troika" of inspectors.

Even ruling socialist party lawmakers criticized the government on Monday for dragging its feet in key reforms and privatizations, another key element of Greece's bailout deal.

"I can't accept we have done nothing for two years to build a state mechanism. It's a political crime," said socialist deputy Nikos Salagiannis. "We did not merge state companies and we did not do privatizations."

Greek officials have yet to spell out how they will reform public administration. They privately admit unions spoiled by their political patrons for decades are resisting change.

Bowing to fears of increasing public unrest, Papandreou assured civil servants on Sunday there would be no mass layoffs, despite the creation of a "labor reserve" that will allow the eventual dismissal of state workers who now enjoy jobs for life.

"The government won't be able to defend this sudden tax decision unless it proves it can crack down on tax evasion and drastically reduce state spending," said the major liberal Ta Nea in its main editorial.

International lenders have long urged Greece to shrink the bloated public sector and push reforms and privatizations. They have warned against imposing new taxes to fill budget gaps for fear of worsening the deepest recession in four decades.

"The government's credibility has completely evaporated," said the main opposition New Democracy, which is leading in opinion polls. "Its infighting, inaction and ineffectiveness resulted in new emergency tax collecting measures."

Analysts said the government's failure on the structural reform front bode ill for Greece's more long-term prospects.

"The problem is that we are not seeing the results and this is unlikely to change in the short-run," Iscaro. "Unfortunately, looking at the whole picture, it's very difficult to be optimistic."

(Additional reporting by Lefteris Papadimas and George Georgiopoulos, editing by Mike Peacock)