Thursday 11 February 2010

Asking the right questions about Greek debt

The barrage of conflicting media reports, government announcements, parliamentary debates, European resolutions and other findings has convinced me quite firmly that the right questions on Greek debt are not being asked.

Instead, government sources and the European Union, whether through collusion or simple coincidence, are focusing on symptoms of at least two major root causes, and thus risk delaying their actual solution.

Let’s start with Greece’s Stability and Growth Plan (SGP), which outlines how Greece will reduce its annual deficit to below the 3% limit specified by the Treaty of Maastricht and the European Exchange-Rate Mechanism (ERM). The SGP provides a 3-year scenario for reducing the annual deficit to 2.7% in 2012. The EU’s Economic and Financial Council has formally accepted this plan, but they have not asked the difficult questions, which are:

1. What plan does the Greek government have to reduce the total debt, which is forecast to reach 130% of GDP by 2012-2013, and is twice the limit set under the Maastricht criteria?

2. What provisions has the government made in the SGP for a scenario where the costs of borrowing rise by at least 1.5-2% to the 6.1-6.2% seen in the latest sovereign debt issue?

3. A national commission, with government approval, analysed national finances and found a number of public debt or debt commitments that are presently not included, nor not quantified, in the central government balance sheet. Some estimates have placed the value of this debt at a further EUR 20-55 bln. Does the government accept the validity of the findings of this commission, and what provisions has it made for these liabilities?

4. What short- and medium-term provisions has the government made for addressing rising pensions and healthcare costs and their associated recurring deficits?

5. What are the assumptions and key sensitivities of the SGP in terms of (a) existing and net additions to government staff positions in the period 2010-2012, (b) total wage and compensation benefits as a share of total government expenditure, and (c) debt incurred by semi-governmental organisations such as the former Olympic Airlines or the Hellenic Railways Organisation (OSE)?

6. The next national election will be in 2012 or 2013. What guarantees are there that the government will not depart from the SGP and engaged in the typical process of pre-election electoral give-aways?

These are my questions as related to the SGP. My questions relating to the root causes of the Greek economic situation are the following:

Root Cause 1: Inefficient Public Sector
The public sector and the wider government approach to managing expenditure is the cause of Greece’s massive debt. Government expenditure has ballooned; most expenditure goes to the wages and benefits of an over-staffed and bloated public bureaucracy which provides very little in terms of value-added services, and utilises an archaic system of forms and certificates to extract personal benefits in the form of bribes.

My questions:

a. What is the government doing to streamline the total public sector and deliver better services to citizens at a lower cost?

b. If public sector institutional restructuring, e.g. “Kallikrates”, is to take place, what benefits will this deliver in terms of a smaller and leaner public sector? Besides reducing the number of organisational units, how else can we measure organisational efficiency and productivity?

c. What is the government doing to raise productivity in the public sector, which ranks among the lowest in the European Union?

d. What is the government doing to use e-government as a means for reducing the long hours lost in queues and government organisations?

Root Cause 2: Declining Economic Competitiveness
Over the past 8 years, Greece’s fundamental economic competitiveness has declined according to all international rankings. My questions are:

a. Greece’s credit expansion in the public, private and corporate sectors grew at a higher rate than its GDP growth between 2004-2009. Together with EU funding and government expenditure, the rate of financial expansion has been unprecedented. What have these financial resources been used for, and why don’t we see many positive results today from this spending?

b. By what moral authority does the government violate European Union law by refusing to recognise the validity of private tertiary education, while recognising private secondary and primary education?

c. Greece’s economy is driven largely by three sectors: tourism, shipping and construction (and their ancillary sectors, e.g. catering, building materials, etc.) What plan does the government have to improve the productivity, inward investment and exports in these sectors? What plan does the government have for supporting additional economic sectors? By plan, I mean a coherent vision, objectives, strategy, resources and set of linked activities and policies intended to deliver this vision.

My understanding is that the political leadership has not understood these root causes, and is not in a position to reveal the true extent of Greece’s debt situation. To do the latter, of course, would be to prompt immediate bankruptcy. I would be reassured if, in exchange for accepting the charade of the Stability and Growth Agreement budget, which is incoherent and opaque, the government showed that at least it grasped the fundamental issues at stake. It does not. Instead, it has embarked on a crusade against “speculators”, is providing conflicting messages to different audiences, and shows few signs of taking advantage of this crisis to implement a generational change, or paradigm shift in governance.

According to Goldman Sachs, Greece faces EUR 20 bln in maturing debt in April-May 2010, out of EUR 54 bln in total in 2010. I am sure the government is hoping that by then, the market turmoil will have quieted down. If anything, I believe it will have accelerated, for the reasons already known: central banks have announced the end of quantitative easing; other countries are planning massive debt issue; China’s government regulations on bank lending may have slowed or punctured their economic bubble; Europe may be heading for a double-dip recession.

If Greece passes the April-May 2010 hurdle, then it is still on track for a minimum debt of 130% of GDP by 2012-2013, according to the government’s own budget estimates. This means that it will be facing similar investor skepticism on its public finances every 3-4 months.

Greece does not have the luxury of PASOK’s familiar siren song of international financial speculators, or ND’s vapid posturings about being a responsible party of opposition. It needs real solutions to reduce the public debt which is, as stated, merely a symptom of a generational problem of Greek political governance.


  1. Wise words, well ahead of our so-called leaders.

    The Greeks have a communal mindset that this was DONE TO THEM, rather than face the truth and recognise THEY DID IT TO THEMSELVES.

    And I hear the nightclubs in Athens are still heaving... they should be ashamed of themselves.

    They should only be able to borrow more on condition of selling. Selling their public land, public companies, even public art if necessary.

    They are only bankrupt if they have no more assets. They have PLENTY of assets at present.. they just, surprise, surprise, don't want to give them up.

    Boo hoo. Bye Bye.

  2. One of the most distasteful experiences I have had recently was visiting the McArthur Glen discount outlet in Pallini this past Sunday. In the middle of a vast crisis, the place was full of eager shoppers, most of them hideous by any standard. No matter how expensive the brand, it somehow couldn't disguise their real nature.

    Unfortunately, that's the nature of the present society. And not just in Greece.

    As a small point: please read my most recent post. Even selling EUR 50 bln of land, and cutting EUR 28 bln in spending, probably won't be enough given the large interest costs each year.