Thursday, 22 July 2010
The Greek Bail-out Package and the Future Political Risks of Debt Restructuring
Wednesday, 21 July 2010
The OSE Saga Continues
Tuesday, 20 July 2010
Sokratis Giolas and Greece Today
Monday, 19 July 2010
Debt at any Cost?
Friday, 16 July 2010
Reflections on the Present
Monday, 5 July 2010
Greek Pharma Debt Restructuring hits International Press
Saturday, 3 July 2010
Greek Government reforms Pick up Speed
Some indicative points I take with me as I leave for the United States tomorrow:
a. Greece is undertaking its first systematic inventory of employees in the public sector. Although this is difficult to believe, the exact number is unknown. In a next step, the conditions of employment in the public sector will gradually be harmonised.
b. Greece is undertaking its first comprehensive reform of the public and private sector pension systems, using actuarial forecasts and modern accounting principles. In contrast with previous efforts, this effort is being done with a full(er) accounting of liabilities and life expectancies than at any time previously. The principle of equal work and retirement conditions for male and female workers, and for workers in the public and private sectors, is at the heart of the pension reform effort. This is attracting major opposition from special interests which may bring about the downfall of the government. For the sake of Greece’s financial survival, the government must succeed. (The alternative to this reform would be to raise pension contributions and link these to incomes, which few taxpayers understand).
c. Greece is making a first serious attempt to measure and reduce its vast public sector debt. Initiatives underway, such as the resolution of medical sector debts (EUR 7 bln), construction debts (EUR 9.5 bln) and efforts to reduce the unrestricted expenditure of public sector organisations such as OSE (apparently EUR 11 bln debt) are gradually taking effect.
d. Greece is taking steps to reduce its operating costs and public investment budget. This includes a permanent component, which will come through the merger of local administrations and public sector units and a hiring freeze, as well as a temporary component, which includes salary cuts, cuts in overtime and extra compensation, and other reductions.
e. Tax reform has been announced and to a large extent implemented. Large numbers of independent, self-employed professionals such as accountants, lawyers and architects no longer pay a lump-sum annual tax irrespective of annual earnings. These professions are also being drawn into the VAT regime for the first time.
f. Greece is starting to cut down on tax evasion. Audits among doctors, public officials, offshore companies, and domestic companies are increasing and important cases of income tax evasion are being referred to the courts.
The government still needs to make progress in a number of important areas:
Public Sector Corruption
To date, there have been no substantial penalties for any public figures implicated in corruption scandals. A few cases such as former Defence Minister Akis Tsochatzopoulos, or former Transport Minister Tassos Mantelis, are under investigation. It remains to be seen whether these individuals will actually pay financial restitution for their crimes, or whether these incidents too will be somehow written off.
Public Sector Inefficiency & Corruption
The government needs to move to replace and prosecute members of the Hellenic Tax Authority, the Hellenic Customs Service, the Ministry of Health and the various hospitals which report to it, and a wide range of other organisations for continuing corruption and dereliction of duty. This will be difficult given the current conjuncture of events, but it is necessary.
Private Sector Tax Evasion
More needs to be done to combat tax evasion in the private sector. Initiatives which should be undertaken include a full inventory of Greek owners (nominal or nominee) of Cypriot offshore companies as well as a full investigation into asset ownership in Greece.
Public Sector Crisis Management and ROI
The government needs to develop a formal crisis management plan designed to restore the country to solvency and growth. This should be modelled on a private sector turn-around plan. Any and all government projects, whether in terms of investments or operating costs or policies, should be evaluated in terms of cost-benefit analysis and return-on-investment. Any non-essential expenditure should be cut.
Real Privatisation and Deregulation
Public sector monopolies in energy production and distribution, renewable energy, fixed-line telecommunications, transport, education, healthcare and nearly every other business sector continue to exist. A determined effort should be made to liberalise these sectors while regulating all players within each sector in a meaningful way. Some companies, such as OSE, should be broken up and liquidated or privatised, or a mix of both. The government has already started this process, and I was pleased to learn that loss-making rail lines are being discontinued or scaled back.
Development of Business Clusters and Vertical Policies
Rather than relying on growth through subsidies, the government should, in conjunction with the private sector, select a number of business sectors to develop vertical, export-oriented clusters. As surprising as it sounds, Greece does not have an industrial, export or investment promotion policy which is oriented on specific products or clusters. There is also no link between its policies for investment in education and infrastructure, with income-generating sectors or projects.
Examples of such clusters include agriculture, where too many products are exported in a whole fresh or IQF form, or the automotive sector, where Greece has almost no domestic production of any significant components or parts. Instead of scattering subsidies among thousands of small businesses, the government should address the needs of a vertical value chain expressed as primary production – processing – retail/export – supply chain. Greece needs to change the state-led mentality of “subsidies for the people”, which has resulted in far too many uncompetitive and under-capitalised micro-enterprises which are not commercially viable, and also in far too much corruption. Greece needs to invest in future industries (e.g. ICT and energy) rather than sunset industries (e.g. cotton cultivation).
Greece remains a country dominated by redundant administrative procedures which detract from efficiency and turn away foreign and domestic investment. The e-government initiatives started should be accelerated, and certain functions, such as investment approval, housing approvals, etc. should be placed online in the form of a “one-stop shop”, which includes licensing and regulation. This should be an urgent priority.
“Real” investment promotion must occur, driven not by subsidies, but by the reduction of administration and pointless procedures, tax incentives and credit guarantees. This should not be oriented solely on mega-projects which take years to materialise, but on small-scale projects as well.
My main concerns at this point in the process are the following:
a. Opaque Statistics
There is still too much uncertainty regarding the true magnitude of Greek debt, the true scale of public sector income and expenditure, and the debt payment schedule. Greece needs to publish, on a single A4 sheet of paper, its total liabilities, the impact of the various reforms being undertaken, and how this relates to its debt repayment schedule, e.g. from 2008 – 2020. Only then will investors have any degree of visibility over Greece’s fiscal position.
b. Ministerial Competence
Some ministers, such as Finance Minister George Papaconstantinou, are doing a stellar job. Others are practically non-existent, or sabotaging the wider government reform efforts. The Prime Minister should, after the passage of the pension reform bill next week, restructure his cabinet. This could include bringing in high-level ministers from outside the PASOK party environment. There are a whole suite of Deputy Ministers who have been selected on the basis of popularity and are doing practically nothing in their appointed jobs. Certain Ministries should be split and decentralised.
Related to this, the current practice of trying to “talk up” the economy should be ended. Recent statements by Minister of Tourism Pavlos Geroulanou on the decline of incoming tourist arrivals, or Alpha Bank President Yannis Costopoulos on the size of the 2010 GDP fall, are transparent boosterism, and give the impression that these officials do not understand what is happening in Greece today. It would be better to accept that Greece’s recession will be much more painful than predicted and that this will last into 2011. Greece will need to practice austerity for at least 10 years to work out even 15% of its actual debt burden.
d. Public Opinion
Unfortunately, the wider public understands neither the necessity of the reforms, nor their real impact. Acceptance of reform measures is minimal, and a feedback cycle is exerting itself in Parliament among members of PASOK. This endangers the party majority, and thus the government of Greece. It is hard to blame the public for its fury: the large majority of citizens have been minding their own business while a political and business elite have plundered the country. PASOK needs to explain what it is doing, and why. It should do this with numbers and information, not shouting matches on television windows. The level of misinformation is incredible; the quality of communication abysmal.
If reforms are to be accepted and implemented, the government needs to actually punish the thousands of individuals and companies in the public and private sectors who have looted the country. This has to be done in a meaningful way, including asset seizure and imprisonment. To expel Akis Tsochatzopoulos from PASOK pending his investigation is not a sufficient act (although the legal investigation is theoretically underway). If dockworkers block a commercial port in contravention of the law, they should be arrested and prosecuted. The Siemens and Skaramanga and Vatopedi corruption cases should be investigated by the courts and legal action taken. These are simple, self-evident decisions which are taking far too long to implement.
f. Financial Sufficiency
My final doubt is whether all this will be enough. Measuring the added financial costs of debt service over the next three years adds up to more than the preliminary savings announced by the current reform plan. It is highly probably that absent an economic recovery (which no one expects), Greece will have to extend the bailout for at least another 3 years, and possibly restructure some debt (probably in the form of an interest freeze, or a lower interest rate). The restructuring of the debt for domestic creditors—notably construction firms and pharmaceutical suppliers—has already started.
Foreign analysts and observers have been quite concerned as to whether the government will be able to implement these reforms, or whether:
• The government will lose its parliamentary majority and fall, or
• Whether the country will dissolve into armed anarchy.
Either one of these options is possible, although the second option would probably not last long if it did occur. What is clear, is that there does not appear to be any alternative among the Greek political parties. New Democracy is clearly trapped in its own illusions and the morass of its past corruption. None of the smaller parties have a credible economic platform or the leaders needed to handle the crisis.
Many people therefore find themselves in the position I find myself: cross your fingers, and hope Papandreou succeeds. The reforms need time to take effect, and political upheaval at the present time is not in anyone’s interest. There is simply no alternative, since about 50% of Greece’s official debt is now in the hands of other Eurozone countries and institutions. I estimate that about 40-45% of the difficult decisions are behind us, but at least the process has started. Will it be enough?
Friday, 2 July 2010
EIB pours more money down the Greek Railway Drain
I was hit by a powerful sense of unreality in reading today’s announcement that the European Investment Bank allocated a EUR 2 bln loan for Greece, of which EUR 1 bln will be spent on rail investment. This including upgrading the Patras-Athens-Thessaloniki-Promahonas line, developing a railway node at Acharnes, a freight complex at Thriassio and a rail link to the Neo Ikonio Container Terminal at Pireaus.
It should be mentioned that OSE, the Hellenic Railways Organisation, has a debt of over EUR 9 bln. Its 2008 turnover of EUR 195 mln was far outstripped by its operating loss of EUR 794 bln.
I have not seen an investment plan, business plan or turn-around plan for OSE. The government claims it wants to sell 49% of the business, including the management, to a strategic investor. Unless the government takes over the debt, and backs the potential investor to reduce and replace staff, I fail to see who could possibly be interested, or how such a partial privatisation could work.
The fact that the government has recently been asked by the Troika to take OSE’s debt directly onto its balance sheet, rather than treating OSE like a special-purpose vehicle, only worsens
Unless this investment somehow translates into a major demand for passenger and cargo traffic between Pireaus, Patras and
· The high debt of OSE means that adding a further EUR 1 bln, for an investment project that will take at least 3 years to complete, and then will not easily result in a direct return on investment, simply seems irresponsible at this point in Greece’s development.
· The terrain of
· The presence of a national highway which is currently being upgraded, and the relatively short distances between the three cities, means that road transport is very competitive against rail. What alternative returns would have been gained by simply expanding the road network, or investing in road transport, which is in fact the objective of the 2 PPP contracts? Why split the potential ROI between two competing transport forms, and invest in double infrastructure (road and rail) along both routes?
I am also continually wondering why Greek and the EIB do not examine and back alternative, more productive investments?
· A EUR 1 bln investment in Patras, Corinth or alternate locations on the Corinthian Gulf, to create and integrated cargo and high speed ferries port as well as bonded warehouses, commercial zones and manufacturing sites similar to the Jebel Ali Free Trade Zone. Such an industrial, trade and transport hub would be much easier to reach from
· A EUR 1 bln investment into
· A EUR 1 bln investment in renewable energy would bring far higher returns to
· A EUR 1 bln investment in modern, large-scale agriculture using geothermal energy and modern greenhouse technology (which requires almost no pesticides or chemicals) would create a new export sector, improve the trade balance, and create many places of employment. Each 100,000 m2 unit costs about EUR 20 mln, employs around 45 people, produces about 15 tonnes fruits and vegetables per day, and generates annual sales of about EUR 7-9 mln. This would literally revolutionise high-value agriculture in
· A EUR 1 bln investment in a high-technology IT and energy incubator for entrepreneurs of any nationality who wanted to set up in
First Steps in Consolidating Greek Debt: OSE/OASA