Sunday 13 March 2011

Main risks in the implementation of the Greek Structural Adjustment Programme

The agreement reached on Friday between Greece and its three creditors (the Eurozone member states, the European Central Bank and the International Monetary Fund—otherwise known as the “Troika”) for the EUR 110 billion emergency loan is a positive development in that the lower interest rate and longer loan term mean that the country has an improved chance of managing its debt burden.

Unfortunately, there remain a number of major problems which have not been addressed by this revised loan agreement:

1. Troika repayments by 2014 will be nearly impossible to meet
The revised loan term requires debt repayment to start in 2014 and end in 2021. The annual principal and debt instalments from 2014-2020 are EUR 19.14 billion per year. Assuming moderate GDP growth from 2013 onwards (in line with the forecast in the IMF Stand-by Arrangement), this implies that in 2014-2015, 8% of nominal GDP will be allocated to debt service for the Troika alone. Such a budget surplus has never been achieved in Greek history in hard-currency terms, and it is doubtful whether it has been achieved in other countries.

2. Government debt to private creditors is at least EUR 230 bln; re-finance starts in 2014
Apparently lost or ignored in the debate is the fact that besides the Troika loan, the Greek government owes an additional EUR 230 billion to private creditors at the present time. Repayment or roll-over commences in 2013, with main tranches set to refinance in 2014-2016. The total amounts are difficult to determine based on available public statistics, but according to the original IMF Stand-by Arrangement (which was drafted before the November 2010 Greek debt re-statement), the IMF forecast a 2014-2015 public sector debt rollover and re-finance of EUR 102 billion at an interest rate of 5.5%. Absent a new intervention by the Troika, it is impossible to see how this rollover can take place given current debt markets and spreads.

3. The EUR 50 bln privatisation target cannot easily be achieved; impact is limited
A new conditionality for the EUR 110 bln debt term revision is the achievement of EUR 50 bln in privatisation receipts over the next 3-5 years. As has already been analysed by this author, this target will be extremely difficult to achieve given the state of political tensions within the governing party, low asset values, Greece’s credit rating and international factors such as rising interest rates and commercial debt issues. However, it is also necessary to put this number in perspective: EUR 50 bln will cover the interest on the Troika loan (estimated at EUR 33.58 bln over the loan term) as well as two years interest on the EUR 240 bln private sector debt from 2014 onwards. In other words, even achieving such a major goal, which has never been achieved in Greek history, will not result in a substantial change in total debt levels. It will be more important to generate private sector investment and employment, which is not being effectively addressed by either the Troika or the government.

4. Greece’s economic survival depends on rigorous, strategic government action
So far, the government has not been able to meet the terms of the EUR 110 bln loan. Revenue is far below target, while substantive structural adjustment has not yet taken place. Rather than liquidating non-performing units and terminating staff, the government is transferring staff and maintaining strategic and operating control over public enterprises. There is no prioritisation of government activity: certain Cabinet ministers slow reform progress; energy is wasted in irrelevant and superficial initiatives which do nothing to reassure international markets or creditors. Economic activities such as developing Greece’s mineral or energy resources are blocked by government inactivity or Turkish irredentism.

5. Economic conditions are worsening
Domestic economic conditions are worsening. Unemployment has reached 14.8% in December 2010 and is expected to increase as retailers lay off staff in the spring 2011. Although tourism may provide an increase due to the instability in Egypt and Tunisia, the short- and medium-term prospects for the private sector are grim. A record number of companies closed in 2010, while the flight of bank deposits and companies delocating increased. Consumer spending has fallen; bank credit is difficult or impossible to access for the majority of consumers. Non-performing loans have risen to nearly 10% of total bank consumer lending. Real estate prices have fallen; a large stock of real estate remains unsold and unoccupied. Interest rates are set to rise on the promise of ECB “strong vigilance”, while rising energy prices cut into disposable income and drive higher inflation.

6. There has been no action on corruption or public sector incompetence
The three major corruption scandals—Vatopedi, Siemens and the structured bond scandal—which PASOK promised to investigate remain deadlocked or have ended without any substantial criminal or civil charges being levied. Additional cases of corruption, such as the Skaramanga shipyard sales, remain unaddressed. The fact that Greeks have extensive offshore holdings in Cyprus and Switzerland is well-known, yet despite multiple means of recourse no action is taken. Corruption in the tax authorities and the customs organisations is endemic, yet unprosecuted. The fact that the Hellenic Railways Authority ran up over EUR 10 bln of debt should be investigated: instead, the debt has been transferred to the central government books, and all staff have remained employed in the public sector. Siemens, despite its own admission of bribes of over EUR 90 million, remains a prime contractor in the public sector. It is impossible for Greek civil society to back the sacrifices required by a strong structural adjustment programme when the two main political parties have both been implicated in major corruption scandals without punishment.

Five Actions for a Turn-Around Management Plan
These factors make it imperative that the following five actions are undertaken:  

a.       The financial model which was used to generate the IMF Stand-by Arrangement and the wider EUR 110 loan agreement requires an urgent update. It does not take into account the restatement of Greek debt by Eurostat in November 2010. Its planning is based on a long-term interest rate which is roughly half the current rate. And its assumptions that Greece will be able to return to the markets in 2014 to borrow over EUR 100 bln in 2 years are unwarranted. These conditions are no longer viable.

b.      A restructuring of private debt is needed. Either this will be led by the successor to the European Financial Stability Fund, and will be an orderly process, or it will occur on a unilateral/market basis, and will be disorderly. There are two options for the restructuring are (a) a haircut of at least 30% (and probably 50%) together with a longer repayment term; and/or (b) the assumption of private sector debt by public sector organisations (a second bail-out). In the case of the second option, it should be noted that a simple transfer from private to public creditors is not a solution. Greece will be hard-pressed to allocate 8% of GDP to re-pay the EUR 110 bln: it is difficult to see where it will find the resources to repay the remaining amount.

We suggest that negotiations on restructuring begin with the assistance of major western investment banks. This requires the prior approval of sovereign creditors and the IMF. But such as step is unavoidable, and it would be better to begin the process in the next 2 years given that bond markets are already pricing in a default and haircut. 

c.       The Greek government needs to take urgent measures to raise revenue targets, decrease spending, privatise assets and attract foreign investment. A turn-around management plan is needed that prioritises government activities around the initiatives which bring the greatest return. These should include a more realistic public sector privatisation plan, based on full privatisation and sale, not partial sale/leasing. It also requires a more active private sector investment plan, which is currently non-existent. The targets per sector and segment are seen below, taking into account a 5-year phase-in:

Private Sector Investments
Revenue (€ bln)
Upstream oil and gas exploration and investment
Natural gas co-generation (replacement of lignite-fired plants)
Renewable energy investments
Mineral development
Shipping repatriation / Offshore shipping centre creation
Real estate sales / second residences / retirement homes
Agricultural & food processing sector / modernisation
Automotive sector investments
Education sector liberalisation and investment promotion
Total Private Sector (EUR bln)

Public Sector Sales
Revenue (€bln)
Sales of government land & property
Sales of government shares in state organisations & banks
Re-assertion of eminent domain on public property (sales)
Hellenikon Airport development
Total Public Sector (EUR bln)

Total Investment & Privatisation Income (EUR bln)

d.      The Greek government needs to take further urgent measures to reduce operating expenses and operations. We believe that there are an additional EUR 6 bln in savings and revenue per year possible:

Public Sector Restructuring / Savings
Annual Savings
Leasing airports and ports (annual fee)
Re-organisation of Hellenic broadcasting & others
Consolidation of public leases and rentals
Central Procurement Organisation
Reassertion of eminent domain on public property (rentals)
Total Income or Savings (EUR bln)

e.       All other commitments undertaken for structural adjustment and public sector restructuring must be implemented as soon as possible, exceeding the targets set by the Troika. 

Unfortunately, it should be clear that the main obstacle to achieving these five actions is the lack of political will and management competence at the EU and national levels. At the EU level, the greatest problem is the issue of private sector debt restructuring. At the national level, it is impossible to see how PASOK’s union supporters and regular members will permit a real liberalisation of the market, and a real restructuring of the public sector. We can expect nearly no support from the remaining political parties.

For these reasons, we consider that the outlook for Greece’s debt management is bleak, and that the years 2013-2015 will result in a technical default. Whether this will be orderly or disorderly is up to Greek and European politicians to decide, and this fact more than anything else minimises the hope for a reasonable solution.

(c) Philip Ammerman, 2011
Navigator Consulting Group


  1. Very thorough and thoughtfull analysis. Congratulations! I wish some of our politicians had the time to read it...

  2. Excellent! I 've read many analyses on the topic but this is indeed the most accurate and thorough. It was the first time I visited your blog but from now on I will be a fanatic! It would be very interesting to hear a comment on a possible impact to the main greek banks of the(inevitable)default or public debt restructuring! Thanking you in advance.

  3. Thanks to you both. I am currently trying to model the impact of private creditor debt from 2013 onwards -- this is really complicated, and there is a real lack of data available.

    After this, I will definitely look at the banking sector. My own suspicion is that the impact of a bond haircut on many banks will be difficult to handle, and may not be fully addressed in the next European stress tests (as it was not in the previous stress tests).

    Watch this space! :-)

  4. In other words - it won't work! Thanks for this thorough, gap-less analysis. My two cents: Greece always had military coups in times of crisis - why not this time? The EU is no impediment - the last time its predecessor ECC wasn't either.