Sunday 29 May 2011

Proposal for a Solution to the Greek Debt Crisis

This past Monday, the Greek government announced one of the most politically courageous additions to the structural adjustment programme ever contemplated in Greece. If it can be implemented, it will represent—for the first time since this crisis began—a real chance at escaping from the debt spiral in which Greece finds itself.

The measures include the following:

a. An further EUR 6 bln in expenditure cuts and revenue additions in 2011;
b. An further EUR 22 bln in expenditure cuts and revenue additions between 2012-2015
c. A privatisation programme at EUR 50 bln, of which approximately EUR 35 bln represents real estate holdings.

As has already been stated, a main challenge in implementing this programme will be the low market values and the perceived political risk of Greece. Political resistance will also play a role.

Nevertheless, this is the first time that numbers of the correct order of magnitude have entered the debate since the debt crisis began in late 2009. The Troika’s insistence that a separate agency, partially staffed by foreign experts similar to Germany’s Treuhand, is also a good idea and should be pursued.

We should also note that even an implementation of 100% of this programme by 2015 will not be sufficient to handle the debt payments expected from 2013 onwards.

It is therefore suggested that:

a. Any future bail-out to Greece should be linked to a voluntary debt roll-over of public sector debt. This would require existing creditors to roll-over current bonds at the same interest rate and maturity. In exchange they should have the opportunity to exchange approximately 25% of the current debt at nominal levels. (EUR 230 bln debt @ 25% = EUR 57.5 bln). This will gain Greece an average of 10 years on its existing debt load, which will be enough time for the structural reform efforts to take effect.

b. Any future privatisation revenues should be used to purchase debt on the open market. Taking into account the average 30-40% discount on most debt, this would enable Greece to retire approximately EUR 66 bln in debt (in 2011 present value—this does not include future interest, and it assumes 100% of the privatisation target is attained).

c. Greece should immediate launch a private sector investment programme, targeting specific sectors for development. We believe that an FDI programme of EUR 80 billion in the next 5 years is possible, providing the adequate tax and investment incentives were in place. Among the immediate investment programmes which should be launched include:

• The creation of an International Shipping Centre and an International Company Centre, enabling companies registered in Greece with activities abroad to benefit from a low corporate tax rate. This would be similar to the incentives Cyprus and the UK offer, and is feasible, given the existing Law 89 framework.

• The launch of hydrocarbon exploration in the Aegean, Ionian and Mediterranean Seas, targeting fields similar to Leviathan discovered in Cyprus and Israel.

• The replacement of Greece’s lignite-fired power plants with natural gas CHP plants.

• The loosening of restrictions on housing development (particularly targetting vacation houses), including a reduction of the minimum land area for building from 4,000 m2 to 2,000 m2, and the reduction/streamlining of bureaucratic requirements thereof. We believe it is feasible to attract investment for 10,000 houses per year with a nominal value for EUR 2.5 bln per year if this were done correctly.

d. Greece should immediate launch a tourism promotion campaign, with a spend of at least EUR 250 mln per year, aimed at increasing incoming tourism from 15 mln tourists in 2010 to 20 mln in 2015 and 25 mln in 2025. This should be accompanied by a progressive fall in VAT on tourism and construction employment and services to 10%.

I believe that, despite the negative reactions in press and media, that the larger middle class has remained broadly unaffected by the current austerity programme, and that the country as a whole is prepared to accept additional measures. The demonstrations which apparently count for so much in the international media have not, until now, managed to halt any significant reforms.

I therefore believe that the government should accelerate the pace of reforms. The main barrier to this is clearly the internal political limitations of the PASOK party and its individual ministers and supporters. However, this barrier is not insurmountable, and much more can be done.

Thursday 19 May 2011

On the Political Meaning of “Cooperation”

On Tuesday, May 17th, European Commissioner Olli Rehn asked for cooperation between political parties for the targets and policies of the Memorandum, i.e. the loan conditionality which had been agreed between Greece and the Troika as a condition of the disbursement of EUR 110 billion in emergency loans to Greece.

This touched off a political firestorm. Deputy Prime Minister Theodoros Pangalos spoke of unwarranted political interference in domestic affairs. Leader of the Opposition Antonis Samaras, in a heated speech at the Zappeio, spoke of a policy which was doomed to fail, and has lost no opportunity in criticizing the government and the Memorandum, even when these contain policy measures which his party has supported in the past.

This widespread and cross-party reaction, magnified in the cynical echo chamber of the mainstream media in Greece, is unfortunately yet another indicator of the moral sickness and bankruptcy of the current political system.

Our creditors—the IMF, Eurozone and European Central Bank--have lent us EUR 110 bln based on certain conditionalities, many of which are eminently rational and should have been implemented long ago. These conditionalities include:

• The collection of tax arrears and the fight against tax evasion;
• Reduction in government expenditure, including the reduction of the public sector workforce through replacing every 5 retirees with 1 new recruit;
• A liberalisation of closed sectors such as pharmacies and road transport;
• The increase of indirect taxes, including VAT and special taxes on fuel, alcohol and tobacco;
• An increase in the retirement age and an end to the favourable early retirement system enjoyed primarily by the public sector;
• Additional fiscal consolidation and structural reforms.

None of these conditions can possibly be objectionable on the grounds of either fairness or evidence-based policies. They were arrived at after a consultation between the government and the Troika. They were all recommendations which the country should have been doing of its own initiative, and did not.

These conditionalities were accepted by the Hellenic Parliament in a fair and democratic vote, to which one other party—LAOS—and several independent or right-wing deputies voted in favour. They are now part of the law of Greece.

In certain areas, the government has decided to cut spending at its own initiative. For instance, the initiative to cut salaries and pensions above a certain level was a decision made by the government to reduce costs, not the Troika. There is no specific clause in the Memorandum which specifies this.

Let us not forget that the money offered to Greece—EUR 110 billion—is financed in the majority by the taxpayers of the Eurozone. This includes countries such as Cyprus, Slovenia, the Czech Republic, which are close allies of Greece or which have lived under Communism. It also includes countries such as Belgium, Italy, Ireland, Portugal and Spain, who are facing major economic challenges of their own.

Let us also not forget that the money is being lent to Greece for the simple reason that Greece is bankrupt. Why is this money needed? Not just to roll over existing debt, but to pay salaries in the public sector, to pay for pensions and hospitals, to pay for the aviation fuel which keeps Greece’s airforce in the air protecting our borders.

Why can’t Greece pay for its own financial commitments? Because for generations it has made outrageous commitments to the public sector workforce in exchange for votes. It has allowed its tax collection system to become a byword for corruption and incompetence. And it has colluded with the private sector in Greece and abroad to extract massive bribes and implement white elephant projects.

This situation is entirely of our own making. Starting with the first government of Andreas Papandreou, which led to massive spending and high inflation, and extending to the disastrous six years of Konstantinos Karamanlis, which increased public sector debt by EUR 150 billion, the Greek political system, with the apparent agreement of the majority of its citizen voters, has corrupted and bankrupted the country and the society.

Every single administration since 1981 has left the country in a worse financial situation than the previous one. Public debt has risen nearly every year since then in hard currency terms. Even Kostas Simitis, revered as a reformer and “technocrat”, was revealed to have “cooked the books” that permitted Greece entry into the Eurozone. “Greek statistics” has rightfully been denigrated the world over.

In the face of this stunning corruption and incompetence, which has for years included the deliberate flouting of European law in multiple sectors from education to the environment, our European partners have decided to give Greece one more chance to save itself from bankruptcy. Part of this is due to ulterior motives: saving the European banks which have extended some EUR 340 bln in loans to Greece as of the end of 2010.

But make no mistake: passing the Greek bail-out package of EUR 110 bln through the national parliaments of fourteen Eurozone parliaments during a global economic crisis require real political courage, and real sacrifice. In many of these parliaments, the vote was passed with cross-party support. What we call, in other words, “cooperation.”

Yet here in Greece, our media and political elite, to say nothing of the average citizen, appears ignorant of these facts. Instead of a sincere, truly national effort to correct the situation and implement the loan terms, our political elite finds every opportunity to score points against their domestic opponents, and against the Troika, which represents other countries who’s citizens who have had the good decency to lend Greece money when no one else would.

This “resistance” often reaches the point of pure irrationality—insanity, if you will. In what other country would people protest the privatisation of a shabby national railways system which has for years incurred losses of over EUR 500 million per year and has a debt of over EUR 10 billion, making it the most-indebted public enterprise in Europe?

Olie Rehn, Jean-Claude Juncker, Dominique Strauss-Kahn, Jean-Claude Trichet: no matter that their individual backgrounds or faults, these people have been overwhelming in their support of Greece. Any Google search done shows the support they have given in articles in the Wall Street Journal, the Financial Times, Bloomberg, Reuters, and others.

They are also charged with making sure that Greece follows the letter of the contract it agreed to. Here, it is clear that although Greece has made very courageous political choices, it has not stuck to the plan, and has not met its targets. Do not search outside Greece for a conspiracy or a culprit: this negative result is solely and unequivocally the fault of our government apparatus and our taxpayers.

Additional measures are clearly needed. Political and indeed national cooperation is clearly needed. Instead of castigating or vilifying our European partners, we would be far better off understanding the magnitude of the problem facing the country, and doing everything we can to ameliorate the situation. This would be first and foremost a reflection the “European” value we all aspire to.

© Philip Ammerman, 2011

The complete text of the Memorandum agreed by the Government of Greece and the Troika can be found on the website of the Hellenic Ministry of Finance:,fileResourceObject,arrayOfFileResourceTypeObject/topicNames/economicPolicyProgram/resourceRepresentationTemplate/contentObjectListAlternativeTemplate#fragment-4

European Commission Report

IMF Standby Agreement

Wednesday 18 May 2011

Changing the General Business Environment in Greece

The main problems faced by Greece remain a large and dominant public sector, and an adverse business environment for the private sector. Unless rapid structural changes are made to this business environment, it is difficult to envision how Greece will be able to compete in the future, let alone handle the challenges of managing its public debt.

Today, few of the business closures or sectoral difficulties evident in Greece are the result of the Troika’s structural adjustment programme. If we take sectors such as tourism, construction, shipping or retail (which are the mainstays of the Greek economy), the main problems are due to public sector taxes and distortions, as well as inevitable economic changes which have long been taking effect.

Some examples are seen below:

Construction Sector

a.     The construction industry was formerly a powerhouse of the economy, comprising over 7% of GDP in 2006-2007. Since then, the sector has seen a major decline, with a resulting impact on high unemployment. The origins of this “crisis” are in fact driven in the first place by the change in taxation of property which took effect on 1 January 2007. All buildings with licenses after this date, and all transactions after this date (with some exemptions) became liable for a VAT rate of 18-19%. This touched off a classic boom-bust cycle, with a spike in construction licenses issued prior to January 1st, 2007 (which made these buildings exempt from the new VAT rates). This stock of new buildings hit the market between 12-18 months later. Most urban centres in Greece have an oversupply of new buildings, which cannot be absorbed according to normal supply and demand.

b.     A further distortion in the construction sector is the adverse impact of high social security taxes (44% between employer and employee) and the resulting use of low-paid, black market labour, primarily immigrants. To insist on social security taxes of 44% is economically irrational in Greece, given that there is so little value returned from the public health or retirement system. This is a major reason why there is so much illegal labour in the sector.

c.     Today, very little is being done by the government or the Troika’s structural adjustment programme to counteract these two distorting taxes. In fact, the new environmental and zoning regulations recently passed make things worse. If Greece wants to see a recovery in this area, it should reduce both the VAT and social security taxes, and loosen the town planning requirements of a 4,000 m2 land plot for buildings outside urban zones. The entire town planning and building codes should be rationalised and revised.


a.     Greece is an important  tourism destination in Europe in terms of arrivals per capita. The recent crisis, as well as the wider economic crisis and exogenous factors such as the decline of the British Pound have seen declining arrivals and expenditure per tourist. Moreover, these arrivals are far below potential. If we compare Cyprus or Singapore to Greece, for instance, we see that it is possible to achieve a ratio of arrivals to permanent population of 4:1. In Greece, this would amount to at least 40 million tourists per year: the highest number Greece has been able to attract peaked at 17 million arrivals per year.

b.     Arrivals will only occur once the product is developed to correspond with a more diverse and demanding customer segmentation, but also once the price:quality relationship is rationalised. There are urgent issues to address in product development which have remained unaddressed: golf courses, marinas, conference centres, and integrated tourism resorts all insufficient or inadequate.

c.     The licensing process for new hotels, marinas or golf courses is a major disincentive to development. Major projects have been cancelled or delayed for this reason, depriving Greece of new products and badly-needed sources of investment and employment.

d.     Transport infrastructure (ports and airports) has not been properly developed. This is an issue of both quality and quantity. Regional airports need urgent upgrading to handle direct international charter flights and seasonal flights from source markets. The potential of Thessaloniki as a regional multi-modal transport hub has been ignored for too long. New airports are needed in areas like Igoumenitsa and the Peloponnese.

e.     Employment in the tourism sector will remain seasonal, so issues of staff transfer, retention, development and employment need to be addressed—among them the futility of a 44% social security tax, and the institution of flexible work time.

f.      Higher tourism arrivals require a stable, long-term marketing campaign and professionalism among the public and private organisations in the market. Neither exists. Greece spends far more on agricultural subsidies each year than on tourism promotion, despite the fact that the agricultural sector is less than one-fifth the value of the tourism sector.

g.    There has been an uncontrolled policy of subsidising hotel investment over the past 20 years. This has had the unforeseen result of an oversupply of small hotels (5-20 rooms). These are usually under-capitalised and run by families with no professional experience or background in hotel management. This oversupply destroys market quality and pricing power. These units operate on a seasonal basis, using low prices and often create a negative brand image. They rely on untrained or unmotivated family members or black labour, and have little economic future without resorting to tax evasion or unsustainable working conditions.

h.     As with other sectors, we see almost nothing being done to address these issues. The policy commitment to turn over regional ports and airports over to private operators for long-term lease could yield results, but it has not yet materialised, and there is no apparent effort to link this with strategic business development or investment attraction. Yet the tourism sector offers the greatest chance of short-term growth in GDP and employment in Greece, and given the unrest in Egypt, Tunisia and other countries, it’s clear the government is missing a major opportunity.


a.     The retail sector shows some of the greatest investments, but also some of the greatest changes needed, in Greece. Over the past 15 years, the sector has been revolutionised through the entry and expansion of big box retailers as well as specialists ranging from Public and Marks and Spencer to the development of large malls and high-end outlets such as Golden Hall, The Mall, etc.

b.     While these investments have by and large been successful, this has had an inevitable competitive impact on the small family retail points which used to be the backbone of the Greek middle class. Such stores are still present in all neighbourhoods of Greece: few of them are doing particularly well.  For many, the financial value of their inventory (their cost of goods sold) is far higher than the value of their sales turnover. Yet the transition is unstoppable.

c.     Additional structural challenges exist in this segment: in the past, loans were given based on hard assets which were collateralised (e.g. a family apartment). Such liquidity is no longer available, and in any case should not be extended given the business potential of most small points. Many of them are housed in inadequate retail space: average floor space is low. Many are undifferentiated: they offer largely the same products at the same prices. Few of them are computerised; few have a stock control or customer relationship management programme; few have a website. The same problem with social security costs exists, leading to a high use of illegal or part-time labour.

d.     In short, far too many small retailers are operating according to the same playbook as they were in the 1970s. Yet both customer expectations and competitors have changed. We can predict a far higher liquidation rate of small businesses of this sort, with an attendant impact on unemployment and GDP decline. There is little that can be done here, except to make the playing field more attractive for those companies and entrepreneurs that are able and willing to invest further.


a.     The major problem with shipping always has been that the Greek government does not offer an attractive investment regime for companies which are based in Greece but do the large majority of their businesses abroad. In addition to high taxes, Greek regulations sabotage the sector by imposing outmoded requirements on shipping crews and obscure rules of cabotage. As a result, the number of ships sailing under the Greek flag continue to fall, while those registered in offshore jurisdictions continue to rise.

b.     The sector is further weakened by Greece’s inability to develop clusters of excellence for service professions such as ship chandlers, brokers, maritime insurance specialists, finance, and others. As a result, most major shipping companies and professions are based in London or other international centres.

c.     The strength of unions and extremely poor public sector planning and services (e.g. a corrupt Customs service) has damaged Greece’s ability to development multi-modal shipping hubs or duty free zones, which would enable certain areas to become high value, high volume transport and logistics nodes.

d.     As with the other sectors, we see nearly no movement on what should be a series of logical, strategic steps to develop this sector.

So what is to be done? I will cover general (structural) recommendations here, and cover sector-specific recommendations in the following days.

Corporate Taxation and VAT

1.     Reduce the tax on corporations (Societe Anonym) to the same tax level as limited liability companies, partnerships and individual enterprises to 20% in 2011 and 15% in 2012.

2.     Tax dividends from corporations and limited liability companies should be taxed at 5%, with no further personal taxation.  

3.     Reduce the VAT on construction, real estate purchase or transfer and building materials to 10%. Allow additional exemptions from VAT for families, first-time home buyers, etc.

4.     Reduce VAT on tourism services to 10%. Eliminate all other indirect taxes on tourism.

5.     Develop an International Business Company legal form. Enable companies which are registered in Greece, but gain income exclusively outside Greece, to pay a reduced corporate income tax to 5%. This is an expansion of the existing Law 89 regime. Eligibility includes a EUR 10,000 minimum paid-in capital, requirement of 1 full-time employee and a permanent office. Encourage the establishment of corporate headquarters units, shipping companies, and other international firms or their subsidiaries in Greece using this IBC regulation. Assure proper infrastructure and support, e.g. all documentation and registration online, in English language, with immediate processing of visa requests and other requirements.

6.     Develop an International Shipping Centre to highlight the IBC corporate form and host ancillary services.

Labour Taxation and Social Security

7.     Reduce the social security tax from 44% to 20% of the gross wage, splitting this equally between employer and employee (10% / 10%).

8.     Enable flexible labour arrangements. Allow each worker to choose where they will register (OAEE or IKA) in line with their own requirements and desires.

9.     Assure that part of each worker’s social security is personal and portable by setting up individual retirement accounts. Transfer all social security functions online and enable each user to see their contributions, social expenditure incurred and likely pension levels and pay-in requirements. Enable the selection of doctors and clinics online. Assure all documentation in Greek and English.

10.  Develop a real labour inspection function to ensure that the current widespread abuses seen in the private sector are effectively and immediately punished with high fines and future business closure and asset seizure. 

Investment Promotion and Incentives

11.  Restructure the Hellenic Investment Promotion Agency so that 50% of its share capital is from the government, and 50% is from private sector organisations (chambers of commerce & industry, the Society of Greek Industrialists, etc.).

12.  Develop transparent procedures for the promotion of specific investment opportunities. Ensure that the President and Vice-Presidents of this agency are recruited independently; are not a civil servants, and have a contract based on performance and results, monitored by the Board of Directors.

13.  Spend at least EUR 100 million per year promoting Greece as an investment destination.

14.  Develop a list of priority sector and specific investment projects, available online and promoted internationally.

15.  Provide scaled income tax incentives (exemptions) for investments at all investment levels, starting from projects as small as EUR 100,000, and provide a real “fast track” investment licensing regime for this.

16.  Develop a business / investor’s visa and citizenship scheme. Make it easier for companies to bring skilled labour and management into Greece (it is currently nearly impossible for citizens of non-EU countries). Make it possible for non-EU nationals who want to live in Greece year-round to gain residence permits easily and effectively. Specifically:

·       Grant fast-track residence permits to all investors and their families who purchase a property of at least EUR 300,000 in Greece.

·       Grant fast-track residence and work permits to investors with specific investment project with a value of at least EUR 1,000,000

·       Grant fast-track residence and work permits to company staff, where the employer can demonstrate the need to bring in high-value, skilled managers and labour.

·       Grant the right to fast-track citizenship for investors and their families who invest over EUR 50 million in Greece.

·       Grant fast-track residence and work permits to individuals of Greek descent and their immediate families.

17.  Eliminate all military service requirements foreign citizens of Greek descent.

Building and Town Planning Codes

18.  Fundamentally restructure the building code to make it simpler, eliminate bottlenecks and provide for energy-efficient building. Develop a pro-growth building code.

19.  Revise the Urban Planning code to encourage growth in specific areas. Incrementally transfer public land, via long-term lease or sale, for development.

Most of these recommendations can be implemented within 6 months. They should all be implemented in 2011. 

Monday 16 May 2011

Media and the Greek Debt Crisis (ii)

Today brought about yet more examples of sloppy analysis from international media on the Greek debt crisis and its supposed impact.

Bloomberg led off with a rather absurd article entitled Euro Crisis may hit East European Recovery with the statement:

Eastern Europe’s economic recovery may be scuttled by any Greek debt restructuring, which would curb lending by western banks and undermine investor bets that have propelled the region’s stocks, bonds and currencies.

To suggest that the Greek debt restructuring is at fault for what is undeniably a difficult international credit environment is absurd, and I speak from enough personal experience in bank portfolio audits and due diligence studies in the region to confirm this personally.

In the Baltics, for instance, credit growth has resumed, but will remain restricted given the disastrous GDP growth conditions and the fact that most international banks, notably Scandinavian and German ones, have suffered major write-downs as a result of over-heated real estate investments. Greece has absolutely nothing to do with this: it’s an independent economic cycle.

In the Balkans and former Soviet Union, credit expansion remains limited for a wide range of factors, not least of which is the fact that Greek banks have a leading market share in the region. Despite this, Greek and other banks are lending, but in a very difficult market environment: rule of law is incredibly difficult to enforce and there are hundreds of thousands of corporate loans which are non-performing, but where assets cannot be seized. Inflation is rising again and while hard-currency loans are at a premium, fewer and fewer creditors have foreign-currency income to handle another potential currency devaluation.

In Central Europe, the economic record is mixed. Although economic growth is strong in Poland, the government itself is anxious to prevent unsustainable credit growth, and faces internal debates about its own public debt. In the Czech and Slovak Republics, the issue is less credit growth or availability as it is the fact that these two economies are too dependent on a few manufacturing sectors and in particular to the German market.

So let’s be clear: if the writers of this Bloomberg article think that Greece is to blame for the credit allocation decisions of western banks (or even multilaterals such as the EBRD or the IFC) in eastern Europe, they are wrong. Credit scoring and loan reviews have become more stringent everywhere as a result of the 2008 economic collapse and the real estate bubble. Greece is hardly a factor.

This is confirmed by the fact that according to most estimates, only EUR 70 bln in Greek government bonds remains in the hands of private banks world-wide: a miniscule amount compared to credit stock in eastern Europe. It’s also miniscule compared with international exposure to Irish private sector debt. But I don’t suppose this is a factor.

Another glaring error was heard this afternoon on France 24’s English edition. I was amazed to hear Dominique Strauss-Kahn referred to as the “saviour” of Greece. This was certainly news here: someone should call up those unionists and tell them to stop blaming the evil IMF and instead start strewing rose pedals at the feet of Poul Thomsen when he next visits George Papaconstantinou. They can play the Arcadian lyre while they’re at it, and maybe weave crowns of grape leaves and eat dried figs.

Silly buggers. I’m not sure who’s stupider: the unionists or the media that comes up with these ridiculous stories in the first place.

Why any number of reporters suddenly believe that because DSK was caught in flagrante delicto or worse with a New York city chamber maid, the Greek economy plummets is beyond me. Can we not accept a Greek economy where millions of rational, economic actors make voluntary transactions every day independently of the IMF Director’s sexual escapades?

If not, I’ll turn my office into a gamistrona and give DSK, Baroso, Trichet, Schauble, and all the other great financiers, including that clever fellow from Luxembourg, free access so they can get on with it, and thus Greece can survive. 

Once again: Greece’s credit policy is largely in place until early 2012. The best thing that could happen to Greece now is no new loans. Let the structural adjustment process take its course, keep the pressure on the government, and stick to what’s been agreed.  

And for those erstwhile journalists out there: it would be far more beneficial for all involved if you did some cursory analysis of the underlying situation rather than trade office gossip. It's not even that difficult, since all major banks have quarterly earnings statements, and you can clearly see what loan write-downs and what credit decisions have been made. 

Hellenic Debt Crisis – Progress Report

It has been over one month since the last entry in this blog. Unfortunately, I’ve been hit by conflicting emotions about the utility of continuing any further posts on the debt crisis, either in Greece, or the United States or other potential countries affected by this issue. The fact remains that amidst the cacophony of opinion online and offline, any single comment adds very little to the debate and much to the white noise and misinformation.

This past month has also seen an unusual recurrence of maudlin pessimism and scandalous rumour-mongering. Comments submitted to English-language periodicals in Greece such as The Athens News or Kathimerini’s English edition verge increasingly on the misinformed or the lunatic. The Greek press has been fully caught up in this process, with journalists who enjoy unparalleled access to government sources publishing a constant, daily forecast of government failure, fuelled by the deliberate sabotage of any reform effort by many of the opposition parties in Parliament.

Much more disturbingly, there is increasing evidence that the reform effort is being derailed by what can only be described as sloppy foreign media reporting and/or financial speculation. Two salient examples in the past month indicate this:

·        Some weeks ago, a rumour was started that Citibank had forecast an imminent restructuring of Greek government debt, which would have been held around Easter time. This rumour apparently originated in one of Citibank’s Asian offices. Despite government promises of an investigation, nothing more has been published. The rumour was sufficient for yet another spike in Greek bond rates and CDS prices.

·        Two weeks ago, Der Spiegel’s online edition published a rather hysterical article about a secret meeting in Luxembourg during which Greece’s exit from the Eurozone was being discussed. This appears either a case of journalistic hysteria (which has not been absent from international reporting about Greece), or deliberate misinformation. Despite denials from all parties involved that a Greek exit was on the agenda, this rumour has apparently entered mainstream debate, and I have lost count of the number of friends asking me when Greece will exit the Euro.

At one point, the process of any turn-around project becomes self-defeating, as the internal resistance to change overwhelms that small minority of elected or corporate officers who are working for change. While I don’t think we have arrived at this point yet, it’s clear to me that the number of people who really understand what the Papandreou government is trying to achieve is becoming more limited by the day, while the scandal-mongering and rumours surrounding what should be a largely technical issue has reached unprecedented heights.
Political conspiracy? Financial speculation? Poor journalism? All of the above? It’s difficult to quantify or qualify. Let’s take a brief look at what has changed in Greece over the past month.

1.      The EUR 50 bln Privatisation Plan
The full details of this plan remain to be published, as does the timeline. However, we are looking at a combination of a partial sell-off of government enterprises, with the public sector retaining a share and/or management, as well as a sell-off (rental / leasing) of government property. This includes privatisation of Hellenikon airport; private management of ports and airports; further sales of government stakes in key parastatals such as OTE, DEH, EYDAP; partial privatisation of the Agricultural and Postal Banks, etc.

What’s new about this?
It would present a major roll-back of the public sector from major areas of economic life, and as such is, in my opinion, urgently necessary on the grounds of basic economic rationality. The corruption, incompetence and low objective return-on-investment of government shareholdings in areas such as gambling (through the OPAP monopoly) or power generation and provision (DEH) has been clearly documented.

Moreover, it’s the first time the government is actually discussing economic figures of the necessary dimension to effect a real change to the economy and to the debt. The proceeds of this privatisation will be used to purchase Greek government debt on the open market: given the 40% discount on government bonds, a EUR 50 bln privatisation income could result in buy-backs of EUR 70 bln in debt, which would be a major and welcome achievement. From my viewpoint, Greece would be able to achieve this target by 2017-2020, but should also set as a goal the attraction of a further EUR 50 bln in additional foreign direct investment in a number of key areas.

The challenges remain those expressed in earlier posts (e.g. The Unrealistic Outlook for Greece’s EUR 50 bln Privatisation Programme, February 18, 2011). On the one hand, the low valuations on the Hellenic Stock Exchange means it will be difficult to achieve fair market value for the privatisation of government companies. On the other hand, internal political resistance to privatisation will be difficult to handle. In neither of these two issues does Greece represent an exceptional case.

Likely Future Developments
While I have commented negatively on many issues of the PASOK government’s decision-making processes, the commitment to a privatisation on this level is one of the most courageous decisions made in Greece in the last 50 years. PASOK has a generally positive track record in privatisation achieved under the Simitis government, although in many cases this was not a full or optimal privatisation process (It has been neither full nor optimal in most countries where strategic privatisation has taken place, so in this respect Greece is not much different from other European or North American countries).

Nevertheless, the fact that both the Troika has been pressing for a specific timetable, and the fact that some elements within PASOK itself have shown the political courage necessary indicate that not every decision should be discounted. What we need to see are results, and the fact that a new bail-out package is apparently on the horizon and will be linked to a specific privatisation programme is positive.

The issue of privatisation of semi-governmental organisations is the rock which may break the back of PASOK. The ‘deep PASOK’ owes much to union militancy, and billions of Euro have been made in the shadowy nexus of public procurement and semi-governmental organisations over the years. This is the single greatest political challenge the current government faces. Not land sales or leases: semi-governmental organisations.

2.      Repaying the EUR 340 bln Debt
The main problem which remains is how the EUR 340 bln in debt will be repaid. It is increasingly clear to all that this will be a largely impossible task under the present conditions of the bail-out package. The objective of a market return in 2012 for EUR 26-30 bln in Greek debt will be impossible. Press reports now indicate the likelihood of a second bail-out package on the order of EUR 60 bln, linked to further specific structural reform.

What’s New About This?
It is the first time the Troika partners accept that the current plan is unlikely to be implemented as planned, and that additional public money will be needed. Alternatively, a default and restructuring should take place. Any such default would have major negative consequences primarily for the domestic banking system: addressing this issue has still not been done.

As a parenthesis: it’s important to differentiate between the fate of the Greek public sector debt and that of the ‘real economy’ – households and companies. The public sector represents at least EUR 75 bln of spending (counting the central government, pension funds and semi-governmental organisations) out of an official economy of EUR 225 bln. The public sector only assures about EUR 50 bln of income, leaving EUR 20-25 bln to be financed by deficit spending. If the public sector is cut off from the international debt markets, the impact on a cash flow basis is about EUR 35-40 bln. It’s a big number, and it will adversely affect vulnerable groups, but it’s a manageable hit to handle.

What is less clear is how Greece would survive a banking collapse. Greek banks depend on ECB loan refinance. Their exposure to government loans is estimated at EUR 46-50 bln by various observers; their own capital is estimated at EUR 29 bln. The difficult scenario, therefore, is not what happens if the government is starved of loan capital, but what happens to the real economy if Greece’s companies and households face such an event.

The main challenge to a ‘rational’ public sector solution involving a future bail out is the increasing political resistance to ‘north-south transfers’ by member states of the Eurozone. I believe that the most likely solution will be a second Troika bail-out in 2012, linked to further specific targets and an updated conditionality package. It is likely that the Troika will have to use the existing EFSF: the Eurozone’s contribution would be about EUR 45 bln, which should be manageable (unless Spain is hit by contagion as well).

The second challenge is what has already been addressed in this blog: the fact that the current payment schedule of even one third of the bail-out package makes it nearly impossible to forecast a positive outcome. (See for instance The Good News from Brussels—and the Problems which Remain. March 12, 2011).

Likely Future Developments
The wider political / financial objective of the initial bail-out package is clear and is in place: a long-term substitution of public financial guarantees is bailing out the European banking sector’s exposure to Greek government bonds. Various observers currently place exposure among international private banks to Greek debt at about EUR 70 bln, far lower than at the beginning of the crisis.

I believe this trend is set to continue, until an orderly restructuring can be conducted in 2013 or 2014 under ESM. This restructuring will likely comprise a ‘voluntary’ extension of loan maturities to at least 20 years and a lower interest rate. In some cases, it may include a haircut of 20-25% of bonds held by private creditors: this is still a vast improvement over the existing 40% discount on the open market.  

However, this scenario depends on the international financial environment as well. The greatest threat on the horizon is no longer a Greek default, which would be minor, but the financing problems we can forecast for Belgium, Italy, Japan, the United States and other countries who have reached a 100% debt-GDP ratio or have surpassed it. The financing problems faced by Portugal or Greece in terms of public debt are minor compared to what will probably happen in 2013-2015 internationally.

3.      Public Reform Process
The general attempt to reform the public sector continues. Among the challenging pieces of legislation implemented include a proposal to streamline public sector salaries, to cut additional central government guarantees to non-performing semi-governmental organisations, and to increase public sector working hours from 38 to 40 hours per week. The pension reforms have been implemented, raising retirement ages and pay-in periods: this was a major reform which, though incomplete, required a major act of political courage.

The main problems in the reform process continue to exist:
·        Much of the public sector refuses to implement many of the reforms.

·        There are major delays in procurement and implementation: the installation of an electronic procurement system, for instance, is fragmented across various ministries, and beset by technical and deeper problems.

·        Many decisions are taken not in light of what is efficient, or what Greece should look like 3-5 years in the future in order to compete, but in light of political expediency. It is impossible, for instance, that the head of the Forestry Service would gain the same salary as the head of the government-owned gas distribution company, but that is the case required by this new law.

·  Corruption has still not been addressed. Despite the recent ‘movement’ against Akis Tsohatzopoulos, the former Minister of Defence, nothing has been done about the myriad additional cases of corruption in the private sector.

·      Regrettably, the enforcement of private sector conditions of employment has been abandoned. I see major cases of employment abuse on a daily basis: in bakeries, where staff are required to work 7 days per week, 10 hours per day at one national chain; in gas stations; in small retail points.

·     The government continues to misunderstand the requirements for attracting foreign direct investment, and as a result not only cannot attract any headline deals, but risks undermining its privatisation targets. It is critical that the political and permanent staff responsible be replaced and a real investment strategy be put into place. It’s clear that unless this happens, the rest of the reform effort will founder.

In short, there is not much new in the previous month. The case of Greece remains one of high expectations and a glaring divide between reality and idealism. The lack of any real public relations plan and investment attraction strategy means that the foreign and domestic press steamroll Greece every day online and off, yet the government does little to respond. Outrageous statements are made in The Financial Times, the New York Time, CNN or other media by journalists who don’t understand the situation, which are never rebutted. This feeds into a vicious circle which daily makes the process of reform ever harder. This is a long-term weakness in the Greek government (irrespective of political ideology) and the country is and will pay a high price for it.

Internally, it’s clear that not all ministers are working at the same intensity, or are following the government’s policy. The lack of a more forceful response by the Prime Minister is regrettable. And there continues to be a basic lack of understanding of how the real private sector works.

And finally, there appears to be a total absence of negotiation or reubuttal internationally. It remains unclear whether anyone realises that Greece’s commitment to fully repay its debt is at the core of the current crisis. If Greece had followed the same debt restructuring strategy as Argentina or Sweden, the crisis exit would be shorter, although the current situation would have been far worse. The fact that Greece accepted as a loan conditionality (a) not to default or restructure, (b) to comply with the original debt payment schedule and (c) without being able to devalue or adopt a tariff strategy, remains an exercise in making foreign private creditors whole, and in removing any sort of moral hazard for the international banking sector that scrambled to lend money without a proper due diligence in the first place.

I would be very interested to see what would happen if CNN or the New York Times made the same statements about Deutsche Bank, Societe General, or other private creditors that they can apparently make about Greece with impunity. The double standard is alive and well in mainstream journalism, and it’s too bad nothing is being done to address this.