Monday 16 May 2011

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.


  1. Good to see you back in form.
    Care to comment on this F1 race track project approval outside Patras? Details are sketchy but even with minority public participation this looks like another big white elephant with absolutely no use.


  2. Andreas Eriksson16 May 2011 at 15:43

    "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."

    Please remind an ignoramus, what swedish debt restructuring strategy are you referring to?

  3. The Swedish systemic banking crisis and the resolution through a "bad bank" is considered a case study in how to successfully implement a debt restructuring of this magnitude. It would be indispensable for preparing Greece for the inevitably melt-down in the domestic banking sector. But the refusal of the latest stress tests to even consider a potential haircut on Greek debt is indicative of the low quality of preparation.

    I believe Roubini has published an analysis showing that Greek banks have between EUR 50-70 bln in Greek government bonds on their books, and a total capital of only 29-30 bln. You can imagine what is likely to happen (and indeed what is already happening).

  4. The F1 track: a good idea in theory, but likely to turn into another white elephant project. The government needs to allocate funding on the basis of return-on-investment, according to the fastest and surest ROI metrics available. As you can probably imagine, the likelihood of a successful F1 race in Greece in the immediate future is quite limited. They should have chosen a better option for this money.

    It's a bit like that EUR 1.1 bln EIB loan for OSE they were crowing about last year: good idea in theory, but in fact we should liquidate OSE, not pour more money down the drain.

    Please remember: this is the country that lives through tourism, yet can't afford a decent international tourism promotion campaign or strategy. Let's build an F1 track instead.

  5. today i found your blog in google, hmm, your thought is very special.