Restora­tion of credit flows ap­pears vi­tal for the coun­try’s econ­omy to re­cover

Pri­vate sec­tor in need of some breath­ing space, which only fund­ing from abroad can pro­vide

Kathimerini English - - Business & Finance - BY DIM­ITRIS KONTOGIANNIS

The Greek econ­omy will not be able to get back onto a steady growth path un­less nor­mal credit flows to the pri­vate sec­tor are re­stored.

Some pun­dits be­lieve this may re­quire the na­tion­al­iza­tion of one or more ma­jor banks and their sub­se­quent sale to some large in­ter­na­tional banks.

The de­bate over whether Greece will re­struc­ture its pub­lic debt, what form this may take and when, ap­pears to have stolen the limelight from an­other im­por­tant is­sue: the strug­gle of a good part of the pri­vate sec­tor.

Al­though part of the pri­vate sec­tor has been able to flour­ish due to its as­so­ci­a­tion with the largely in­ef­fi­cient pub­lic sec­tor and is there­fore now pay­ing the con­se­quences, the lo­cal econ­omy has re­lied heav­ily on the rest of the pri­vate sec­tor to keep on go­ing.

Faced with a steep drop in con­sumer de­mand along with heavy tax­a­tion and grow­ing dif­fi­cul­ties in se­cur­ing the nec­es­sary fund­ing from the lo­cal bank­ing sys­tem, a part of the healthy pri­vate sec­tor is show­ing signs of se­vere strain.

Since do­mes­tic con­sump­tion is pro­jected to re­main sub­dued for quite some time and for­eign de­mand is not suf­fi­cient to pick up the slack, the least these com­pa­nies need is less credit from their tra­di­tional fund­ing source, that is, the lo­cal banks.

This is, of course, the re­sult of the state’s in­abil­ity to con­vince the in­ter­na­tional mar­kets that the pub­lic debt is sus­tain­able un­der the cur­rent eco­nomic pol­icy pro­gram, as demon­strated by the record-high lev­els of Greek bond yield spreads over Ger­many and the large amounts paid by in­vestors to in­sure their Greek bond hold­ings against a mora­to­rium of pay­ments by the coun­try.

This has put the coun­try into a quar­an­tine by in­ter­na­tional mar­kets and lo­cal firms, and banks are not ex­cluded.

Banks have tried to re­place de­posit with­drawals with cheap short-term ECB (Euro­pean Cen­tral Bank) fund­ing with the help of state guar­an­tees.

How­ever, this is ob­vi­ously not enough to fund the healthy pri­vate sec­tor and the econ­omy in gen­eral.

More­over, it cre­ates an as­set-li­a­bil­ity ma­tu­rity mis­match for the banks since they have to fund mostly longer term loans to house­holds and com­pa­nies with loans up to three-months from the ECB.

In ad­di­tion, lo­cal banks are fully aware that they will have to grad­u­ally re­duce their de­pen­dency on ECB fund­ing down the road and will have to delever­age, mean­ing that the amount of new lend­ing will need to be less than ma­tur­ing loans.

It is, there­fore, very im­por­tant that credit flows to the pri­vate sec­tor and es­pe­cially to its healthy com­po­nent, are re­stored if the Greek econ­omy hopes to re- cover, and, by ex­ten­sion en­abling the state to re­pay its pub­lic debt.

Some think that the re­struc­tur­ing of the pub­lic debt may ac­com­plish this by mak­ing the debt sus­tain­able and open­ing up the mar­kets to the coun­try and its banks. How­ever, this is not as easy as it may first sound.

Any vol­un­tary form of debt re­struc­tur­ing – such as an ex­ten­sion of re­pay­ments on ex­ist­ing bonds by five or 10 years with or with­out a coupon rate cap to, let’s say, 3.5 per­cent com­pared to an es­ti­mated 4.9-5.0 per­cent at present – will not do it.

As we have ar­gued be­fore, only if the new bonds to be ex­changed for old bonds are col­lat­er­al­ized or credit en­hanced by a AAA-rated en­tity such as EFSF, could there be some chance of open­ing up the in­ter­bank repo mar­ket for lo­cal banks.

How­ever, it is not sure whether Greece’s EU part­ners will ac­cept some­thing like this since it is likely to bur­den their na­tional debt, mak­ing it po­lit­i­cally very dif­fi­cult.

A manda­tory form of hair­cut of 40 to 50 per­cent would have in­deed re­duced the debt-to-GDP ra­tio to lower lev­els that may be deemed sus­tain­able by the mar- kets. How­ever, on the one hand, Greece’s EU part­ners are not will­ing to ac­cept such a so­lu­tion and, on the other, it would have likely shut the coun­try out of the mar­kets for many years.

There­fore, any form of debt re­struc­tur­ing ex­cept the credit en­hanced so­lu­tion of “Brady bonds” will not help lo­cal banks ac­cess the mar­kets for fresh fund­ing. Even the “Brady bond” so­lu­tion of credit en­hanced bonds may be of lim­ited use for long-term is­suance by banks.

But the Greek econ­omy can­not wait for­ever so that nor­mal credit flows are re­stored. From this point of view, some ad­vo­cate that weaker banks be­come the sac­ri­fi­cial lambs in the sense that their share­hold­ers lose most of their money by es­sen­tially na­tion­al­iz­ing and then sell­ing cheap to large in­ter­na­tional banks.

This can be done if banks are in need of fresh cap­i­tal and ex­ist­ing share­hold­ers are not able to par­tic­i­pate in a share cap­i­tal in­crease. The bank or banks, ac­cord­ing to this ra­tio­nale, will end up at the Fi­nan­cial Sta­bil­ity Fa­cil­ity funded with 10 bil­lion eu­ros from the 110-bil­lion-euro loan.

Is is this the right so­lu­tion for get­ting the econ­omy jump­started?

It is ob­vi­ously wrong to “sac­ri­fice” pri­vate com­pa­nies in or­der to pre­serve a large and in­ef­fi­cient pub­lic sec­tor.

Even if they have made wrong choices in the past such as giv­ing loans to cus­tomers with poor credit for the mere pur­pose of en­hanc­ing their prof­its or/and buy­ing an ex­ces­sive amount of gov­ern­ment bonds, banks and their share­hold­ers do not de­serve this fate.

How­ever, since the po­lit­i­cal sys­tem seems un­able to pro­vide the right so­lu­tion of dras­ti­cally cut­ting back the pub­lic sec­tor, one may ar­gue that there seems no other so­lu­tion left to im­prove the credit con­di­tions in the broader econ­omy and help avoid a pro­longed re­ces­sion.

Not go­ing any­where fast:

The Greek econ­omy re­sem­bles an in­jured turtle, drag­ging its feet and in need of help. This seems harder to find for Greece than for the trou­bled an­i­mal, as the coun­try ap­pears iso­lated.

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