EU needs to be more con­struc­tive with Greek cri­sis, em­pha­size growth ini­tia­tives

Sale of gov­ern­ment as­sets at low prices could be off­set by buy­ing heav­ily dis­counted bonds

Kathimerini English - - Bussiness & Finance - BY DIM­ITRIS KONTOGIANNIS

AIf Greece wants to over­come its eco­nomic and pub­lic debt cri­sis it has no time to waste in im­ple­ment­ing its am­bi­tious pri­va­ti­za­tion and real es­tate de­vel­op­ment pro­gram. How­ever, this by it­self will have lim­ited suc­cess un­less the other eu­ro­zone coun­tries rec­og­nize it is in their best in­ter­est to en­cour­age the coun­try to re­turn to growth and a vir­tu­ous eco­nomic cy­cle.

As we have pointed out in the past, there are ex­am­ples of highly in­debted eu­ro­zone coun­tries that man­aged to sig­nif­i­cantly re­duce their pub­lic debt-to-GDP ra­tios over time with­out re­sort­ing to any type of debt re­struc­tur­ing. Bel­gium started in 1993 with a debtto-GDP ra­tio of 141 per­cent and man­aged to lower it by over 50 per­cent­age points be­tween 1993 and 2007. Italy had a pub­lic debt equal to 132 per­cent of GDP in 1998 and brought it down by about 20 per­cent­age points by 2007.

Of course, both of those EU coun­tries have a much more vi­brant ex­port sec­tor than Greece and ben­e­fited from hav­ing their own cur­rency dur­ing the ad­just­ment pe­riod. A cri­sis mis­man­age­ment has made things much worse for Greece, whose start­ing point was worse and has nei­ther a large ex­port sec­tor nor a soft na­tional cur­rency to boost growth.

Given that a good num­ber of eu­ro­zone coun­tries and their banks are stake­hold­ers, one would ex­pect them to do their best via the Euro­pean Com­mis­sion and other in­sti­tu­tions to make up for the dif­fer­ence and help Greece re­turn to a growth path be­cause it would en­able the coun­try to pay back its debt.

How­ever, many high-level eu­ro­zone of­fi­cials are more busy think­ing out loud about what to do with the coun­try’s ris­ing debt bur­den and dis­cussing pub­licly whether they should pro­vide ad­di­tional fund­ing to the tune of 60 bil­lion eu­ros or more for 2012-2013 since it is ob­vi­ous Greece will not re­turn to the mar­kets by, rather than pro­mot­ing growthori­ented strate­gies.

In so do­ing they shoot them­selves in the foot by hurt­ing Greece’s growth prospects. More­over, they have al­ready partly con­trib­uted to the coun­try’s in­abil­ity to ac­cess world bond mar­kets by es­tab­lish­ing a per­ma­nent sta­bil­ity mech­a­nism (ESM) for in­debted coun­tries start­ing mid-2013, which has cre­ated dis­in­cen­tives for pri­vate in­vestors to buy bonds of suspect coun­tries like Greece.

Al­though it is true that it is their tax­pay­ers’ money that is at risk and there­fore they should be cau­tious, it is also true they make a profit out of this and part of the money is re­turned to their own banks, in­surance com­pa­nies and pen­sion funds. Of course, they risk los­ing much more by lend­ing to Greece if the lat­ter was to go un­der.

This ex­plains why some politi­cians and oth­ers in those coun­tries ad­vo­cate re­cap­i­tal­iz­ing their own banks if they suf­fer losses from their Greek bond hold­ings in case of re­struc­tur­ing rather than pro­vid­ing new funds to the coun­try. What they’re miss­ing – though not of course the more as­tute Amer­i­cans – is that they may end up pay­ing a much big­ger bill and put the euro pro­ject in dan­ger if Greece is al­lowed to fall be­cause the mar­kets will be­come more hes­i­tant in lend­ing to other coun­tries in the so-called pe­riph­ery as well.

Con­struc­tive ac­tion

In­stead of spend­ing too much time on all of the above, they should in­stead do some­thing more con­struc­tive. En­large and speed up EU trans­fers to the coun­try and help it ab­sorb the funds by pro­vid­ing know-how. It will be much eas­ier for any Greek gov­ern­ment to sell this type of as­sis­tance to its sus­pi­cious pub­lic rather than ask­ing for meas- ures that sur­ren­der sovereignty.

This is very im­por­tant be­cause it partly makes up for Greece’s rel­a­tively small but boom­ing ex­port prod­uct sec­tor at a time when a re­turn to eco­nomic growth should be a pri­or­ity.

It is no small sum if one takes into ac­count the 3.5 bil­lion euro of EU funds ear­marked for the coun­try this year and more than 3.7 bil­lion for next year.

If one adds much more than 1 bil­lion euro in cheap loans from the EIB (Euro­pean In­vest­ment Bank) and the troika in­sists that the gov­ern­ment cuts other forms of ex­pen­di­tures and not the Pub­lic In­vest­ment Bud­get’s to meet the bud­get deficit re­duc­tion goal, things may look brighter for Greece and its eu­ro­zone cred­i­tors af­ter all.

But Greece should also make good on its com­mit­ment to bring in some 50 bil­lion eu­ros in pri­va­ti­za­tion and real es­tate prop­erty de­vel­op­ment by 2015. There is no ex­cuse for the coun­try not to pro­ceed with pri­va­ti­za­tions even if this is not the best time to do so since as­set prices are de­pressed.

Prob­lems, so­lu­tions

It is un­der­stood that the rul­ing so­cial­ist party has a prob­lem with this since most of the trade unions in the greater pub­lic sec­tor are made up of its mem­bers and oth­ers from left­ist par­ties. It be­comes even more dif­fi­cult for Premier Ge­orge Pa­pan­dreou since they helped him win the party lead­er­ship a few years ago, but as some other party mem­bers point out, this is not a nor­mal time.

It is also un­der­stood that some cabi­net mem­bers may be afraid of be­ing ac­cused of sell­ing off pub­lic as­sets too cheaply in a few years from now and end up in a court. This is a hur­dle that has to be re­moved in­sti­tu­tion­ally with the con­sent of both ma­jor po­lit­i­cal par­ties since both PASOK and New Democ­racy agree in prin­ci­ple on pri­va­ti­za­tions.

It will be pleas­ant sur­prise if Greece found buy­ers will­ing to pay a pre-cri­sis price for ac­quir­ing state as­sets but un­for­tu­nately, most likely this will not be the case. So, there is in­deed the risk of some­body be­ing ac­cused later on for fire sales.

How­ever, one should bear in mind that that this ob­sta­cle can be par­tially over­come if the pro­ceeds go di­rectly into Greek debt buy­backs. Greek bonds trade at deep dis­counts to their face value and there­fore this off­sets to a large ex­tent the lower price from as­set sales. More­over, pri­va­ti­za­tions cou­pled with di­rect in­vest­ments should fur­ther en­hance the cause by pro­mot­ing growth.

All-in-all, the EU should be­come more con­struc­tive in ap­proach­ing the Greek cri­sis by em­pha­siz­ing growth-ori­ented ini­tia­tives and en­cour­ag­ing the Greeks to re­move ob­sta­cles in or­der to push for­ward their pri­va­ti­za­tion and pub­lic prop­erty de­vel­op­ment agenda. The short sighted poli­cies of of­fer­ing more pain are likely to back­fire by hurt­ing both Greece and their own in­ter­ests and bring about a more dis­rup­tive debt re­struc­tur­ing down the road.

Black and na­tional flags are sus­pended out­side OTE tele­com’s head of­fices last week, as work­ers protested a gov­ern­ment de­ci­sion to re­duce its stake in the phone com­pany.

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