Gov’t must stop kick­ing the can down the road and im­ple­ment struc­tural re­forms

Athens risks end­ing up in a sud­den death in the event that the coun­try’s fi­nan­cial back­ers pull out

Kathimerini English - - Business & Finance - BY DIM­ITRIS KONTOGIANNIS

AGreece’s eco­nomic fate lies in the abil­ity of the gov­ern­ment to over­haul the large, un­pro­duc­tive pub­lic sec­tor and help the pri­vate sec­tor re­cover. Whether this is pos­si­ble re­mains to be seen but the po­lit­i­cal de­vel­op­ments in the last few days make one think twice whether this huge task can be car­ried out, but it is en­cour­ag­ing that some Euro­pean lead­ers fi­nally seem to un­der­stand how high the stakes are. Prime Min­is­ter Ge­orge Pa­pan­dreou de­cided last week to reshuf­fle the Cabi­net, ap­point­ing Evan­ge­los Venize­los, his main party ri­val, as fi­nance min­is­ter and re­quest­ing a vote of con­fi­dence from Par­lia­ment, which he is likely to get to­mor­row.

He may also see the medi­umterm strat­egy plan ap­proved by Par­lia­ment in the next cou­ple of weeks, se­cur­ing the fifth in­stall­ment of 12 bil­lion eu­ros from the Euro­pean Union and In­ter­na­tional Mon­e­tary Fund pack­age, and per­haps see the EU lead­ers ap­prove a sec­ond aid pack­age next month to calm the mar­kets.

Un­doubt­edly, the chaotic po­lit­i­cal sit­u­a­tion in Greece last week and the neg­a­tive re­ac­tion of the mar­kets made more EU lead­ers re­al­ize how big the stakes are since it made clear the ex­tended dam­age the con­ta­gion from any disor­derly de­fault would have caused to eu­ro­zone, other in­dus­tri­al­ized economies, many emerg­ing mar­kets and the in­ter­na­tional fi­nan­cial sys­tem.

So it comes as no sur­prise that Ger­many dropped calls for a manda­tory bond ex­change that would most likely lead credit rat­ing agen­cies to de­clare Greece in de­fault, open­ing the way for a sec­ond aid pack­age.

It should be noted, how­ever, that press re­ports putting the new fi­nan­cial pack­age at 100 bil­lion eu­ros or more are partly mis­lead­ing. This is be­cause the ini­tial res­cue pack­age is 110 bil­lion eu­ros and Greece will have an­other 45 bil­lion eu­ros to get as­sum­ing the next tranche of 12 bil­lion eu­ros is fully dis­bursed in July.

Greece’s bor­row­ing needs are es­ti­mated at be­tween 137 and 140 bil­lion eu­ros un­til mid-2014 so the coun­try will need an ad­di­tional amount of 92 to 95 bil­lion eu­ros to fully cover its es­ti­mated needs by then.

Ac­cord­ing to avail­able in­for­ma­tion, pri­vate sec­tor par­tic­i­pa­tion in the form of a vol­un­tary rollover of debt could be be­tween 25 and 35 bil­lion eu­ros over this pe­riod. In ad­di­tion, Greece will com­mit some 30 bil­lion eu­ros from pri­va­ti­za­tion pro­ceeds and the de­vel­op­ment of pub­lic prop­erty. The to­tal from these two sources is es­ti­mated at be­tween 55 and 65 bil­lion eu­ros. This leaves some 40 to 37 bil­lion eu­ros for the EU and the IMF to fill in which is not re­ally such a big amount as­sum­ing the coun­try sticks to its prom­ises.

In other words, the sec­ond aid pack­age is not in re­al­ity as big as one as­sumes when one hears about 100 to 140 bil­lion eu­ros for the rea­sons we ex­plained above.

To put it in con­trast one has to con­sider the cost of not bail­ing out Greece and other pe­riph­eral coun­tries if nec­es­sary. Ac­cord­ing to some cal­cu­la­tions by Credit Suisse, the cost of bail­ing out pe­riph­eral eu­ro­zone amounts to about 200 bil­lion eu­ros needed to bring the pub­lic debt-to-GDP ra- tio down to 100 per­cent.

This com­pares fa­vor­ably with the di­rect cost of leav­ing them on their own which is es­ti­mated at some 500 bil­lion eu­ros or more. The cal­cu­la­tion is based on the as­sump­tion that core Europe holds 800 bil­lion eu­ros of as­sets in pe­riph­eral Europe and there will be hair­cut of 50 per­cent. It also takes into ac­count the Euro­pean Cen­tral Bank’s gov­ern­ment bond hold­ings of 75 bil­lion eu­ros and a por­tion of the ECB’s repo-ing of pe­riph­eral debt.

How­ever, this should not dis­tract any­body’s at­ten­tion from the need for Greece to tackle the root of its prob­lem which is the pub­lic sec­tor. It is re­ally strange for a coun­try fac­ing such a grave debt cri­sis to spend half of its out­put on pre­serv­ing such a huge pub­lic sec­tor. It is noted that gen­eral gov­ern­ment spend­ing amounts to about 50 per­cent of GDP in Greece.

So it is not re­ally sur­pris­ing that many an­a­lysts and bankers think Greece could re­ally strike a chord with the mar­kets if it had a gov­ern­ment de­ter­mined to pro­duce spend­ing cuts equal to 10 bil­lion eu­ros ac­com­pa­nied by se­lec­tive tax cuts to en­cour­age in­vest­ments by the pri­vate sec­tor this year.

This cold-tur­key ap­proach could have caused more pain in the short term but could have helped the econ­omy re­cover faster, es­pe­cially if it was ac­com­pa­nied by open­ing up tens of pro­fes­sions to competition by lift­ing bar­ri­ers to en­try and se­lec­tive pri­va­ti­za­tions.

Of course this re­quires do­ing away with un­nec­es­sary pub­lic sec­tor en­ti­ties and sig­nif­i­cant cuts in the pay­roll of the pub­lic sec­tor which the cur­rent gov­ern­ment and per­haps the other main­stream po­lit­i­cal par­ties are clearly un­will­ing to do.

How­ever, econ­o­mists who have ex­pe­ri­ence from other sov­er­eign debt crises in the past say the lesser-pain ap­proach taken to­day by Greece pro­longs the re­ces­sion, mak­ing aus­ter­ity pro­grams less so­cially and po­lit­i­cally ac­cept­able in the end.

More­over, this grad­ual ap­proach which amounts to kick­ing the can down the road as long as the coun­try does not im­ple­ment the nec­es­sary struc­tural re­forms may end up in a sud­den death when the fi­nan­cial back­ers pull out.

Un­doubt­edly, Greece missed an op­por­tu­nity last week to form a na­tional unity gov­ern­ment and pur­sue more ag­gres­sively a re­form agenda at the same time it sought greater aid from the EU in the form of struc­tural funds and loans and changed the com­po­si­tion of its fis­cal pol­icy in fa­vor of spend­ing cuts to meet the bud­get deficit tar­gets.

The new gov­ern­ment can do bet­ter than its pre­de­ces­sor in eco­nomic pol­icy for­mu­la­tion and ex­e­cu­tion but it un­for­tu­nately looks weaker from a po­lit­i­cal point of view and this is not an en­cour­ag­ing sign.

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