PAUL B. KAZARIAN & GEORGE SERAFEIM *

How to turn around a country

COMMENT

TAGS: Economy

Change is hard. Especially trying to change an entire country and its public sector that consists of more than 650,000 employees and has an annual budget of about 80 billion euros. This is the case of Greece, once the fastest-growing eurozone country, which has experienced devastating value destruction in the past seven years because of bad management.

We have both been trying to change Greece for the past few years. Paul is one of the largest private holders of Greek government bonds and as a long-term investor has committed a significant amount of capital with a deep belief that the Greek economy can recover in the presence of professional management, and George is a professor at Harvard who specializes in long-term competitiveness and the winner of the inaugural Pericles Leadership Award established by the Hellenic-American Chamber of Commerce and presented by the Greek prime minister for creating value for the Hellenic Republic through professional management processes.

It is clear to both of us that the country needs professional management and the appointment of a executive turnaround manager to initiate the process of change. This person needs to be independent of political parties and to report directly to the prime minister.

What is his or her mandate? Twofold: a short-term one and a long-term one. In the short term, to bring yields of Greek government bonds down. Two-year Greek government bonds are still in the range of 8-9 percent when those of Portugal are close to 2 percent. There is no chance the Greek economy will recover if that gap does not close. The current yields are suffocating the Greek economy, limiting access to finance for nonfinancial corporations, financial institutions and, ultimately, households, and depressing real estate prices.

How will he or she do that? The first step is the production of a balance sheet for the public sector under internationally accepted accounting standards. We believe that the production of the balance sheet will have a tremendous effect on the economy. The balance sheet will show that the present value of Greek government net debt is just a fraction of the future face value that is being reported, showcasing that the true level of indebtedness of the country is much lower than other EU program countries (i.e. Portugal, Spain, Ireland). It will also increase transparency and help in the fight against corruption. Moreover, it will promote good management consistent with the well-known phrase “What gets measured gets managed.”

The second step is to relentlessly engage and communicate with the capital market ecosystem. First, educate credit rating agencies about the true level of debt in order to receive a better credit rating. Second, educate sovereign wealth funds in order to attract long-term investors that will make investments in Greece with a long horizon. As of now, most financial investments in Greece are dominated by distressed funds with short horizons. While they have a valuable role, providing liquidity, they cannot be the only foreign investors in Greece.

The publication of a preliminary balance sheet for the Greek government could be accomplished in 60 days and would have a tremendous positive effect on economy, an economic “super-boost.” Within the next six months it could lower yields on Greek government bonds by 300 basis points, which would lead to the creation of about 200,000 jobs within two years according to our analysis.

The long-term goal is to promote and institute the value of meritocracy in the country. Unfortunately, we still observe nepotism dominating the public sector. People are being appointed to key positions with little regard to skills and the potential of the appointee to create value. As a result, value is being destroyed.

Given that every successful turnaround starts with and depends on human capital, we recommend that to immediately start an economic super-boost the prime minister appoint an executive turnaround manager (ETM). The ETM appointment would show the world a commitment to a system of meritocratic appointments in key public sector positions such as general secretaries at various ministries.

Promoting meritocracy will take time and, indeed, be a far more difficult task than everything that we described above. We believe that an effective way of promoting meritocracy and eventually cultivating an environment of merit starts with the young people of Greece. In that capacity, we will launch a campaign to educate youngsters about the importance of accountability and transparency and how those can promote meritocracy.

The challenges of Greece are not unique. Indeed, we expect that the same challenges are present in other developed and emerging economics. Just take a look at Brazil or Turkey. They will also need a turnaround and an ETM.


* Paul B. Kazarian is founder, chairman and CEO of Japonica Partners, an entrepreneurial investment firm. George Serafeim is the Jakurski Family Associate Professor of Business Administration at Harvard Business School.

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