European and IMF policies to deal with the Greek crisis have failed so far to calm financial markets despite enacting a strict austerity program and structural reforms. This is mainly due to the fact that they have underestimated the likelihood of insolvency, while EU policies to cope with the overall sovereign debt crisis have been reactive rather than proactive.
However, it looks as if EU and IMF officials have finally come to grips with reality and decided to partially address the issue of insolvency by asking Greece to raise at least 50 billion euros in proceeds from privatizations and other state asset sales during the 2011-2015 period. Is this feasible?
The representatives of the European Commission, the International Monetary Fund and the European Central Bank, the so-called troika, claimed during last Friday’s press conference that the targets of the MoU (memorandum) have been largely met so far. But, looking at the yield spread separating the Greek 10-year bond from bunds, one does not get this impression. The spreads are actually higher than they were back in March-April 2010, that is, before the program was put to work. Admittedly, the secondary market for Greek bonds is not liquid. However, we think, it is indicative of the market’s view.
Although the 10-year yield spread has come down considerably to around 800 basis points from 970 points in early January, it is still way off the kind of level Greece could borrow at in international markets without calling into question the sustainability of its public debt.
It is clear that even if the spread drops to 500 or even 400 basis points, it will be difficult for the troika or anybody else to convince the markets that Greece can borrow at these levels with its debt-to-GDP ratio projected over 150 percent in the next couple of years.
It is reminded that the economic program, which is financed by the 110-billion-euro EU/IMF loan, is structured in such a way so Greece can be fully funded by end-March 2011. Afterwards, the country should have been able to restore its credibility and access the bond markets.
Asked about it, the IMF’s chief representative, Poul Thomsen, said he has not yet lost hope but it looks increasingly unlikely to outsiders that Greece will be able to access wholesale markets at reasonable interest rates before April 2012 at best.
Perhaps things would have been different if the program had placed equal or even greater emphasis on reducing the stock of public debt and boosting the economy’s competitiveness from the start rather than raising all sorts of taxes, crowding out part of the private sector and hurting the real economy while attempting to close the budget hole.
Opening up the so-called closed professions and other markets, such as energy, should have been first on the troika’s agenda along with any deficit reduction plan, putting the brunt of the fiscal adjustment where it owed to be: the main beneficiary of Greece’s over-spending policies, that is, the public sector and related entities.
Still, it is encouraging that EU and IMF officials have finally understood that they cannot restore calm in markets unless they also address concerns about Greece’s insolvency by asking for proceeds from the privatization and sales of assets of at least 50 billion euros.
Of course, the stock of public debt could have also been reduced via other means, such as the plan to buy back Greek bonds held by the ECB at discount prices with long-term financing provided by the EFSF (European Financial Stability Facility). But this exercise would not have netted more than 12-13 billion euros at best which compares with a public debt stock estimated at over 370 billion euro in a few years’ time.
So, selling public property and other assets is a reasonable way to reduce public debt in a meaningful way and partly address the market’s concerns about insolvency rather than focus on providing liquidity via extending the maturity of the 110-billion-euro EU/IMF loan to reduce the roll-over risk of the Greek debt.
The assets sales will have to be transparent and this may be time-consuming when involving non-listed companies or/and public property. It may be easier to do it by selling equity stakes and even control in listed companies but even this will be an extremely difficult exercise in some cases, such as Public Power Company (PPC). On our calculations, the state could raise no more than 10 billion euros from selling its stake in all listed state-controlled companies even after allowing a sizeable premium of even 100 percent in most cases on today’s prices.
So, the big money should come from other areas such as selling public property. Even though some economists say public property is worth some 300 billion euros, this appears to be more wishful thinking than reality unless they include monuments such as the Acropolis on the list, which is not the case.
Moreover, people with deep knowledge of the workings of the Greek real estate market warn it will take some two years or more to register and then identify the property for sale because of legal complications. Of course, there are some public properties such as the land at the old Elliniko airport that may go first but even this will not be easy because of the vested interests, experts argue. Although no one knows what the public property available for sale is worth, some experts put it at less than 50 billion euros.
This makes the goal of raising 50 billion euros via state asset sales very difficult to attain in the 2011-2015 period given the bureaucratic and other hurdles expected. This is without considering the appetite for such investments at prices acceptable to any Greek government and the outcome of the debate on whether the state should first develop and then sell the property or just sell it outright at a lower price.
Whatever the problems, some involving even sovereignty, one should finally rejoice that the troika finally understands the importance of addressing insolvency in resolving the Greek debt crisis.