ECONOMY

EU needs to be more constructive with Greek crisis

If 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 debt-to-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 growth-oriented 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 measures 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.