Little time to turn tide, says BoG chief

Greece is fast running out of time to convince the eurozone and the markets that it can tackle its mammoth debt, Bank of Greece Governor Giorgos Provopoulos has warned in an interview with Sunday?s Kathimerini, adding that all political and social forces in the country need to help ensure that the necessary reforms are implemented.

Provopoulos tacitly criticizes the government, saying that delays and oversights in the implementation of the first Memorandum signed by Greece and its lenders — the European Union and the International Monetary Fund — last year harmed the country?s credibility and increased uncertainty.

The Bank of Greece governor also notes that the medium-term fiscal plan, set to be voted on in Parliament tomorrow, does not place enough emphasis on spending cuts. The burden on taxpayers, he adds, has reached its limit.

In reference to the opposition?s stance on the midterm agreement, Provopoulos implies that there are no easy solutions and to think so is delusional.

Was the Memorandum a failure, or was it simply not enforced?

The Memorandum staved off bankruptcy, which in April 2010 appeared unavoidable. However, certain fundamental terms have not been applied and this has significantly weakened its overall effectiveness. How can we say that something has failed when it was applied in bits and pieces? Without wanting to discount the positive steps that have been made, it is true that the public sector was not reduced as it should have been, privatizations have yet to get underway, useless and costly state organizations continue to operate, and some legislative initiatives have stayed on paper… The delays and oversights have harmed the country?s credibility, resulting in more uncertainty and skepticism from the markets and from our lenders. The hourglass is almost empty and this is why we need to act fast and emphatically.

Adopting a framework for fiscal adjustment is the first step, but it is not enough. We need to see the reform effort gain momentum so that it covers some of the lost ground and provides a push for the rest of the program.

Many argue that a program of intense fiscal discipline right now will sink the country deeper into a recession. Do you agree?

The crisis was the culmination of an unviable economic model. This model was based on the artificial extension of prosperity based on borrowing and it was broadly accepted by society. We are paying the price of past mistakes. Fiscal adjustment is not the main cause of a recession, though it will aggravate it in the short term. Nevertheless, it is a precondition for restoring confidence and setting growth on a healthy footing. You can?t achieve growth while maintaining a huge public deficit and debt, and at the same time experiencing a large deficit in competitiveness. We need to move away from the habits of the past that led to the deficit, the constant borrowing and statist policies that pushed us to the edge. We need to understand that there is no going back and that to succeed, we all need to put our backs into it: both political and social forces.

Decades of bad thinking

How did we ever come to be talking about unservicable debt?

For decades we believed that the state could be the engine of prosperity. So we fed it with funds, spending and wasting money in areas that often made no contribution to the greater good. For example, if in the period between 2000 and 2010, public sector hiring had been frozen and wage adjustments had not exceeded inflation, the percentage of debt to GDP would now be down by 31 points. Moreover, if the percentage of revenue from taxes to GDP had remained at the same levels as in 2000 instead of dropping, we would have seen a further reduction in the debt by 26 percentage points. In short, if a wiser fiscal policy had been applied over this 10-year period, the debt today as a percentage of GDP would be under 100 percent.

Do you think it is possible to rein in the recession and to boost Greece?s growth potential?

To achieve this, and stability, we need growth-boosting policies that do not compromise our fiscal targets. In October 2010, the Bank of Greece put forward an action plan for growth aimed at creating an environment that is more conducive to business. With state funds being in the state they?re in, we need to attract foreign investment. We have two significant opportunities for doing so. Privatizations can slash state expenditure and attract foreign investment. Also, we can make better use of European Union funds.

To achieve growth we need to shift from consumption to saving and investment, and from statism to competition, to entrepreneurial initiative. We also need to gain the competitive advantage. According to Bank of Greece data, our competitiveness has shrunk by some 20 percent in the overall period between 2000-2010.

Some say that restructuring is inevitable and may as well happen now. What would the consequences be?

I have said time and again that this is neither necessary nor desirable. Those who argue that bankruptcy is inevitable fail to consider the positive effects of a succesful midterm program. It could turn things around completely, it cxould improve the economy?s ability to bankroll itself and would attract funds. On top of boosting confidence, it would be possible to shift the dynamic of the debt dramatically. I am referring to the assets of the Greek state, worth over 300 billion euros, compared to the 340 billion euros of its debt. If a portion of these assets were put to use — to which the government has already committed itself — the debt could be reduced soon and significantly.

Restructuring is not desirable because it would have a devastating effect on society and on the economy. It would also raise impossible obstacles in our relationship with the European Union that would put the country?s future in the bloc in jeopardy.

Revenues vs taxes

The midterm program puts an equal share of the burden on increasing revenues and cutting spending. Do you agree with this ratio?

The Bank of Greece has been arguing since 2008 that the deficit reduction must be two-thirds based on spending cuts and one-third based on revenues from taxation. Fiscal policy so far has been mostly based on tax increases, and the midterm austerity strategy, in my opinion, does not place enough emphasis on the containment of spending. Piling more taxes on taxpayers has reached it limit. Moreover, if more were done to curb tax evasion, taxes could be reduced in certain areas to provide a boost to growth. I need to stress this point: Tackling tax evasion is absolutely crucial and it would also increase people?s sense of justice and their support for the austerity program.

Banks are not at risk with EFSF in place

-Greece?s banks are accused of failing to inject liquidity into the real economy, thus exacerbating the crisis.

First of all, and I repeat, any problems in liquidity are not the responsibility of the banking sector. Unlike what happened in most other countries, in Greece the problem was caused by the country?s poor fiscal condition. Since the early months of 2010, banks have been facing declining deposits and exclusion from foreign markets because of Greece?s downgrade by international rating agencies.

You recently set a series of strict measures regarding banks? capitalization. What will happen to banks that fail to draw capital from the markets?

Banks are not at risk. If there is need for a capital increase and a bank cannot borrow from the markets, it will turn to the European Financial Stability Facility, which was set up for exactly this reason. Of course, this is no excuse for not exploring alternative solutions.

The government?s has met with strong reaction from a large section of society that is firmly opposed to the Memorandum.

People seem to blame the current crisis on the social and political status quo of the past few years. There is little doubt that the failings of that system hindered the implementation of policies that would have averted the existing ills. That said, a large part of society tolerated and, in some cases, fed into these ills by demanding perks and opt-outs from an ever-expanding state. There is no going back to that state, and anyone who thinks that scrapping the Memorandum will allow us to do so, is making a big mistake. Moreover, the Memorandum is often viewed as the root-cause of the problem and not as a remedy. Politicians have failed to adequately explain that the Memorandum has soothed some of the symptoms.

Does that mean that people are poorly informed?

There certainly is a deficit in that respect. Some people have fostered illusions that consolidated the impression that there can be an easy way out of all this. But there isn?t. Maintaining these illusions will only prevent people from rallying behind a collective effort.