Country risk reduces sell-off prospects
The risk of Greece being ousted from the euro may have been limited following the Eurogroup’s decision to release long-awaited loans of 49.1 billion euros by the end of the first quarter next year, but a shortfall in projected privatization revenues by 2016 should not be ruled out. Although the goal for the proceeds has been set at more realistic levels for the 2013-2016 period, a miss seems likely as revenues from real estate asset sales and development, a core part of the privatization program, look set to disappoint.
Greece has collected less than 2 billion euros from privatization proceeds since the country sought an international bailout in May 2010, missing all annual targets set since then, including this year’s. In the latest mid-term fiscal framework spanning the 2013-2016 period, the minimum cumulative amount targeted has been set at 9.5 billion euros, eyeing a total of 50 billion euros beyond 2020, of which 25 billion is estimated to come from property assets.
The amount of 9.5 billion euros is very modest, to say the least, compared with the initial 50-billion-euro goal set to be reached by 2015 and even the downward revised target of 15 billion. Nevertheless, it is still tall if one takes into account that the country raised some 10 billion euros from the sale of public assets, concessions etc in the previous decade when nobody doubted Greece’s position in the eurozone, funding was ample and cheap, and the local economy grew at a fast clip.
Of course, politics and operatives linked to the ruling parties did their best to delay or even cancel various privatization projects in the last 12 years or so by dragging their feet or showing incompetence. This is not the case any longer as the intentions of the current leadership at the Hellenic Republic Assets Development Fund (TAIPED), the body responsible for privatizations, are under doubt.
However, other risks remain as the recent privatization tender for the state lotteries has shown. A consortium led by state-controlled OPAP submitted an improved financial offer of 190 million euros to win the tender for the operation of the lotteries in 12 years. The offer turned out to be much higher than the initial one, prompting US-Italian concern Lottomatica, a member of the consortium, reportedly to disagree and drop out. Analysts and others think the consortium would not have been able to improve its bid so much were it not for local banks providing the extra loans at a time when many healthy private companies are cash starved.
Of course, channeling money to the state via loans provided to state-controled entities, like OPAP, by local banks for the purpose of privatization is not anything new or unusual. Banks may be able to back these decisions on financial grounds, but a number of analysts are not convinced. The latter argue that such a practice undermines the private sector at a time when credit is scarce and highlight potential risks to the success of the privatization program if it is so heavilly dependent on local banks to provide the necessary credit.
The availability and cost of funding appears to be a big issue for all kinds of privatizations and especially real estate assets. Although potential investors may be willing to use equity to pay for the purchase of land, it is almost certain they will resort to loans to finance development. With many foreign banks nurturing huge losses from their Greek holdings, it is unlikely their credit committees will give the green light to finance such projects in Greece.
Local credit institutions may be more willing and able to provide funding after their recapitalization, but some bankers caution against exuberant expectations. They cite the tighter regulatory framework of Basel III, the tough macroeconomic environment and the drive to repay state capital and reduce their exposure to the eurosystem.
Of course, no investor can ignore the tail risk of a Greek exit, even though it has been reduced considerably after the Eurogroup’s decision to disburse the much-anticipated bailout funds to Greece. In this context, few investors would be delighted to have the Greek state as a tenant in a sale-and-lease deal, which may explain the insufficient demand for such transactions, at least so far. Even if investors feel more comfortable about this type of deal in coming years, prices should reflect the country’s risk, bringing in fewer revenues.
Moreover, prospective investors are expected to be less willing to make sizeable upfront payments in large-scale real estate development projects such as in the old Athens airport at Elliniko according to investment bankers. Instead, investors are expected to somehow tie payments to the performance of the medium- to long-term projects.
This is on top of legal and other issues pertinent to individual property assets and urban planning, requiring a lot of preparation and assessment before bringing them to the market. This limits the number of exploitable property assets, Greece can put on the block and therefore the privatization proceeds can collect.
All-in-all, the disbursement of the 49.1 billion euros by the eurozone and the reduction in the public debt, following the completion of the debt buyback, have eased concerns about a Greek euro exit. However, this may not be enough to avert missing the new, lower target for privatization proceeds in the 2013-2016 period, largely due to issues related to the state’s property assets.
