Public debt, a real threat

Greek bankers do not appear to share the fears expressed by the media about the excessive debts of companies or households. Data, they say, do not give cause for worry. They point out, for instance, that corporate borrowing in the eurozone reaches 58 percent of gross domestic product, compared with 43 percent in Greece; mortgages are at 21 percent in Greece against 40 percent in the eurozone, and consumer loans at 11 percent of GDP in Greece against 16 percent in the eurozone. The bankers’ reaction is logical and completely justified, since retail banking accounts for most of their profits, thanks to interest rate spreads. There may be some losses, forcing them into high numbers of bad debts, but these are covered by high profits, too. Nevertheless, forward-thinking bankers make no secret of their worries. These mainly depend on the economy’s course, which in turn reflects government policy. I recently followed a debate among bankers on excessive borrowing through the columns of the financial newspaper Naftemporiki. Eurobank’s deputy CEO, Nikos Karamouzis, hit the nail on the head in saying «the issue of excessive debts depends on the economy’s growth prospects, the interest rate level and other factors. If Greece keeps its average growth rate above 4 percent annually, I would not see any problems with society’s excessive borrowing. I do not see a more general bad debt problem. What is crucial is the Greek economy: If its growth rate is good, we will have healthy banks and more profitable enterprises.» Steps to improvement How might the economy improve, then? First, the state must sort out its finances and reduce its participation in running companies, promoting a bold privatization program. Karamouzis said the state should not be involved in tourism, transport, communications and so on, using railway operator OSE as a typical example, whose debt is seven times its turnover. «We have never discussed in our society who benefits when we spend vast amounts of money on dozens of corporations that are inefficient and insufficient. You cannot have a corporation such as the Evangelismos hospital, with expenses of 350 million euros, not publishing a financial statement, lacking a financial director and a budget, and having no expense control. It’s high time the average citizen is relieved from the tormenting myths that the state can do everything,» wrote Karamouzis. Then, growth must rely on the private sector and not on public spending that supports loss-making state companies and interests. Economy and Finance Minister Giorgos Alogoskoufis stressed this week that «securing the future requires the operation of strong enterprises that can succeed independently, without the state’s help,» and called on citizens not to fear the changes aimed at reducing the size of the public sector. The risk, therefore, is not excessive household and corporate debt, but public debt. Undoubtedly some companies in the textile, information technology and construction sectors are deep in the red, or rather the competition has brought out their reduced competitiveness; yet if the economy goes well, banks will agree with them on arrangements that will save most of those firms. It is also true that certain households in the lower-income bracket have borrowed too much and are having problems with settling their debts; on the other hand, if the members of those households are not hit hard by costs or unemployment, they can hope that with some banking arrangements they can settle their debts gradually. But with public debt at 112 percent of GDP and with dozens of loss-making enterprises, banks cannot help. If these high debts undermine growth and lead the economy into recession, then banks will be in trouble as companies and households will be unable to service their debts. This is the vicious circle of excessive debts, which can only be broken by reducing the role of the state in the economy.

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