Securitization politics
The Greek conservative government has repeatedly stated it wants to pursue fiscal consolidation and bring the budget deficit below the 3 percent of GDP threshold in 2006 to abide by the EU Stability Pact without dealing a serious blow to economic growth. This goal, which has political implications since Greece is scheduled to hold general elections in the spring of 2008, may be in danger should Eurostat, the EU statistical service, not accept that proceeds from the securitization of past delinquent taxes be used to cut the budget deficit this year and next. What is at stake may not be just the course of the Greek economy but the shape of the political landscape ahead, since a rejection will make it imperative for the government to take painful measures, hurting its chances of winning the next general elections. So, a rejection by Eurostat may lead to unforeseen political developments in 2006. It is true that the Greek government was unpleasantly surprised last week to hear Joaquin Almunia, EU commissioner for economic and monetary issues, say it was okay to use securitization proceeds to help reduce the budget deficit to around 3.6 percent of GDP in 2005 from a revised 6.6 percent in 2004, but not for the year 2006. Although the final decision on the use of proceeds from securitization lies with Eurostat, «a professionally independent organization,» according to the commissioner, his statement took aback many in the government. Expected reaction It should not. Almunia did his job by coming out strongly in favor of structural rather than one-off measures to reduce the budget deficit in a sustainable way. This is his role after all. Of course, one may readily point out that there is an issue of inconsistency here because it is not normal to accept the deficit reducing measure for 2005 and not for 2006. we should remember that Greece wants to tap the securitization market for an amount estimated at between 3.5 and 4.5 billion euros this year and next. It had abandoned securitization after it was forced to restate its budget and public debt figures in 2002 to take into account Eurostat’s new guidelines. As a result, the budget deficit and public debt were augmented, since capital transfers, that is, subsidies to state-controlled corporations, were reclassified as expenditures and money collected from securitization, convertible bonds and privatization certificates were added back into the public debt. At the time, the conservatives had criticized their socialist predecessors for resorting to accounting tricks to window dress public finances. Aware of this, national economy officials respond by pointing out that there is a huge difference between securitizing future revenues and receivables from the Third Community Support Framework, the state lottery and other assets, put at some 3.7 billion euros, and securitizing past delinquent taxes. Undoubtedly, Almunia’s statement and position on the securitization issue complicates things but it does not erase the possibility that Greece is finally getting the green light from Eurostat to use the cash collected from the planned securitization to slash the budget deficits of 2005 and 2006. Of course, one may say that the vast revision of Greek public finances, following the fiscal audit initiated by the current government after it took power in the spring of 2004, has hurt its chances because it struck a sensitive chord at Eurostat. Favorable precedent Although this may finally turn out to be the case, one should not ignore that the EU statistical service allowed Portugal to use some 1.7 billion euros from the securitization of delinquent taxes in December 2003 to reduce its budget deficit. Things may have been complicated a bit because Portugal did not make the first coupon payment in time due to the change in government in February. Nevertheless, Greece is counting on that case and is following in Portugal’s footsteps, taking a step-by-step approach and continuing deliberations with Eurostat officials to ensure the final transaction contract is compatible with Eurostat regulations, including the transfer of risk away from the state. Assuming Greece gets the green light from Eurostat and succeeds in bringing the budget deficit to below 3.0 percent of GDP in 2006 and produces savings equal to 0.6 percent of GDP or greater from structural measures, few analysts believe the government will have any problem in convincing its EU partners that it honored its commitment under the Stability and Growth Pact. This is so even if Commissioner Almunia sticks to his guns and calls for the fiscal adjustment to rely exclusively on structural measures. Even so, the final outcome of this securitization saga may not be known before November or December. Assuming Eurostat allows Greece to count the proceeds, estimated at 1.0 percent of GDP this year, in the reduction of the deficit, the 2005 fiscal gap will turn out around 3.6 percent of GDP. This means the budget deficit can go down to 2.8 percent in 2006 even if it means relying exclusively on measures already presented in the 2006 draft budget. Tax rises ahead? If, on the other hand, Eurostat does not okay the transaction, then this year’s budget deficit will be around 4.6 percent of GDP, make it impossible to push it below 3.0 percent of GDP in 2006 without additional measures. Everybody can guess what these measures would be, starting with raising VAT and excise taxes on alcohol, tobacco and other goods and services as well as cutting additional budget outlays. Whatever they are, the measures will be restrictive and thus unpopular with the government’s constituency, with significant political cost. But these are exactly the circumstances that Greek politicians almost never fail to rise to, especially if their party has the upper hand. All in all, Eurostat’s decisions on securitization are likely to have political ramifications.
