Redefinition of debt may do good

Eurostat’s recent decision to include money raised via privatization certificates in the definition of the public debt, therefore prompting an upward revision of the country’s debt-to-GDP ratio, comes at a difficult time for the Greek government. Nevertheless, it should not be looked upon as another hurdle. Instead, it should be embraced as an opportunity to present a more realistic picture of public finances and chart a clear fiscal consolidation course based on public debt reduction. Finance Minister Nikos Christodoulakis said last week Greece’s debt-to-GDP ratio will be revised upward to 101.7 percent from 99.7 percent in 2001, following Eurostat’s decision to include the proceeds from privatization securities, known locally as «prometoha,» in the calculation of the general government debt. However, this figure may have to be revised upward again in a few months’ time if Eurostat rules that proceeds from securitization and convertible bonds should also be included in public debt. In Greece’s revised Stability and Growth Program, the general government-to-GDP ratio is projected to decline to 97.3 percent this year from 99.6 in 2001 and dip further to 94.4 percent in 2003 and 90 percent in 2004. The improved debt-to-GDP outlook is based on the assumption of satisfactory GDP growth rates and a rising budget surplus, estimated at 0.8 percent of GDP this year, 1.0 percent in 2003 and 1.2 percent in 2004, well above last year’s budget surplus of 0.1 percent. This, of course, should have come as no surprise to those closely following the developments on the public debt front. The European Commission had warned months ago that «developments in the government debt are persistently affected by financial operations, as these are partly not recorded in the budget, lack of transparency raises doubt about the quality of the budgetary adjustment.» Although nobody disputes Greece’s progress in putting its public finances in order, demonstrated by turning a huge budget deficit accounting for over 13 percent of GDP in early 1990s to an estimated tiny budget surplus in 2001, most analysts agree that this consolidation has been achieved on the back of declining interest payments, mainly thanks to the country’s successful EMU convergence drive, and rising tax revenues aided by a more efficient tax collection mechanism and faster GDP growth. They point out that little progress has been made on curtailing primary budget spending, deemed essential for fiscal consolidation in the long-run. The fact that Greece’s public debt continues to grow at a time its debt-to-GDP ratio is declining points to a stock-flow discrepancy in budget numbers, part of which can be explained by capital transfers to money-losing state corporations, which are basically subsidies matched by equity stakes, and partly by money raised through securitization, exchangeable bonds and privatization certificates. Bad as it may look, the upward revision of Greece’s public debt-to-GDP ratio may turn out to be a blessing in disguise for two reasons. First, it gives a more realistic picture of public finances and future debt dynamics which is very important to help policymakers design a more effective economic policy. However, the recent developments and more to come on the definition of public debt raise serious questions about the way economic policy was planned and carried out so far. Secondly, a more inclusive definition of public debt should put pressure on government officials to pursue a more aggressive policy on structural reforms, strengthening the economy’s growth foundations in the long-run. The latter should become more clear and necessary at a time that competitiveness considerations and mounting political pressures call for lower direct income and corporate taxes. With the government already contemplating an overhaul of the country’s tax system, which may lead to some revenue losses in the short-run, the need to privatize state-owned companies and deregulate markets becomes more apparent in order to cover the shortfall and arrest adverse debt dynamics. Faced with an unpleasant redefinition of the general government debt, an unwillingness to cut back on primary budget spending and a fragile Athens Stock Exchange, which helped plug in budget holes in the past thanks to the part-flotation of state-owned companies, the government has no option but to push forward with structural reforms. Although other forms of privatization may be more appropriate, the government should not rule out the use of privatization certificates, exchangeable bonds and securitization to attain its goal. It should, however, adhere to a single principle: Money raised via these means are earmarked for debt reduction. The upward revision of Greece’s public debt-to-GDP ratio does not surprise and should not be viewed solely in a negative way. By helping present a more realistic picture of the country’s debt, Eurostat may have done Greece and other EU countries a great service. It has raised awareness of the real dimensions of the debt problem, which, in turn, will help policymakers plan a more effective economic policy and show the need for structural reforms. Moreover, it has signaled to all EU countries that privatization certificates are OK as long as proceeds are used to retire public debt.