The thin red line

Last Friday, the troika (the International Monetary Fund, the European Commission and the European Central Bank) presented its overall assessment of Greece during its third quarter evaluation. The main conclusion was that the Growth and Stability Program continues to make progress toward its various fiscal, revenue generating and structural reform objectives.

However, they note that major reforms still need to be designed and implemented to build the critical mass necessary to firmly anchor fiscal sustainability and economic recovery in Greece. But, for the first time, a public controversy has erupted between the troika and the government of George Papandreou over what that means specifically. During last Friday?s press conference, members of the IMF, EU and ECB suggested that Greece recalibrate its assets. What does that mean in practice?

In contrast to past quarterly reviews, the troika focused on the asset side of Greece. What does the state own, how is it valued and what could be done with some of these assets? They did so in order to move away from the focus on the country?s debt dynamics and persistent restructuring discussions across Europe. Obviously the troika now has a rough estimate of what assets are being held by the Greek state relative to its public debt.

In their estimate, the volume is equivalent to roughly 300-billion-euros worth of assets, from which approximately 100 billion euros come from land and real estate valuations. In practical terms, they suggested that the government should aim to raise 50 billion euros from the privatization of state assets (including land and real estate) by 2015. This target is well above the original 3-billion-euro objective set out by the Papandreou government when it presented its privatization program back in mid-2010.

Putting a figure on asset sales and attaching a timetable during which this could be achieved was the first time that the troika provided a numerical recommendation to the government as regards privatization and revenue increases through asset sales.

The reaction from the Papandreou government was quick and sharp. «We do not take orders from the troika» (Papandreou) and «meddling in domestic economic affairs» (government spokesperson Giorgos Petalotis) were two of the official, and angry, reactions. Papandreou placed a call to Dominique Strauss-Kahn, the managing director of the IMF, underlining the urgency of the matter and his irritation at this kind of public intervention from the troika.

The sensitivity of the subject should not be underestimated in Washington, Brussels or Frankfurt. People in Greece do not have short memories. You will recall the arrogant suggestions by some German parliamentarians from the governing coalition in Berlin in mid-2010 that Greece should sell islands.

So, for the first time there is a manifest public disagreement with and government disapproval of the troika?s proposals. But this should not come as a surprise. As the implementation of the agreement with the troika moves into its next phase, i.e. from a focus on expenditure cuts to revenue increases and structural reforms, the issues on the agenda are going to become much more delicate, creating disagreements and possibly outright refusal among the parties and constituencies involved.

Just look at neighboring Romania and its fraught relationship with the IMF. Or the manner in which Prime Minister Viktor Orban from Hungary is currently challenging the policies and recommendations of the IMF.

In practical terms, it is not realistic to achieve asset sales in the range of 50 billion euros by 2015.

Given the circumstances in Greece, the sale of land and real estate would be difficult to move ahead with because the central government does not yet have a fully operational and transparent property registration system, or cadastre. Moreover, as the Vatopedi Monastery scandal has shown, asset sales (or swaps) involving land/real estate are subject to very controversial valuations and the influence of middlemen. It would be rather precarious to embark on a sustained sale of real estate assets now when the full implications of the Vatopedi scandal are still unknown.

I would also want to ask what the sales proceeds would be used for? Do you use them in order to invest in the real economy, infrastructure, higher education, innovation or green technology? Or do you use the additional revenue toward buying Greek public debt at depressed prices and thus bring down debt dynamics? In short, toward what end[s] do you want to use the additional revenue? Here the troika has kept silent. But these questions need to be answered.

Finally, I think that the troika/Papandreou disagreement is also a sign of the former pressing the latter to come up with a flagship achievement that can really catch the imagination of international capital markets and reassure observers that Greece is on a sustainable reform path.

Put otherwise, can the government come up with another Cosco/Chinese FDI project? Or do you deliver a major reform, e.g. regarding combating tax evasion, which sends a clear signal to market participants that Greece is capable of executing when the going gets tough? This public controversy is as much about the substance of going forward in terms of policy making as it is about shaping Greece?s narrative for market participants.

In my view, Papandreou and Finance Minister Giorgos Papaconstantinou would like to move forward. They are modernizers in their own right. In particular Papandreou, whose mission is essentially to undo most of his father’s achievements, including nationalizations.

But these issues have to be prepared inside the governing PASOK party and communicated accordingly with a coherent message to the wider public. Here the government was caught off guard by the specific proposals of the troika. It points to a lack of internal message discipline between troika and government modernizers as well as understanding where the ?thin red line? is drawn.

* Jens Bastian is a visiting fellow for the political economy of Southeast Europe at St Antony?s College, Oxford, UK, and a senior economic research fellow at the Hellenic Foundation for European and Foreign Policy (ELIAMEP) in Athens.

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