The latest twist in the Greek crisis is the idea to generate 50 billion euros in resources for the Greek government by privatizing public assets. Nobody seriously believes that the full amount can be realized quickly enough to have an impact on the current situation. But the country?s European creditors still hope that enough privatization receipts can be mobilized within the next two years so that the funding of the government can be assured until the next German federal elections (which will take place in 2013).
The key point is that the selling of state assets to Greek residents will not bring much relief because any Greek resident wanting to buy state assets will have to find the funds somewhere. If Greek residents were to buy state assets for 50 billion euros by drawing on their bank accounts, the banks would have to refinance themselves by this amount. But how? They would either have to cut credit to other residents, or go to the central bank, i.e. the European Central Bank. The first route would cause the economy to tank (even more than it already has) and the second seems to be closed, given that the ECB has forced Greek banks to reduce their reliance on ECB financing.
This illustrates once more that the key problem for Greece is not so much the size of its government deficit and debt; rather, the problem arises from the fact that most of its debt is foreign debt and the country does not generate enough domestic savings. The government?s funding problems can be alleviated only if foreigners are willing to buy large amounts of local Greek assets. But acquiring a controlling stake in an enterprise or a large chunk of land is usually classified as foreign direct investment (FDI). And how much of this could Greece hope to attract over the next year or so?
The entire stock of existing FDI in Greece at present is about 25 billion euros. If this is the amount the country has been able to attract over its entire history, it is highly unlikely that foreigners will now suddenly start pouring billions into a country that is teetering on the brink of collapse, lacks both a functioning land registry and clear zoning rules, and is burdened with an opaque bureaucracy.
The most likely scenario is thus that there will be a lot of interest shown in the assets that the government puts up for sale, but that few foreigners will be willing to actually conclude a deal and pay in cash for assets that they could expect to be able to buy much more cheaply as the crisis rolls on.
The only way in which the country can realistically hope to generate substantial funds is by selling off foreign assets.
Greece?s only significant foreign assets are the foreign investments of its major banks. According to official statistics, their participation in Turkish and other foreign banks is worth a little less than ?20 billion. Of course, these assets belong to private institutions, but in a crisis, the fate of the banks and that of the government is inextricably linked.
Whether it makes sense to sell off valuable foreign assets to prop up government finances that might in any event be unsustainable is a different matter. It might well be in the short-term interest of its international creditors, but not necessarily in the interest of the country if it only postpones the day of reckoning.
* Daniel Gros is the director of the Center for European Policy Studies in Brussels.