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Privatisations offer Greece the best way to avoid a bail-out Άρθρο του Ανωτέρου Διευθυντού Οικονομικών Μελετών της Τραπέζης Μιχαήλ Ε. Μασουράκη στην εφημερίδα “Financial Times” της 11 Φεβρουαρίου 2010

Greece does not need a bail-out. It needs more reform and, in the long run, nudging Greece in the right direction may be more important than providing short-term assistance. At the same time, there is no appetite, within either the Greek government or its eurozone partners, for Greece to resort to the International Monetary Fund. Care needs to be taken with any stand-by support deal to ensure the forces of reform are not weakened and that necessary changes are not derailed. Greeks seem to understand the advice of the ancient Greek proverb: “Along with calling on Athena for help, move also your hands!” I hope this is what they will do. Greece can avoid a bail-out if it demonstrates convincingly to the markets that the reforms in its stability programme will be implemented in a timely fashion. They also have to be big enough to ensure that the government meets its commitment to cut the budget deficit from 12.7 per cent of gross domestic product to 2.8 per cent by the end of 2012. But even at the end of the adjustment period the debt to GDP ratio will still stand at 113 per cent, which is no smaller than it was in 2009. To bring the debt to GDP ratio level below 100 per cent, not to mention the 60 per cent level required by the Maastricht treaty, will require further adjustment in the coming decade. So the reform process that starts in 2010 should be sufficiently robust to ensure that Greece also reduces its debt burden substantially. The reforms announced recently clearly have the potential to achieve this transformation. The downside risk, which has to be avoided at any cost, would be if the country went through a legislative process to translate these policy intentions into law, but came out with a product that failed to meet expectations. Then the markets would stop giving Greece the benefit of the doubt. That is why I think that the stability programme needs to be strengthened with more actions and initiatives. Clearly there is no need to worry about overshooting in structural reform. It is better to engage now in an all-out assault on rigidities and distortions that condemn the economy to belowpotential growth. Today’s opportunity to transform the economy for good should not be missed because the country may not have another chance. To speed up and enhance the content of the reforms in the stability plan, there needs to be a bold new privatisation programme to unleash the economy’s potential. Much could be gained from further privatising an economy that is probably the last “Soviet-style” economy in the developed world. To kill the Greek leviathan, one has to starve its gargantuan voracity for intervention in the economy. The state not only runs hospitals, universities and churches but also casinos, lotteries, hotels, marinas, ski resorts, trade fairs, exposition centres, ports, airports, water, electricity and natural gas companies, oil refineries, postal services, transport, banks and insurance companies. The state’s stake in listed companies on the Athens Stock Exchange is worth more than € 9bn ($12.3bn). Real estate holdings in major state property-management companies are conservatively valued at more than € 300bn and yet yield next to nothing. Privatisations, therefore, represent a huge untapped opportunity to

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re-establish discipline in public finances while, potentially, reducing public debt to more manageable levels. The stability programme refers to privatisations as a potential source of funds of € 2.5bn, or 1 per cent of GDP, in 2010, while doubling that amount over the period 2010-12. Clearly, given the magnitude of state control in the economy, these figures are suboptimal and would mainly be achieved by selling government stakes in state enterprises through the stock exchange. However, what is required is a complete severing of the umbilical cord between the state and the economy. If a wider privatisation programme were carried out, it has been estimated that the total raised could amount to as much as 10 percentage points of GDP – in other words equivalent to the amount by which the budget deficit needs to be cut between now and the end of 2012. Socialist governments in Greece have been credited in the past with the success of major stabilisation efforts. The current government has to outdo its predecessors because conditions are vastly different. The potential for success is clearly there. The task is Herculean for a government in a country with very low credibility. The way out therefore is to opt for marketorientated additional reforms so that stabilisation comes with improved growth potential that will make implementing the three-year stabilisation programme fail-proof. It is not just about fiscal consolidation. It is about farreaching reforms that will guarantee beyond doubt that the stability plan is implemented in a way that is credible for markets.

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the worst is over for Greece: after weeks of uncertainty and turmoil, the country is now well-Positioned for a robust recovery Άρθρο του Ανωτέρου Διευθυντού Οικονομικών Μελετών της Τραπέζης Μιχαήλ Ε. Μασουράκη στην εφημερίδα “The Wall Street Journal” της 11 Μαρτίου 2010

The specter of a Greek national bankruptcy is no longer haunting Europe. All the powers of Europe have entered into a holy alliance to exorcise this demon: the German Chancellor and French President, European Commissioner Olli Rehn and Central Banker Jürgen Stark—even French journalists and German bureaucrats. All the forces in the universe, in short, seem to have conspired to this effect. Greece is about to undergo one of the most demanding and long-overdue austerity-cum-reform treatments ever. Greece’s Stability Program, beefed up with additional measures of immediate effect, may at last become the vehicle to overhaul Greek governance and free the economy from the shackles of rent-seeking behavior. The markets, however, remain doubtful, and justifiably so. The walls of Jericho will not tumble down solely on the Greek government’s trumpeting its program. Unlike in the Bible, where faith alone did the trick, Greeks have to do all the hard work to translate policy commitments into laws. Recently, a big chunk of credibility-building measures, primarily involving wage cuts and tax hikes, were voted into law within days of announcement, surprising the markets positively and enabling the government to access the longterm debt market rather successfully, albeit at a spread of 320 basis points over 10-year German bunds. While initially the recession will deepen, private consumption and investment will eventually revive to compensate for the compression of demand due to fiscal consolidation. Market participants will increasingly anticipate the return to stability, pushing the economy into a self-sustaining recovery. This is what happened in Ireland and Denmark, as well as in Greece itself, in the second half of the 1980s and in the 1990s, respectively. The Greek economy’s recovery will be assisted by the global economic upturn as well as some pickup in domestic investment activity. Greek tourism can expect to experience a better season in 2010, with arrivals probably rising somewhat following a 7% decline last year. Shipping may also benefit in 2010 from a pick-up in world trade volumes, which are expected to rise by 6% after falling by 12% last year. Construction will remain weak. But 2010 is the fourth year of negative growth in residential investment. As a result, the excess housing stock has shrunk and, with confidence returning to the economy, even here an upturn may not be out of the question. Infrastructure investment, accounting for the other half of construction, will probably pick up somewhat starting in 2010 as there are € 24 billion of EU funds in the pipeline to be absorbed through 2015, only 3% of which have been used to date. This may offset to a certain extent the continuing weakness in business-equipment investment. Last but not least, private savings rose steeply in 2009 in line with the crisisrelated collapse of confidence and the dramatic surge in tax evasion. As disposable income will start bearing the brunt of extended wage cuts and tax increases, the beefed-up private savings will come in handy in cushioning the sharp reduction in living standards. Furthermore, this recovery may find fertile ground in Greece, which is not,

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despite its profligate public sector, an overleveraged economy on the whole. Private loans outstanding in Greece equal 106% of GDP, compared to a euro-zone average of 141% of GDP. Loans to households are equal to 50% of GDP (of which 34 percentage points’ worth are in mortgages). Therefore, Greek households and businesses don’t have as far to go in deleveraging as in some other countries. Moreover, Greek banks had virtually none of the toxic assets in their portfolios which plagued so many of their global peers. During the frothy years, Greek banks were instead busy expanding their commercial-banking franchises at home and elsewhere in southeastern Europe, in markets possessing substantial long-term potential. In doing so, they kept their heads above water, with use of wholesale markets for capital funding kept to a minimum. Loans outstanding as a percentage of deposits in the Greek banking sector, including operations outside the country, stands at just 113%, compared to an average of 136% in the euro zone and 211% in Spain. Throughout the crisis, Greek banks remained largely well capitalized, with adequate loss provisions and strong liquidity. They were in no way responsible for the ensuing fiscal crisis, as in many other countries. At present, they may suffer from the adverse consequences of the sovereign’s rating on their funding costs and the unfolding arid credit environment. But all in all, short of a calamity in the economy, Greek banks are in a good position to resume growth in their core markets when conditions start improving. Over the next several weeks and months, if concrete reform legislation comes on stream and markets become hesitantly convinced that fiscal consolidation may be adequately anchored, Greece then may have a fighting chance. The outlook may actually start to improve as investor, business and consumer confidence in the economy is gradually restored and the Greek-bashing can come to an end.

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lies, damned lies and … Greek debt dynamics Άρθρο του Ανωτέρου Διευθυντού Οικονομικών Μελετών της Τραπέζης Μιχαήλ Ε. Μασουράκη που εστάλη προς δημοσίευση στην εφημερίδα “Financial Times” και δεν δημοσιεύθηκε

I am willing to risk two predictions. The first is that Greece will adjust faster than expected. The second is that Greece will not default. One inescapably may be drawn to a default outcome if he assumes the worst of all possible worlds configuration about the future. One can build a straw man and then reach an obvious conclusion. Debt dynamics can become explosive if calculations are calibrated to reflect one’s negative assessment about the country’s underlying willingness and capacity to adjust. On the other hand, one can show that if the 2010 target is achieved, even if borrowing costs remain at stubbornly high levels and nominal GDP growth turns negative from 2011 onwards, then debt stabilization still occurs sometime towards the end of the decade. This of course requires that primary expenditure shrinks at rates similar to the 2010’s adjustment effort despite revenues declining in line with nominal GDP growth. But even this is nonsense of course because the country will default long before the debt is stabilized at the high level the model predicts. I do not know whether Greece’s political system can endure a sustained austerity program. But what I know is that there are enough measures in the pipeline to achieve the 2010 target. I further believe that this may set the stage, through structural reform and proper public sector management, for continuing adjustment in 2011-2012, restoring confidence in the economy and mitigating the impact of the consolidation on growth. I do not profess to know what will be the eventual outcome. I will choose to point instead to certain numbers that may help one in making up his mind about the future. First, the 2010 target is achievable. Measures taken and being implemented in 2010 are estimated at € 16 billion (while the program assumes a € 10 billion reduction in the primary deficit). Standard and Poor’s report of April 6, 2010 takes for granted that even with -4% real GDP growth in 2010, the budgetary target will be achieved. End of this story. Second, negative nominal GDP growth implies deflation. Deflation, given the import content of demand, is unlikely unless it is imported. Moreover, the adjustment will bring an increase in prices in almost everything under the influence of the government, from bus and train tickets to gasoline to medications to hospital care to electricity to natural gas to water etc., so as to reduce the deficits of state-controlled corporations or to raise tax revenue. In 2010, in particular, average inflation is expected at 3.5% (3.9% already in March). With respect to growth, disposable income will definitely decline steeply as a result of the consolidation but so will private savings, having shot up dramatically in 2009 due to unprecedented tax evasion, as people attempt to defend their living standards. Moreover, the adjustment will impact primarily on imports so, overall, real GDP will fall but not as fast as disposable income. In 2010, in particular, consensus estimates point to -2% to -3% real GDP growth. A week recovery may materialize from 2011 onwards if the consolidation is accompanied by a generous dose of privatization and market liberalization. Third, with respect to the adjustment in the primary balance, the potential to raise revenue and cut waste may be substantial following years of fiscal profligacy. Indicative of the predicament the authorities find themselves in is that the general government’s wage bill has doubled in the last decade and

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in 2008 it absorbed 57% of the total revenue vs. 40% in the EU16. Current revenue from 38.5% of GDP in 2008 is expected to rise to 41.7% of GDP in the Stability Program by 2012, when the Eurozone average stands at 44% of GDP. Most of the difference is accounted for by direct taxes, as Greece collects 7.7% of GDP vs. 12.2% in the EU16. Is bridging this gap so unrealistic given the major overhaul of the tax system attempted today in Greece? I do not think so. Moreover, current primary expenditure from 37.6% of GDP in 2008 (having surged from 32.9% of GDP in 2000) is expected in the Stability Program to return by 2012 back to the 2008 level from its one-off high of 42.2% of GDP in 2009, when the Eurozone average stands at 40% of GDP. Can such a return to trend be considered implausible? I do not think so. Greece has a bloated deficit because the public sector operated until recently with very little, if any, attention being paid to income constraints and cost recovery principles. And this is precisely why the deficits will come down now that proper management is being installed. A lot will depend on the government’s resolve to stay the course. But this time around there seems to be little or no alternative.

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http://www.statnews.gr/library/Privatisation