GREEK TRAGEDY
On Tuesday, February 16, 2010 16:08 by Sudip BandyopadhyayThe tragic events unfolding in Greece & it’s impact on EU as well as the entire world economy has confused the world capital markets. The call for bail out of Greek economy & public debt is getting shriller & shriller. However a careful scrutiny of the unfolding events clearly highlights that 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.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 over 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.
Today’s opportunity to transform the economy for good should not be missed as 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.The Greek 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 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 2010-2012. 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 was 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 market-orientated 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 far-reaching reforms that will guarantee beyond doubt that the stability plan is implemented in a way that is credible for markets.
