Sunday, March 27, 2011

Greece’s Privatization Agenda in Comparative Perspective

In the past, I noted that it was good for Greece to have ambitious privatization targets and that the government’s initial targets of raising €5-€7 billion through privatizations were timid given Greece’s own history (see here). Now, in its most review of Greece’s program, the IMF compared Greece’s privatization challenge with the experience of other countries, noting that the target for Greece to raise €50 billion from asset sales “would be at the high end of the pace that other countries have in the past managed to adhere to.” The table below provides more information.

The table examines five episodes of large privatizations: Peru, Estonia, Argentina, Hungary and Greece. Each privatization effort was a multi-year affair, ranging from 4 years (Peru) to 8 years (Hungary). These countries were able to raise annual proceeds of anywhere from 1.8% of GDP to as high as 4% of GDP, for a cumulative effect of anywhere from 11.1% to 32% of GDP. By contrast, says the IMF, Greece’s target would entail a five-year effort to raise 4% of GDP in annual proceeds and 20% of average GDP. In other words, hard but doable.

One obvious problem with this analysis is that the data set is very narrow: it looks at only five episodes, all of which took place in the 1990s (the paper it is drawing from was written in 2000). To put a little more context to Greece’s current predicament, I enlarged the analysis by looking at privatization proceeds in 23 European countries since 1981. The result is 390 annual observations of privatization proceeds as a share of GDP (see below for details on my approach). This analysis reveals several important conclusions:

- On average, countries were able to raise 1.08% of GDP through privatizations.
- Around half (47%) of the 390 observations involved privatizations where countries raised over 0.5% of GDP; in those cases, proceeds averaged 1.78% of GDP.
- Around a quarter (26%) of the 390 observations involved privatizations where countries raised over 1% of GDP; in those cases, proceeds averaged 2.51% of GDP.
- Around 18% of the observations involved countries that were experiencing a recession.
- Only 4.4% of the observations (17) involved countries that were able to raise over 4% of GDP annually through privatizations.

In other words, the enlarged analysis supports the IMF’s initial conclusion that what Greece needs to do is at the high end of what other countries have accomplished. However, when examined in the context of “how many countries have actually accomplished this” the evidence suggests that Greece will be part of a very small circle of European countries to have accomplished such massive privatization programs. Even so, even a more modest target of 2%-3% of GDP should be attainable.

- From the Privatization Barometer, I took every privatization from 1980 to 2009. The database includes information on 23 European countries.
- From the IMF World Economic Outlook, I took current GDP in US dollars.
- For every year, I estimated a share of privatization proceeds by merely dividing one by the other. 
- In theory, there could be 667 observations (23 countries x 29 years). In reality, there are 397 observations, meaning that the countries in question performed no privatizations in the other years. There are, however, 7 observations where we have privatization proceeds but no GDP estimates, chiefly for former Eastern European countries where the GDP numbers for the early 1990s are non-existent. So we have 390 observations in total.

Monday, March 14, 2011

Greece’s Loan Extension Makes Sense

Greece was able to secure the concessions it had wanted on its EU loan; so far, the details suggest that (a) Greece was able to extend the maturity from 3 to 7.5 years and (b) it was able to drop the interest by 100 basis points (1 percentage point). In the past, I have said that I considered such an extension to be a no brainer, noting that, “if no extension comes, Greece is almost sure to default and might as well give up on the program now” (see here). In this post, I want to look at what Greece has accomplished and why it matters.

The first thing to understand is that the loans from the Europeans and from the IMF are quite distinct. The IMF loan is priced at ~3.5%, although the actual interest is market-driven plus a surcharge (see here). The IMF staff reviews show that Greece would repay its loan by 2018 and the assumed interest rates shown on the annual disbursements amount to ~3.6% percent.

The EU loan is different. The terms of the loan are laid out in a European Commission Paper (here): “The loans are priced with a view to providing an incentive to return to market-based financing as soon as feasible. They carry a variable interest rate, calculated as the three-month Euribor rate plus a charge of 300 basis points. For amounts outstanding for more than three years, the charge rises to 400 basis points. To cover operational costs, a one-off service fee of 50 basis points is also charged for each drawing.”

Since late 2010, Euribor has averaged a little over 1% - so the interest for Greece is that 1% plus 300 basis points (4%), plus a one-off service fee, plus an escalation after the third year of repayment. Given the payments from the troika are made until April 2013, and assuming that the repayment trigger is similar to the IMF loan (3.5 years after first disbursement), Greece would start paying back the EU in October 2013 and amortize the loan over three years (October 2016). With €80 billion to pay back, that’s quite a burden for a three-year period.

Truth be told, the numbers are a bit murky and often contradictory. Yet I think the graph below – which includes some of my own calculations – gives a good enough picture of what Greece’s repayment schedule would look like (this is a bit different that the schedule I published in the past, in part due to more precision on the EU loans). Just to pay back the IMF and EU, Greece would need to devote 15% of GDP in 2014 and 2015 - clearly a very high number. 
The new deal does two things: it lowers the interest rate, although it is not clear whether the 100 basis point jump remains after year three (so is the new interest rate Euribor+200 and then Euribor+300?). Greece has also extended the repayment period from 3 to 7.5 years. The blue line shows the new total repayment schedule for both the EU and the IMF loans (the IMF loan having remained the same).

PM George Papandreou told the press that the new deal will save Greece €8 billion. Frankly, I have no idea how it will do this. Even on a nominal basis, the higher remaining principal and the lower interest almost offset each other – so the interest payments for the first three years are fairly similar. What is different of course is the principal – Greece has to pay just as much money, except it will pay it later and with interest. Do not get me wrong: this is a good deal for Greece and an essential one at that. It is not a deal that will save Greece money, but it is an essential deal to alleviate pressure on the key years 2014 and 2015 when Greece will be expected to rely more and more on the market to refinance debt.

Saturday, March 12, 2011

Debt is a Symptom, not the Disease for Greece

Is debt Greece's biggest problem? At first glance, this seems like a silly question. No mention of Greece in the international press these days comes without the word debt lurking close by. Greek-style is to debt crisis what French-style is to surrender - the two phrases are inseparable. And yet, thinking about Greece along a singular axis - the ability to repay and reduce debt - is too narrow-minded. As the European Union steps up pressure on Greece to accelerate its debt reduction schedule, it should remember that there is more at stake that merely avoiding default. In fact, debt is a symptom that reflects Greece's underlying political and economic weaknesses - it is to resolving these weaknesses, not just paying down debt, that policy ought to focus on.

Think about the following schematic of Greece's current situation. There are broadly speaking four possible outcomes for Greece: (a) the country fails to make significant reforms and defaults on its debt; (b) the country fails to make significant reforms but manages to avoid default as a result of more EU support with new loans and lower interest payments, or of easing of global financing conditions, etc.; (c) the country makes significant reforms but time runs out and it ends up defaulting on its debt; (d) the country makes significant reforms and avoids default.

There are at least two observations to make about these four outcomes: First, it is obvious that outcome (d) is the best of the four and outcome (a) is the worst, at least among those who have not shorted Greek bonds. Yet from a third-party perspective, it is not clear whether (b) or (c) is better. For the European Union, at least in the short to medium term, outcome (b) is preferable since the main problem for Europe is to avoid the run on debt that would result from any one Euro member collapsing. Limiting contagion is Europe's immediate goal.

For Greeks, whether (b) or (c) is preferable depends on who you ask. Those Greeks who have benefited from the status quo (or the status quo ante) would prefer to see their privileges maintained as much as possible. For them, if the inconvenience of default could be avoided without changing how the country really works, this would be ideal. Public sector employees, several unions and professions in "closed" sectors (limited competition) fall into that category.

The constituency that would prefer (c) to (b) is more limited. In the sense, these are the people who have either not benefited from the system or who are fed up by its shortcomings. These are the Greeks you can find in London, Boston and Brussels; the group includes youth and others who have been disenchanted by the lack of meritocracy and the dearth of opportunities; Greeks who think in national versus parochial interest are in this camp.

The second observation to make about the outcomes is that while reform and the avoidance of default are correlated, they are not the same thing. In other words, while reform should help the country avoid default, it does not necessarily do so. Think about some extreme instances: say for example, that Greece decides to have a fire sale and manages to raise one or two hundred billion Euros by selling state property. By all measures, the infusion of cash would lower, if not eliminate, the chance of default. But this outcome entails no real political or economic reform.

On the other extreme is a case where Greece institutes a flat 20% tax on personal and corporate income. This policy could be stimulating in the long-run, boosting investment and lessening tax evasion by simplifying the tax code. But the short-term effect on government revenues would be disastrous. Greece's odds of default would multiply, and the country is unlikely to survive unscathed to see the long-term effects of such policy.

Obviously, these are extreme cases. For the most part, there is a virtuous cycle between reform and avoiding default: introducing competition, restricting the role of the state, enforcing tax laws, curbing corruption - all these are measures that deliver short- and long-term benefits. But the idea that reform and the avoidance of default is not the same thing is important to bear in mind, primarily because reform these days is intricately linked to pressure from abroad. Without the troika looking over the government's shoulder, the reform agenda would at best be shrunk, and at worst dropped altogether.

This is Greece's fundamental issue: outside help is focused on the avoidance of default, whether with or without reforms (outcomes b or d). But for Greece, the best outcome is to make the country a better place to live; if default can be avoided along the way, so much better (outcomes c and d). And while everyone can more or less agree on the measures that would bring Greece towards (d) it is important to assess carefully whether measures are engineered to improve Greece's chances to pay back debt only or whether they are meant to make Greece a better place in the long run. As much as possible, the task for the Greek government will be to convince the troika to implement measures that are based on a strategy that goes beyond merely "avoid default" and actually addresses the underlying causes that got Greece in this mess to begin with.

Monday, March 07, 2011

Reform Fatigue and the Vision Deficit in Greece

Readers of this blog know that I am generally an optimist about Greece. Not necessarily of the country's odds to avoid default, but of the reform agenda more broadly. I have been heartened, for example, that fewer subjects seem to be taboo these days; that there is finally an effort to account for how the state spends money; and that the government has refused to back down in the face of protests.

Yet my optimism is weakening. The problem is that the government cannot seem to move beyond crisis management towards offering a compelling vision for the country. The inability to do so hinders the prospects for change. The government is obsessed with avoiding default; it should be obsessed, instead, with creating a better Greece.

The way to think about Greece right now is of a country at three overlapping crossroads. First is the European crossroads, where Greece wants (a) to secure an extension to the maturity of its loan from the troika, preferably with a lower interest rate and an ability to buy back debt, and (b) to obtain some promise that come 2013, EU help will not be contingent on a partial default. This front, however, is more pan-European than Greek, and so Greece's fate rests on a broader European consensus.

The second crossroads is one of political unity. The "troika press conference" was a turning point in that regard. It made public a set of divisions within the cabinet that have since grown. The splits are too numerous to mention, but the very public dispute between Interior Minister Yannis Ragoussis and Defense Minister Evangelos Venizelos over the handling of the hunger-striking refugees at Villa Ipatia is only the latest manifestation of the breakdown of whatever unity existed before.

The third crossroads is one of political will. There are two issues here. The first and most obvious is an unwillingness to fight powerful unions - GENOP-DEI (power sector union) comes vividly to mind. But second, and perhaps more worrisome, is a watering down of laws and/or a deferral of hard decisions. Laws are passed, but regulations on how the laws will be implemented are set to come later. Often, the implementation is nowhere to be seen months after a law passed.

There are several paths through these crossroads. In Europe, the terms of access to European help post 2013 are far from clear. Some extension to the loan makes sense, otherwise the aid package might as well cease tomorrow (see here). But what kind of deal will be struck remains to be seen. At home, a cabinet reshuffle looks likely, although there is also always talk of early elections (which the prime minister downplays, even though he was the one to raise the question seriously to begin with). Yet even here, the direction of the reshuffle is not clear.

These are battles, however, not the war itself. The government's problem is that it lacks a broad, compelling vision for the country. Political change can happen in two ways: politicians can either tap into a growing pie to extract concessions, or they rely on sufficient political weight on one side to overwhelm their opposition. In other words, politicians can either buy off opposing forces or squash them.

The political economy of Greece is such that the government cannot hope to use either of these two levers: it cannot promise patronage, and in fact, it promises a shrinking economy and a shrinking public sector; and it also has no political counterweight on which to rely in its battles against vested interests because it battling all vested interests at once.

Against such odds, the government needs a broader narrative to create a new coalition for change. It needs to articulate a direction for the country and to convince Greeks that at the end of this difficult decade awaits a better life. Avoiding default cannot be the sole or even the principal preoccupation of the Greek government.

The kind of vision I am talking about will call on people to take on responsibilities that they have eschewed in the past. It will ask them to be risk takers rather than seek shelter in government jobs. It will value the risk taker and the entrepreneur, the expert over the politically connected charlatan. It will expect more from the public than collective mediocrity. In other words, it will be very un-Greek. It will seek to create a Greece that has not existed for a very long time. But it will be a Greece that will be worth living in and worth waiting for.