GREECE – Discovering The Road To Prosperity In a Difficult Debt Terrain

Posted on October 15, 2012. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , |


The gruesome reality of the ongoing European Crisis is that some countries in the EU including of Greece were living way beyond their means and in the last decade benefitted the most from the European Union idea without realizing that all the rise in the living standard and good times hasn’t been paid for. For example after Greece adopted Euro the public sector wages rose by over 50% during the 8 years period ( 1999 to 2007), which is by far the fastest rise in the Euro Zone.

As evident from the unfolding events of the past few years. There is no doubt that Greece was ill-prepared to cope with the global financial CRISIS and has thus seen its real GDP growth decline year-on-year since 2008. According to Eurostat, the real GDP Growth for Greece in 09 was -3.3%, for the financial year (FY) ending 10 was -3.5% and the projection for 2011 is -6.9% and for the year  2012 its around 3.8 – 4.4% . The human cost has been enormous. And the pain and sufferings of millions has gone from bad to worse.

Although people on the streets across Greece have vented their frustrations and anger continuously by rejecting the status quo. A large percentage of the population still wants to be in the European Union. The onus is on the politicians as well as the population to fully understand and appreciate the gravity of the situation. Greece should take this once in a life time opportunity to reconfigure its economy.

The rebalancing and reconfiguration of the economy is a process that will take time and will require all the parties with vested interest to work together without losing sight of the BIG PICTURE. The solution will come from an open and honest collaboration and each party delivering their side of the bargain.

Getting GREEK debt on a sustainable downward trajectory is KEY. And this will require the lenders as well the policy makers in Greece to agree on a clear road map outlining the debt reduction plan.

Based on various media reports the troika consisting of the IMF, the European Central Bank and the European Commission is believed to be working on a Greek debt sustainability analysis and the officials are trying to figuring out ways to bring down the huge debt burden on the country. It is estimated that under the current scenario Greece’s debt to GDP ratio target set by the troika of 120% (of GDP) by 2020 is beyond reach. The median forecast for the economy is to shrink by 3.8 % in the financial year 2013, which will obviously be its sixth consecutive year of declining growth putting the overall debt to GDP ratio to around 180%. This falls way short of the initial goal and is clearly unsustainable going forward.

The need of the hour is to work out a plan incorporating the ground realities that has a real chance of SUCCESS. And creating a sustainable debt reduction strategy will require exploring all the feasible OPTIONS.

Here are some IDEAS worth considering. The suggestions below covers the debt held by troika including of the bonds held by European Central Bank (ECB), the bilateral loans as well as the IMF loans.

  • Consider recapitalising the GREEK banks through European Stability Mechanism (ESM) as planned for Spain.
  • Look at converting a portion (around 25-30%) of the agreed Euro 48 billion loan from European Financial Stability Fund ( EFSF ) marked for the recapitalisation of the banks into equity. This could be managed through the Central Bank of Greece.
  • Consider extending the overall maturity of the loan facility by additional 2 – 3 years  with a grace period on the interest payment.
  • The European Central bank (ECB) should consider taking a hair cut on the bonds it bought from the secondary market as investors or agree on a debt swap extending the overall maturity of the bonds by at least 2 years. Rules defining ECB’s role are vague and unclear but the central bank should take the initiatives here.
  • The policy makers in the EU should consider extending the bilateral state loan to Greece in the amount of euro 53 billion (already provided) by another 2-3 years with a reasonable grace period.
  • Greek government should fast track the planned privatisation process expected to bring in euro 40-45 billion and use part of the proceeds to buy-back the existing debts especially the post restructured PSI bonds that are currently trading at around 22-28% of the par value.

The above measures should reduce the overall debt burden on the Greek economy which is just over euro 330 billion but it won’t be sufficient especially if there are no clear strategy to GROW the economy and fill the fiscal hole from the revenue side. This will require a close cooperation between the Greek Government and Brussels. The politicians in Athens will have to set and drive the AGENDA forward at war footing.

The Government will have to start implementing the structural reforms including of reforming the complicated tax laws, increase competitiveness and productivity by  identifying champion sectors that will drive growth forward providing employment and support them with right legislation and tax incentives, use part of the  privatisation proceeds to support SMEs funding requirement, encourage investment in the real estate and other struggling sectors by inviting the Non- EU nationals to invest in the Economy through various programs that may include providing tax incentives and resident permits, provide flat tax rate to new foreign companies especially the GREEK Diaspora living overseas and explore all the other feasible options.

The next 6 to 9 months will be critical for Greece and the country should use this   CRISIS as an opportunity to come together with a strong resolve and  mindset that it will get over the line. And there is a road that leads to PROSPERITY but discovering it in this difficult DEBT terrain will require patience, perseverance and a right strategy.

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