Tag Archives: Economy of Greece

Greece: Bloodbath & Beyond

This may very well be another case of wishful thinking. On the other hand – if these experts are right – there may be a light in the end of the tunnel for the people of Greece after all. This analysis is provided by three high-profiled London-professors and syndicated by http://www.eurointelligence.com. They conclude that a new government in Greece may be able to do what Papandreou never managed – create confidence in the nations economic recovery.

” If political forces miss this opportunity, they should be held individually and collectively accountable by the Greek population for the collapse of their financial sector, the destruction of productive forces, and the wealth reduction and re-distribution (from the poor to the rich) that inflation and a return to the Drachma would entail.” 

Michael G Jacobides/Richard Portes/Dimitri Vayanos  

“Time is running out fast for Greece. This is the last opportunity to use the crisis as an occasion to change the structure of the Greek economy and allow Greece to enter the growth path of which it is capable. A cross-party government should not have a narrow mandate on securing the restructuring deal; rather, it should seek consensus to engage in far-reaching reforms that no party alone would dare to initiate,” the three professors writes.

Well, the quote above is quite obvious…

However, the rest of the article, including arguments, suggestions and  proposals, are interesting.

Anyone involved in the current  “Greek Tragedy” should read this piece:

The dramatic political developments in Athens have focused international attention on Greece. Papandreou’s ill-fated initiative to hold a referendum was partly an effort to increase popular support for the bailout and reform package. A new interim government with a strong mandate to engage in far-reaching reforms could achieve exactly that.

That the biggest bailout plan in history has become unpopular among its supposed beneficiaries may seem paradoxical. But this is not only the result of a populist stance from the opposition and of lopsided coverage by the media.

It is also because the plan’s implementation, as run by the government and monitored by the Troika (IMF, EC, ECB), has focused disproportionately on fiscal targets, as opposed to structural reforms.

Over the last eighteen months, fiscal discipline has been limited to reducing capital and discretionary expenditure,  cutting public-sector wages uniformly with no relationship to productivity, and raising tax rates to unsustainable levels.

We have not seen real progress on tackling tax evasion or on a far-reaching rationalization of the public administration.

While there have been some steps in the right direction, effecting real change has been slow.  But deep institutional change is necessary for popular acceptance and hence success of debt relief, to avoid an eventual default and disastrous exit from the euro.

Greece must not waste this opportunity. Structural reforms, including the aggressive pursuit of tax offenders, would reduce the need for unpopular austerity measures.

More important, they would restore faith in the government by reducing the feeling of inequity and cutting waste, corruption and rents held by interest groups, whether in the private or public sector.

Creditors and the IMF should consider whether the proposed debt relief is sufficient for sustainability and growth.

The focus in Greece, however, should now change from fiscal targets and debt restructuring to operational restructuring.

Politically difficult but often economically evident decisions need to be made.

The debt overhang in Greece is the symptom and indeed consequence of the underlying inefficiencies of Greek public administration and of the current economic model. Without addressing the causes, any debt reprieve will surely be temporary.

Three weeks ago, we hosted a meeting at London Business School where former ministers and current MPs of both major parties met with senior policy makers, bankers, regulators and academics from Greece and abroad.

It is sobering to note that this was the first event of its kind, whether inside or outside Greece. Very positively, despite the range and diversity of the participants, a remarkable consensus emerged on the way forward.  

We are thus convinced that a set of bold structural reforms can be supported by many parties, if only they take the courageous step of severing their own ties to practices which led to the onset of the problem.

Our report, informed by the meeting, focuses on four key areas: tax evasion, public administration, privatizations, and the financial sector.

Reform in the public administration is essential for the better functioning of the state and hence for the success of all other reforms.

The main directions of reform are to make the public administration more independent from the politicians, while also introducing greater accountability and incentives.

In the area of tax collection, for example, lack of accountability and incentives have generated a highly inefficient and corrupt system, which strongly resists change.

  • We propose to abolish the current tax collection offices – which would result in minimal loss of tax revenue – and move tax assessment and collection to a new independent authority.
  • This authority should have an arm’s-length relationship with the Ministry of Finance, and its staff should be hired on limited-term contracts and be evaluated based on Key Performance Indicators (KPIs).Independent Authorities with  tight governance and accountability could be useful in other areas as well.
  • We propose three additional such authorities:  one charged with the overall monitoring of structural reforms, one on healthcare procurement (a big expenditure item, where waste is rife), and one on corruption reduction. These authorities may help jump-start the change effort throughout the Greek government and its associated institutions.
  • All authorities should be staffed by competent technocrats and be accountable to the Parliament as opposed to the government.
  • An additional measure, which would bring technocratic skills, continuity and accountability, would be to reinstate Permanent Undersecretary of State, appointed for periods longer than a parliamentary term, accountable to Parliament.
  • We argue that the privatization process has been hastily designed: targets are unrealistic and the mandate does not, as it should, include the increase in value of the assets for ultimate disposal. The resources of the Privatization Fund must increase, and its mandate should be the increase of long-term value of formerly state-owned assets.
  • We propose that the programme’s focus shift from immediate sales to a scheme supported by a moderate amount of debt financing using the assets as collateral. This would provide an incentive to the government to increase the value of assets to be sold, while also avoiding fire-sales.
  • We further point to the risk of increased political interference in banks as an unwanted side-effect of their recapitalization process. Such interference has been common in the past, and has harmed the corporate governance and efficiency of the affected banks, as well as their sound supervision.
  • We suggest ways to promote good corporate governance during the recapitalization process, and we emphasize the need to  strengthen financial supervision.

Time is running out fast for Greece. This is the last opportunity to use the crisis as an occasion to change the structure of the Greek economy and allow Greece to enter the growth path of which it is capable.

A cross-party government should not have a narrow mandate on securing the restructuring deal; rather, it should seek consensus to engage in far-reaching reforms that no party alone would dare to initiate.

Anything short of this will quickly lead to Greece being marginalized and expelled from the euro zone.

A caretaker government with a weak mandate, focusing on elections, will send the ultimate wrong message and risks losing the waning creditor and EU partner support.

It is thus critical to launch a concentrated effort now, and not just a caretaker government.

If political forces miss this opportunity, they should be held individually and collectively accountable by the Greek population for the collapse of their financial sector, the destruction of productive forces, and the wealth reduction and re-distribution (from the poor to the rich) that inflation and a return to the Drachma would entail.

Download: Greece Looking Ahead White Paper

Michael G Jacobides, holds the Sir Donald Gordon Chair for Innovation and Entrepreneurship.

Richard Portes  is Professor of Economics at the London Business.

Dimitri Vayanos is Professor of Finance at the London School of Economics and Political Science.

 

 

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Greece: Just Do It!

One might certainly wonder how long the stage managers in Brussels will let the Greek tragedy run, before they finally close down the show. It seems like the top leaders of EU are afraid of the consequences of a Greek default and a restructuring of the nations debt. But the consequences of doing nothing may be far worse.

“We therefore urgently need a thorough assessment of the systemic implications of a Greek debt restructuring.“

Guntram Wolff

As Guntram Wolff points out in a syndicated column by eurointelligence.com,  the opinions are divided whether or not a Greek debt restructuring would undermine the financial stability of the euro area . But, as Wolff also indicates, the current strategy of doing nothing may cause far worse problems.

In fact, no one can say for sure what will be the result of a Greek default and a restructuring of the nations debt.

But one thing is for sure; the longer the EU and IMF wait to come up with a solution, the longer we have to wait for our economy to recover.

And most important of all: we have to get all the facts regarding Greek debt on the table.

As this blogger has stressed a thousand times, market confidence will not return before a transparent financial system is in place.

Mr. Wolff makes an additional good point about this being a natural task for the  newly established European Systemic Risk Board (ESRB) to take on.

Here’s the full article:

Among the most vocal opponents of a restructuring, ECB’s board member Bini Smaghi has argued that a restructuring would severely undermine the stability of the Greek banking system and euro area financial stability as a whole.

He may be right.

Others, however, argue that a sovereign restructuring is manageable, pointing out to the low exposure of German and French banks to Greek debt.

The Greek banking system could even be restructured and taken over by foreign banks.

Moreover, they dismiss the idea that a restructuring would lead to contagion beyond the countries that are already under EU/IMF assistance. Hence they argue that this would not be comparable to a second “Lehman Brothers”.

Given this uncertainty in the assessment of what a restructuring of debt with private sector involvement means, European decision makers have so far erred on the side of caution, preferring to commit significant amounts of tax payers’ money instead.

However, the election success of the True Finns has shown that such a policy has limits.

We therefore urgently need a thorough assessment of the systemic implications of a Greek debt restructuring.

The ESRB is the institution uniquely placed to make such an assessment.

First, it has probably the best access to the kind of data needed to make such an assessment.

The ECB – providing a large part of the infrastructure of the ESRB – knows which banks use Greek bonds as collateral for the open market operations and should therefore have a good picture of exposure to Greek bonds.

The ECB should also have fairly detailed information on the interbank market, from which contagion across banks can be assessed.

Last but not least, the ESRB has the legal authority to request data from the national and European supervisors needed for such an assessment.

The assessment would obviously have to take into account the possible contagion effects.

Second, the ESRB is the European institution with the legal mandate to warn about systemic risk..”

A warning from the ESRB that a Greek debt restructuring undermines the stability of the financial system of the EU would enjoy great credibility since its General Board includes among its members central bank governors, national supervisors and the chairs of the European Supervisory Authorities.

To further increase the credibility of the warning, the ESRB could choose to publish its warning.

Publication would also help convincing voters that a bail-out is in their own best interest if, indeed, a systemic risk exists.

Conversely, in the absence of a warning from the ESRB, EU decision makers as well as voters should rightly assume that a restructuring would not constitute a systemic risk and would not undermine the financial stability of the euro area.

They could then confidently move to the task of involving the private sector in the restructuring.

Could the ESRB have a different opinion than the ECB’s current opposition against restructuring?

The ESRB is of course dominated by central bankers and might therefore be similarly risk averse as the ECB.

However, in the ESRB central bank governors of all 27 member states are present.

Already now, one can see substantial differences in the assessment of some of the central banks of the euro zone.

As regards the central banks outside the euro area, little is known to date as regards their opinion on the issue.

Moreover, one should not underestimate the importance of the other members of the board, including the non-voting members, who will voice their opinion.


At the end of the day, the decision will crucially depend on how convincing the analysis prepared by the ESRB staff will be.

Different degrees of risk aversion will only play a role if the analysis does not allow for a clear decision. In that case, the ESRB may opt to be risk averse, not least because it will fear to lose its reputation.

Whith respect to timing, the second half of 2011 would be the right time for the ESRB to undertake such an assessment.

This is important in particular for Greece.

Greece will have to return to the market on a large-scale in 2012.

If the market refuses to provide finance, Greece will either need a new program or it will need to reduce its debt burden through a restructuring.

Clearly, a decision will have to be made earlier to avoid further risks.

Guntram Wolff

A clear communication strategy would help mitigate short-term risks.

In the absence of a contagion warning, EU decision makers should move ahead with restructuring not to strain the financial stability of the euro area any further.

It is time to act for the ESRB.


By Guntram Wolff

Mr. Wolff is a scholar at Bruegel in Brussels.


Article syndicated by www.eurointelligence.com


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