Greek Debt Restructuring is not the Answer--Economic Growth Is

3 July 2015 | Philip Ammerman

The recent debate over Greek debt restructuring is largely artificial and will do little to improve the actual economic environment in Greece. Here’s why:

Greece’s debt has already been restructured. This led to a small write-down of private sector debt in 2012, and more importantly, very long maturities (25 years+) and very low interest rates (0.7%) from the European Financial Stability Fund (EFSF). In practice, this means that in 2014, Greece had an effective interest rate of 1.7%: it paid € 5.57 billion in interest in the first three quarters last year (slightly more on a full-year basis). These interest costs are difficult but manageable.
High creditor costs. There are reports that the IMF has recommended a 30% principal haircut (I have not yet read the entire IMF report). Given that Greece’s debt is about € 314 billion today, this means a write-down of nearly € 105 billion, 80% of which is held by official creditors. This means an € 80 billion loss for Eurozone taxpayers. This is not small change, and I don't see that this financial loss is merited, particularly since the “saving” in terms of Greek interest costs would only be on the order of € 1.7 billion per year. This is hardly sufficient to compensate for the political consequences of such a write-down.
At least 30% of Greek GDP remains unreported. This means that there is significant fiscal headroom to be gained by simply collecting taxes efficiently and auditing individuals and companies. SYRIZA has made some good progress in this regard, but more is needed. Rather than re-hiring 550 cleaning women, SYRIZA should hire 550 forensic auditors, or simply outsource the function.
Government monopolies and private cartels. The Greek economy remains dominated by the dead hand of the state, as anyone who has had any dealings with the Greek tax authority or the Greek social security funds can attest. Licensing an investment in Greece—whether a building a house or building a hotel—is a nightmare of conflicting procedures that have to be obtained from multiple authorities. There is no excuse for such a system in Europe today: the only excuse is that maintaining it creates public sector employment and the necessity of paying bribes to “facilitate” licensing. What is particularly demoralizing is that this system affects everyone from a homeowner trying to renovate and rent a floor of his house, to a multinational corporation planning a multi-billion Euro investment in Greece. There are no exceptions.
Poor management: After the dead hand of the Greek state, the second greatest barrier to improving the economic situation is management in the private sector. Every investment I have worked on in Greece is affected by double book-keeping (lower profit for the taxman; hidden revenue for the owners); unclear strategy; over-valuation of assets; complex cross-holdings; the need to restate corporate accounts to international standards; over-centralisation by a single founder / manager; undeveloped management team; no systems approach to development; etc.

Therefore, I find the entire debate over debt relief at the present time wrong-headed, if not hypocritical. Greek Finance Minister Yanis Varoufakis, for instance, stated in an interview that the debt needed to be restructured so that investors would invest in Greece. This is disingenuous. Far more investors have seen their investments cancelled due to ideological hostility from SYRIZA than for any other reason

Some recent investments standing by in Greece that have been cancelled or idled include:

Eldorado Gold Mine at Skouries (2,000 employees; $ 450 million invested to date): although the Greek Council of State has twice approved the environmental permits of the mine, SYRIZA minister Panayiotis Lafazanis has revoked its license to continue development.

Hellenikon Airport Development (€7-10 billion investment): although a consortium led by Lamda Development won a privatisation tender last year, SYRIZA has cancelled or idled the project.

Regional Airports Lease (€1.2 billion initial investment): although a consortium led by Fraport won the tender last year, SYRIZA has attempted (and failed) to renegotiate the contract. This is strategic investment over time that would radically improve regional airports in Greece, increase employment, and provide massive revenue to the Greek state through a 28% EBITDA share.

Astir Privatisation (€ 1 billion+ investment): Although the project was won by a British investment fund in 2013, it was frozen in early 2015 due to very peculiar objections of the Council of State over environmental zoning of the development.

These are just a few examples of high profile projects: there are many more that are smaller in scale, but no less important.

These investments were not materially affected by the debt : GDP ratio. They were primarily affected by government regulation, or lack of proper regulation, and by political instability deliberately introduced by SYRIZA.

Right now, Greece has the following immediate economic priorities in the real, non-government economy. I list these in order of importance:

Only 3.5 million people in employment. No matter how much debt is “restructured”, only higher investments in the real economy, and higher net exports, can reverse the low employment rate. There is no way that any of the "social welfare" investments currently on the Greek books can be implemented with an employment rate this low.
Over 1.5 million employed and under-employed people. Again, new, real jobs are needed. Not make-believe European Social Fund traineeships that cannibalise existing work places. Certainly not a larger public sector with more cleaning ladies or school guards.
Higher salaries. This is the only way of assuring higher disposable income, and therefore higher consumption (an important driver of GDP growth), and therefore higher tax revenue through VAT and personal income taxes. Higher salaries will not come from increasing payrolls of pensioners or public sector staff, but from the private sector.
Untangling Greek bureaucracy: Greece is over-regulated, but most regulation is meaningless. It is mostly authorization-seeking that creates bribery or sinecures for low-level public sector staff, and protects oligarchies and monopolies at the higher end of the system. This needs to be urgently resolved.
A functioning justice system: Anyone who has had any experience with the Greek justice system understands that it is functioning extremely badly. Key issues, such as case law or jury selection, are sub-standard by nearly any judicial standard available. The back-log of cases and the deliberate delays introduced by lawyers makes it difficult or impossible to settle commercial, civil or criminal disputes.
A stable tax system: Successive Greek governments have taxed Greek companies and employees far too highly, with too many changes each year. This is a major barrier to official employment, and a major driver of black-market or grey-market transactions.

Let me close this article by reminding readers of the components of the expenditure approach to gross domestic product:

GDP = consumption + investment + government spending + net exports (exports – imports)

Consumption is household consumption. Government spending includes salaries and capital expenditure, but not social transfers (which is not considered value-adding, even though it does contribute to intermediate and final consumption—and has thus already been counted).

Given the basic structure of GDP and economic activity, it should be obvious that in Greece today:

Government spending remains high (this will be the subject of a separate article), mainly due to public sector wages and public sector pensions.

Consumption has been hit due to higher taxes, high unemployment, a low employment rate, continuing high prices and other issues.

Net exports would be higher, but there are a number of challenges including government bureaucracy in licensing exports; lack of working capital; lack of strategic planning; and small, technologically-primitive production units in Greece

Investments would be higher, but are being continually blocked by political interference and corruption.

SYRIZA makes the point that government expenditure should be switched from debt service costs (mainly interest costs) to social expenditure. This is a theoretically valid point, but it will do nothing to solve the six challenges I’ve listed above. The maximum gain from this would be € 1.7 billion per year which is simply irrelevant given the real challenges in the real economy. Greece cannot solve its low employment problem by expanding the public sector: there are no resources for it.

For me, there are four obvious economic priorities for Greece:

Crash-start an investment promotion programme and simplify licensing new investments. This should definitely include privatisations, structured so that the Greek state can share in the upside (e.g. through leases rather than outright sales, profit sharing, warrants, etc). There are no barriers to this that cannot be solved within Greece itself.
Simplify export licensing; develop national export / sectoral plans; allocate financial resources for this, preferably using European Bank for Reconstruction and Development, European Investment Bank, KfW, and other foreign funds with real expertise in the sector, and no political interference.
Focus government resources on improving and simplifying the tax and justice systems in parallel. This means switching staff into these areas, allocating budgets, providing higher salaries, using new technologies, etc.
Focus government and private resources on six high-growth potential industries: (a) tourism, (b) shipping, (c) information technology, (d) property development, (e) energy and minerals, and (f) high-value food processing and agriculture. This implies a pro-growth policy, enhanced training and start-up grants, a national promotion campaign; a national development policy; and internationalisation.

I believe that within 3 years, Greek GDP should start a growth track that would increase total GDP to an additional € 120 billion within 6-8 years. Added tax revenue would include at least € 18 billion more per year. A minimum of 750,000 places of employment would be created. The right policies for tourism alone would increase arrivals to 30 million per year very quickly.

Putting these policies into place would mean a GDP of at least € 300 billion and increasing employment to at least 4,250,000. Servicing Greek public debt would also be relatively easy. And in contrast to the state-led model of development we have seen in the past, this policy would be both sustainable and offer greater opportunities for innovation, entrepreneurship and real employment.

Finally, none of these priorities require Troika approval. They can be implemented immediately, assuming there was a government that understands the basic elements of private sector development, and can operate honestly and transparently. This last point is in fact the greatest barrier to implementation.

Philip Ammerman