From Indecision to Fast-Track Privatisations: Can Greece Still do it?

Abstract

This paper explains how the collapse of growth after 2008, in combination with soaring public and external deficits, led to the escalation of Greek debt, while the government's delay in responding to the crisis increased the cost of borrowing and necessitated the bail-out agreement with the IMF and the European Union. One year later, Greece is struggling to harness fiscal deficits amidst a deep recession and rising social tension. Debt sustainability has not yet been ensured and another tranche of loans has been negotiated under new terms and conditions, including higher taxes and extensive privatisations of public companies and property. The paper discusses the main failures of the bail-out agreement and why the lack of growth so far has undermined efforts at stabilisation. As an alternative, the paper suggests that with a modest return to growth, combined with fast-track privatisations, the prospects of debt sustainability improve substantially. In light of the recent debate on the European Stability Mechanism, the paper suggests that the bail-out facility should avoid the debt seniority condition, so that Greece could return to normal market borrowing after 2013 without raising new fears of ‘haircuts’ on private sector obligations.

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“…notes 1 Among many others, see Giavazzi andPagano (1990 and1996), Alesina and Perotti (1997), Alesina and Ardagna (1998). For the case of Greece see Christodoulakis (1994). 2 In this form, the expression ignores the effect on debt due to seigniorage.…”

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“…This expansion also explains the increase of the privatization proceeds, although the value of the privatized assets has been decreased. Furthermore, privatizations affect but are also affected by the macro-economic environment that may facilitate or hinder investment activity, for instance debt sustainability and growth prospects (Christodoulakis, 2011). Thus, the relative stabilization of the Greek economy could provide an additional explanation for the increased privatization receipts.…”