Crunch time for Greece

Today, Prime Minister George Papandreou sent a letter to Jean-Claude Juncker, President of the Eurogroup.  The letter is interesting for several reasons: it tries to force the eurozone governments into concerted action, it stresses that “Crunch time” has arrived, and finally it seems to invite bold and drastic action so long as the results are worthwhile.

More precisely, PM Papandreou seeks a sustainable debt level (read a lower debt level), the means to restart economic growth and access to the markets (liquidity).  Sensing that contagion to Italy and Spain would doom the eurozone and the EU, he demands an end to the “cacophony of voices and views”, reminds his peers that they face equally dire straits should their banks need to take big hits, and finally suggests that Greece will not make further sacrifices for the good of other nations unless other nations decisively step up to the plate.

What next?  The PM may be bluffing, but then he must have Plan B too.  I may be wrong, but I think that he wants a substantial debt reduction, and if this reduction is big enough, he doesn’t care whether private creditors are participating or not, or whether the debt restructuring constitutes an event of default or not.  As he sees it, that is the problem of the rest of the eurozone.  What is interesting in the PM’s letter is that he seems to lament more the “meager results” of the (French banks) plan than the fact it may trigger a selective default.
  

Some commentators have written that Argentina might be a model for Greece, i.e. a unilateral default.  I doubt it, as the 2002 default and subsequent 75% “haircut” proved very costly to Argentina.  I do think however that the 2009 prepackaged bankruptcyof General Motors could, and probably should, be.

For one, I don’t see the ECB and the creditors accepting a significant debt reduction voluntarily.  For another, the current handwringing reminds me of the months that preceded the GM bankruptcy and the dire warnings that the company could never recover from it.  Then as now, markets wanted two things: (1) avoiding chaos and (2) being presented with a realistic plan that would enable them to recover a reasonable share of their claims.  That is why they responded positively to the GM plan, even if it contained objectionable features.

So the pressure is on the eurozone to help Greece devise a pre-packaged default and restructuring.  PM Papandreou is calling on finance specialists to come up with a plan that “will work” and that politicians will then have to implement.  The trade-off proposed by Papandreou is pain for gain.

A restructuring would make the lower debt load sustainable, and would be a necessary condition for an economic restart.  But it would not be sufficient.  Having reduced debt by 20% to 25% via an exchange of old obligations for new ones sporting longer maturities and lower interest rates, Greece will need to do much more to improve productivity and encourage investments.

As I have written in this blog, I think that Greece will need to privatize at least €100 billions worth of state assets, bringing its ratio of public debt to GDP down to 70% to 80%.  It will also need to enact far-reaching reforms, many of which will be unpopular and difficult to implement.  In other words, privatization and reforms will take TIME and a mechanism will have to be devised to provide the liquidity that Greece needs by reassuring those that will supply it.  One possibility could be the creation of a privatization trust fund where the assets to be sold would be held for the benefit of the European supranational institutions that would provide liquidity to Greece.

The Chilean privatization program in the 1980s is, in my view, the best example to follow, and this for two basic reasons: it reestablished confidence and (2) it secured popular and political support; by selling financially healthy companies, the government could devise programs to empower many Chileans to share in the privatization promises.  As was the case in Chile, it will take time for Greece to clean up the finances of big companies and to negotiate, vote and implement new and improved labor, financing and economic frameworks.
 
Selling healthy companies makes it possible to empower citizens of modest means to buy into privatizations; if free markets and capitalism are so good, they should be tangibly so to millions of people.  In Chile, a significant share of key privatizations was ear-marked for mass participation (capitalismo popular); because the firms being sold were financially healthy, they could guarantee set minimum dividends for five years or so; these annual dividends were greater than the annual interest payments charged by banks on loans made to people for the express purpose of participating in specific privatizations.  The combination of financing, positive carry and stock appreciation proved very successful and should prove equally so in Greece.

We seem to be approaching the beginning of the end game in Greece.  The stakes have been raised high and restructuring is increasingly viewed as inevitable by all parties.  Rather than avoiding the inevitable, the eurozone needs to agree on a prepackaged exit where the immediate pain will be accepted in order to permit a recovery.  Euro governments and agencies also need to learn FAST that the only way to stop a crisis is to overtake it and apply overwhelming force. Sadly, what Mexico learned and did in the 1990s  has yet to register in European capitals.  It is a pity, a very expensive one.