Greece: On the Right Path, but Obstacles Remain

The lack of political will, combined with limited resources, means Greece’s government is failing to get to grips with its deficit and debt reduction program as efficiently as it would otherwise, thus undermining its credibility and perpetuating the risk of ultimate failure. The deficit situation has improved, but substantial efforts are needed to deal with the legacy of debt, which will continue rising for another decade. Given the deep economic contraction the country finds itself in it is perhaps all the more incredible that the general government deficit shrank to an estimated 6.8% of GDP last year from 9.4% in 2011, with both the cyclically-adjusted and structural deficits coming in below 2% of GDP. Still, the deficit remains very high and with the debt burden on an upward trajectory the government needs to implement tough fiscal austerity that may further delay economic recovery and exacerbate social instability.
The government has thus far relied on debt relief to moderate the expenditure burden and will continue to do so in future years, despite a promising bond repurchase program supported by the troika, comprising the European Commission, European Central Bank and the IMF. With little alternative private sector creditors were forced at the tail end of last year to assume large losses by selling back their bonds at vastly reduced values. The debt buy-back program was considered crucial to the disbursement of a tranche of the bailout loan, and to keep Greece on track to meet its debt target, even though it involved a higher cost of €11.2 billion ($14.9 billion), compared to the €10 billion ($13.3 billion) originally estimated.
To appease the troika, the government will aim for a primary budget surplus this year. However, it will also be required to address major concerns over policy execution, notably in terms of improving tax revenue (as explained above) and energizing a moribund privatization agenda, among other initiatives to convert Greece from a sclerotic state-led economic model to one more akin to its more competitive EU compatriots. But it is worth remembering the size of the task in hand. Greece’s debt burden will still be 124% of GDP in 2020, falling to 110% of GDP by 2022 if all goes well. The prospect of slippage is considerable given the imprecision of economic forecasts and the political risks involved. A further debt restructuring is inevitable and the possibility of Greece leaving the euro zone has not been eliminated entirely, even if it has receded.
Investors Wanted
The privatization agenda may prove the key to the government’s success over the coming years even if expectations of the amount of privatization revenue that can be raised have been lowered to €11 billion ($14.7 billion) from €19 billion ($25.4 billion), and the time-frame extended from 2015 to 2016. Less than €2 billion ($2.6 billion) has been raised to date, with just two deals taking place in 2012. One involved a €190 million ($254 billion) sell-off of the state lottery to a consortium of gaming companies led by OPAP in which the state still has a 34% share, but which will in turn also be sold this year. The second involved the sale of a state-owned shopping mall (also used as a media center during the 2004 Olympic Games) to Lamda Development, a privately-owned real estate firm for €81 million ($108.2 billion).
Overcoming the obstacles arising from trades unions and public opposition, given the likely job cuts and underlying resentment toward foreign ownership, remain fearsome obstacles, but the government is expected to press on regardless.  The PRS Group has previously noted the star-buys, including the prized islands if the government is desperate. Prime Minister Samaras is eying the cash-rich Gulf region in particular and is planning an imminent visit to Qatar, whose government has shown interest in Hellenic Defense Systems, an ammunitions manufacturer. The Qataris have been quietly building up some small-scale investments in Greece and appear to be interested in acquiring other, larger assets, in spite of public opposition that these may well be sold too cheaply amid some concerns over too much influence from an Arab state with scant regard for democracy.