30 November 2011

Portes et al: Greece - the way forward

After a period of intense political turmoil, Greece has converged on a coalition government tasked with implementing reforms. This column argues that Greece should now change from fiscal targets and debt restructuring to operational restructuring.

Authors: Michael G Jacobides, Richard Portes, Dimitri Vayanos

With Lucas Papademos’s popularity in recent polls exceeding 70 per cent, there is now an opportunity to address not only the symptoms of Greece’s malaise, the debt and its proposed restructuring, but also the underlying causes, the structural and administrative failures which have brought Greece to the brink of bankruptcy (European Commission Task Force for Greece  2011).

The authors propose three additional independent authorities with tight governance and accountability:  one on healthcare procurement, one charged with the overall monitoring of structural reforms, 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.

They propose additionally that the focus of the privatisation programme shift from immediate sales to a scheme supported by a moderate amount of debt financing using the assets as collateral. (To ensure that debt financing is kept at low levels, a minimum rating on the debt could be mandated.) This would not only help avoid fire-sales, but would also provide incentives to the government to help increase the value of assets to be sold. Indeed, as assets are sold, debt raised by the Privatisation Fund could be used to purchase government debt in the open market at low prices.

Finally, the authors point to the risk of increased political interference in banks as an unwanted side-effect of their recapitalisation 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. The recapitalisation of banks using public funds should not be viewed as an excuse for the government to regain control of the banking sector. This would be a big step backwards in the reform of the Greek economy. Indeed, state ownership of banks is harmful for productivity and growth.

The agency in charge of recapitalising the Greek banks is the Hellenic Financial Stability Fund. The fund should be able to withstand political pressures, and to implement the necessary changes in banks’ corporate governance. Since the fund’s mandate is likely to be no less than recapitalising the entire Greek banking sector, the fund should be given enough specialised resources, and receive expert support from European authorities. In particular, a new European-level institution with the mandate to exercise corporate governance in banks (which, for example, the European Banking Authority does not have) might be helpful in supporting and complementing the Hellenic fund in the recapitalisation process of Greek banks.

A related and fundamental concern is that financial supervision should be strengthened in Greece– as noted by a number of reviews. This applies to both the Bank of Greece, in charge of bank supervision, and to the Hellenic Capital Markets Commission in charge of capital markets supervision. 

The cross-party government 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 Greecebeing marginalised and expelled from the eurozone. 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 redistribution (from the poor to the rich) that inflation and a return to the drachma would entail.

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