Syntagma Square and the price of sovereign equity

Posted by Joseph Cotterill on Jun 20 14:50.

You appear to be violently protesting about privatisation and it is scaring markets, says the Eurogroup to the Greek people. Please privatise some more then. About €50bn before 2015 should do it.

Don’t ask us about actual implementation — that’s your job now.

Oh, and please hurry up and vote for Tarp, oh sorry austerity, before we withhold your next €12bn…

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Well, about that implementation, and the privatisation now being asked of Greece (a forced release of sovereign equity to solve this sovereign debt problem really). Few appear to have noticed the sheer historical scale of the Eurogroup’s request (ultimatum?):

That’s a chart from the last IMF staff review of the Greek bailout, completed in March, so it’s largely of historical value now that the original programme has been torn up. But you have to remember that the scale will get even bigger as Greece is pushed to privatise more under the new plan. Note the Estonian and Hungarian asset sales on the table.

So, if we’re talking about scale:

Greece’s original 2011-2015 privatisation agenda has already rivaled the great post-communist European sell-offs of the 1990s, in terms of the proportion of the economy being offloaded within a set period of time. Given that Greece’s economy is much larger than Hungary’s in 1991 and it will have to sell assets at a faster rate, we’d argue that the Greek privatisation effort is in fact going well beyond the 1990s dismantling of communism.

Last we heard, Greece was still an OECD member…

Actually it’s going beyond in a very special way — the proceeds of asset sales will go straight into cash-flow to pay off Greece’s debt, versus the big political and economic reasons at play in post-Soviet Europe. There’s a broader rationale to the asset sales of making the Greek economy more efficient, but that takes years to realise, while the constant eurozone official emphasis on quarterly privatisation receipt targets, debt sustainability analysis demanding x amount of cash to be raised, and so on tells you the overriding motive here.

Foreclosure on a country, as Yanis Varoufakis aptly put it earlier.

So wouldn’t it have been surprising if Greek citizens hadn’t been protesting about so much change in such a short time?

But strange in any case that the purpose and size (and asset composition) of Greece’s privatisation are at logger-heads…

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The cashflow problem

Obviously, even at this size — or rather because of this size — it’s not going to provide sufficient cash-flow to establish a sustainable debt. For example, it’s all too well known by now that two-thirds of the assets on offer comprise real estate, which will be harder to sell quickly than the company stakes that have mostly been touted so far. (Obviously it’s even more true of the €300bn that will be sold in the alternate reality inhabited by the ECB). Like John Dizard said, valuation is meaningless in this situation.

True, there’s plenty to sell in the one-third of assets comprising company stakes. Assuming there are natural buyers out there for taking telecoms, utilities, etc. in the middle of Europe’s deepest recession…

But also, many of the stakes are in Greek banks. It’s no longer a tail risk that banks would come back on to the sovereign balance sheet in the future anyway, via the need for capital, in the event of a write-down on their government bonds and/or depositor flight.

And oh yeah — the tax revenue shortfall immediately facing the state (say this year, the year for tax take) is far bigger than the privatisation proceeds that could be used to fill it.

So, this version of Greek sovereign equity is rubbish as cash-flow.

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Greek debt-for-equity swap, anyone?

The maddening thing is that there are lots of other reasons to release Greece’s sovereign ‘equity’ without linking it to the requirement of cash-flow for debt payments. There is basic lip service paid by eurozone officials these days to the idea that privatisation will also raise Greek growth by cleaning up the government’s balance sheet, but as we’ve said, it takes years. Possibly a decade even. Not good enough to secure cash now.

The thing is, a decade of rebuilding the Greek state is inevitable at this point, given how thoroughly everything has been trashed by recession, and the economy is going to (eventually) grow more as a result. It would take longer but it’s more likely to be democratically legitimate. Greece may be radically transformed (restructuring, out of the euro, whatever — in which case you might as well buy up real assets like sovereign equity as euro exit gets nearer) but it’s always possible, or likely even, that a decade from now Greece and the periphery will look better off than the highly-indebted euro core.

So isn’t growth not privatisation the real price of sovereign equity?

Argentina famously issued GDP warrants as part of its 2005 restructuring following the 2001 default. Detested at the time because of their ‘complexity’, the warrants posted huge returns from their link to growth and are pleasingly counter-cyclical (no growth, no payout) for a country that might struggle to pay off debts during a recession. They’ve been mooted for Ireland in the present crisis.

Is it too crazy to think that one day, instruments like these will be the true face of Greek sovereign equity? (Perhaps, given the sheer size of Greece’s economy, GDP warrants’ big moment.)

Not as crazy as the current privatisation plans, we think.

Related links:
Democracy vs Mythology: the battle in Syntagma Square – Sturdyblog
Is Poland selling itself for nothing? – FT Alphaville (2009)

This entry was posted by Joseph Cotterill on Monday, June 20th, 2011 at 14:50 and is filed under Capital markets. Tagged with , , , , , , .

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