By: Constance Douris
Greece has implemented financial reforms, and now it is time to restructure Athens’ debt to allow its struggling economy to grow. Sustainable debt would increase investor confidence, improve the country’s credit rating, and play a significant role as to whether Athens reaches its 2017 budget targets. President Barack Obama will emphasize Greece’s need for debt relief during his visit to the country today.
The Greek government has demonstrated that it is committed to implementing reforms by revamping its pension system, setting fixed social security contributions and increasing tax rates. Privatization of state assets has also occurred. The Public Power Corporation, Inc. (PPC), Greece’s state controlled power company, sold 24% of the country’s electricity grid operator to China for €320 million. China Cosco Holdings Co. purchased 51% of Greece’s largest port, Piraeus, earlier this year, and an agreement with PPC and China Machinery Engineering Corporation to build a €1 billion power plant in Greece has been signed.
Greece has transferred the control of public utilities, the state-run power and water companies, to an asset fund created by international creditors, called the Hellenic Company of Assets and Participations. The fund is also taking control of the state-owned subway operator in Athens, a military vehicle maker and a public property management fund. The Hellenic Company of Assets and Participations is led by an official chosen by creditors and Greece’s Finance Ministry will retain overall control. The fund will control public utilities and other assets for 99 years. Creditors believe that consolidating Athens’ assets under one umbrella will encourage privatization and speed up asset sales.
It is clear that Greece is cutting government expenses, implementing steep taxes and selling assets. Athens has remained faithful to its creditors’ demands and now needs to restructure its debt to allow its economy to grow. Greek officials hope that the second review will be completed in early December so that debt relief decisions can be made before Christmas. Some Eurozone countries have argued that discussions for debt relief are not due until Athens exits the bailout in 2018. This is ridiculous considering that a good portion of the bailout packages Greece has received over the years goes to servicing debt and not stimulating the economy.
Of the money received from the 2010 and 2012 bailout packages, only about 10 percent went to soften the blow of the 2008 financial crisis and fund reforms for Greece’s economy — the rest of the money went to pay debt and interest. More recently, of the €2.8 billion loan Athens received for implementing new reforms, €1.1 billion will be used for debt servicing and €1.7 billion will repay arrears owed to domestic contractors. Hence, bailout funds are recycling themselves and ballooning with interest.
The Greek economy has contracted by 25 percent in six years, and has an unemployment rate of about 23%, double the Eurozone’s average of 10.1%. The economy is expected to contract by .3% this year before growing by 2.7% in 2017. The International Monetary Fund (IMF), which has yet to commit to Greece’s third bailout program, and U.S. Treasury Secretary Jack Lew have stated that Greece’s debt burden is unsustainable without some debt relief such as an extended grace period for 20 years and a haircut on the total debt owed.
Sustainable debt would increase investor confidence and allow Greece to be included in the European Central Bank’s quantitative easing program which it has been excluded from due to its low credit rating. Greece would like to partially enter bond markets in 2017 and fully return by 2018. Restructuring the debt would improve the country’s credit rating, boost the credibility of the economy and play a significant role as to whether Athens reaches its 2017 budget targets.
Germany should be the first to support restructuring Greece’s debt as it benefitted from one of the largest debt relief programs in history. After World War II Greece and about 20 other countries wrote off a large chunk of German loans and restructured the remaining debt by extending the repayment schedule and granting a lower interest rate. West Germany’s debt repayment schedule was linked to its ability to pay by tying repayment to its current and expected trade surpluses. Thus, Germany was free of difficult debt payments, trading partners were incentivized to buy German goods, and its economy was able to grow. Greece’s debt repayment should also be extended with a lower interest rate and linked to its surpluses to relieve the country from difficult debt payments.
As part of Greece’s third bailout package, Athens agreed to a budget surplus, excluding debt servicing costs, of 3.5% of economic output by 2018. Prime Minister Alexis Tsipras has called to renegotiate that target to a more realistic goal of about 1.5% to 2% to allow room to cut taxes and help the battered economy return to growth. The IMF has noted a 3.5% target surplus will be hard to achieve without debt relief and has stated that a budget surplus of more than 1.5% is not possible for coming years.
President Barack Obama is visiting Greece today to meet with President Prokopis Pavlopoulos and Prime Minister Tsipras. President Obama will reaffirm U.S. support for ongoing efforts to place the Greek economy on a sustainable path by supporting meaningful debt relief. America’s dedication to Greece’s economic recovery is expected as Athens has a long relationship of defending the West and is one of the few countries that surpasses the minimum 2% of gross domestic product spending on defense amongst North Atlantic Treaty Organization members. Not only is Greece located in a key geostrategic area to support U.S. and allied activities in Europe, Africa and the Middle East, it is also home to several NATO facilities, such as Naval Support Activity Souda Bay, NATO Maritime Interdiction Operational Training Center, NATO Missile Firing Installation, and NATO Naval Forces Sensor and Weapon Accuracy Check Sites, that the U.S. and allies depend on for logistical support and training.
Greece has honored it promises to its creditors by implementing economic reforms, and now debt relief must be provided to allow the Greek economy to grow. President Obama has chosen to support Greece’s need for debt restructuring because that is what is needed for the economy to return to prosperity. Not only is Greece dealing with economic struggles, but it is also on the front lines of several critical European issues: economic stability in the Eurozone, the immigration crisis, the threat from Islamic State of Iraq and the Levant and increased military activity in the eastern Mediterranean. Looking ahead, President-elect Donald Trump should follow Obama’s footsteps in providing support for Greece as it confronts economic hurdles and other challenges that could eventually affect America’s economy and safety.
Constance Douris is Vice President of the Lexington Institute. Her current research interests include ballistic-missile defense, nuclear strategy, European security, and the Greek financial crisis. @CVDouris
Image: U.S. Air Force