Greece for Sale, or Maybe Not

by Nicole Gelinas

European leaders said Sunday night that they’ll take another few weeks to figure out what to do about Greece. Will they use the delay wisely? One sentence in this New York Times piece hints at “no”:

Europe’s finance ministers unexpectedly put off approval early Monday of the next installment of aid to debt-laden Greece, delaying the decision until July and demanding that the Greek Parliament first approve spending cuts and financial reforms that include a large-scale privatization program.

A “large-scale privatization program” can’t help Greece’s finances. 

Europe wants Greece to sell things like the state lottery, highways, and utilities so that Greece has some cash to pay for government services and debt.

If Greece were in good fiscal health, this suggestion would be okay, with some caveats. Selling off an asset like a lottery, which produces steady cash every year, for the sole purpose of obtaining a one-time windfall is not a good idea. Plus, privatization is hard. If a government isn’t competent or honest enough to run the sale right, it can end up handing over valuable assets to crony capitalists at a loss to the taxpayer. 

Those are academic considerations, though — because selling assets to address Greece’s untenable sovereign-debt problem is never going to work.

Here’s why.

Investors who purchase Greek assets presumably want to be paid back, through the income that the assets generate. But in this case, a hidden (well, not-so-hidden) currency risk lurks that could diminish that income. 

Sure, investors would buy Greece’s assets in euros, probably using borrowed euros to do so. Greeks buy lottery tickets and pay to use highways in euros. The currency matches . . . right?

But there’s a real risk that two years from now, Greeks won’t be buying their lottery tickets or paying for road use in euros. If Greece leaves the common currency, its citizens would pay for goods and services in a new currency, and it likely wouldn’t be worth enough to cover an investment made in euros. 

Right now, potential asset buyers face a difficult time in evaluating this risk. Lenders would levy a penalty interest rate on any borrowed money for asset purchases, likely higher than on Greek’s existing bonds. Buyers would have to take that interest expense into account. That factor, plus buyers’ desire for a high return for themselves for incurring high risk, would keep purchase prices low. 

Buyers could forgo debt, of course. But it’s cheap borrowed money that makes the global capital markets go ’round right now. Any bidder paying without debt would pay much less than would a bidder playing with someone else’s money.

Maybe Europe could “solve” this problem by prodding its banks to lend cheaply to potential buyers of Greece’s assets. But European banks already have enough exposure to Greek debt. Greek taxpayers then, would get the shaft on their government’s sales. 

Selling assets is something that Greece should look into after it’s resolved its debt problem — not the other way around.

It’s hard to determine which explanation is more worrisome:

  • that Europe’s financial wizards don’t understand that this sticking point would inevitably arise in a “large-scale privatization”;
  • that they do understand it, but figure that Greece won’t figure it out or won’t care; or
  • that Europe will use any flimsy delaying tactic, even though its ministers know it won’t work, to avoid making an unpalatable decision. 

— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal. 

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