Privatizations Key to Greek Fortunes

By Simon Nixon

Moody’s decision to downgrade Greek government debt by another three notches to B1 is not a huge surprise. The rating agency says the move reflects the increasing risk of a sovereign debt restructuring amid concerns that structural reforms are not being implemented fast enough, tax receipts are rising too slowly and that there is uncertainty over the willingness of the euro zone to continue supporting Greece beyond 2013. That’s understandably angered the Greek government which points out it managed to reduce its budget deficit by 6% of GDP last year and increase tax revenues by 6% of GDP against a backdrop of GDP falling by 4.5%. It also protests that it’s unfair to penalize Greece for what might happen after 2013 when European leaders have yet to agree their reform program.
With Greek government 10-year bonds currently yielding 12.1%, Moody’s is hardly saying anything the market didn’t already work out a long time ago. Indeed, Moody’s central scenario that government bondholders won’t have to bear losses looks decidedly Polyanna-ish compared to the market’s long-standing assumption that a default is all but inevitable. Greece can at least console itself the Moody’s downgrade will have limited impact in the real world since the Greek government and banks continue to have access to emergency funding from the European Union, International Monetary Fund and European Central Bank. Even so, the speed of the Greek government’s fall from grace is something to behold: Evolution Securities points out that:

Greece has now been downgraded 9 notches in just 440 days by Moody’s from the starting point of A1. To put this into perspective the average number of days that a firm  remains at the A1 rating level is 1,647. If we add up all the days that a firm spends on average at the rating levels that Greece has travelled in this time the number we arrive at is 12,627.

One final thought: Moody’s still has Greek government bonds on negative watch and inevitably most of the attention will focus on the risks of further downgrades. But Moody’s says an upgrade is also possible too “if the pace of fiscal consolidation were to proceed more rapidly than Moody’s currently expects — for example, through the receipt of large amounts of privatization revenues, or if positive surprises to tax receipts were to reveal strong progress in the government’s fight against tax evasion”.
As I see it, the interesting point here is privatization revenues. We don’t hear nearly enough about privatization as a solution to Europe’s sovereign crisis. Outside of Spain, where there are plans to privatize the airport and lottery, there is very little talk around the markets or among bankers of major state asset sales. Yet by some estimates, the Greek state owns EUR270 billion of real estate alone, much of it yielding well below the 6% that the government must pay on its emergency loans, some of which could be sold to pay down debt. So far, the Greek government has seemed reluctant to consider selling this land and doesn’t even have a full inventory of what it owns. But with total public debt of EUR340 billion, even realizing a fraction of this estimated value could transform the government’s debt metrics.