Opinion
How To Solve The Greek Public Debt Problem
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Through targeted investments, Greece will increase GDP and tax revenue as well as reduce unemployment and the debt/GDP ratio.
By Nicholas Economides
In 2009, Greece faced three significant economic problems, a huge budget deficit, large sovereign debt, and the need for structural reforms to increase competition and productivity. In 2014, thanks to enormous sacrifices of the Greek people, the state budget has been balanced and Greece even has a primary surplus (before paying interest). Sovereign debt was reduced through the haircut of private bondholders, but remains large. Structural reforms were implemented in the labor market, and we wait for reforms in other sectors. Greece was successful in re-entering the world money markets after 4 years of exile by issuing 5-year bonds at 4.75% interest.
Nevertheless, life is still hard for the average citizen. Greece has 25% unemployment. It is imperative that we set as an immediate target the reduction of unemployment to 15% in two years. How can that be done? Only through investment. How and by whom? Despite the significant interest of large foreign investors such as China, many investors are waiting in the sidelines hoping for lower asset prices. This is quite natural during the crisis. But exactly the opposite happens during recovery – investors dash to buy assets before their prices increase.
Greece has not yet convinced investors that it is at a stage of recovery. How can it convince them? Thought public investment with money raised from sale of new bonds. Greece should issue, every year for 3-4 years, €5 billion per year of 5-year or 7-year bonds at an interest rate of 4-4.5% and put all the money raised in a “Development Fund.” Greece should ask the large European countries (Germany, France) to put €1 billion in total to the same fund, and have common governance. The Fund’s money should be invested in prioritized investment suggested by the Ministry of Development (that’s one of its functions). If the Fund is created as outlined, the best possible message will be given to private investors. And, besides the message, injecting 3% of GDP in the market every year will automatically accelerate the economy and will pressure private investors to invest immediately fearing that they will be forced to buy at higher prices very soon. The only hindrance to this plan may come from the IMF, which may argue that issuing bonds increases the debt and makes it unviable. Such a position would be mistaken.
Read full article as published in Greek Reporter
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Nicholas Economides is a Professor of Economics.
Nevertheless, life is still hard for the average citizen. Greece has 25% unemployment. It is imperative that we set as an immediate target the reduction of unemployment to 15% in two years. How can that be done? Only through investment. How and by whom? Despite the significant interest of large foreign investors such as China, many investors are waiting in the sidelines hoping for lower asset prices. This is quite natural during the crisis. But exactly the opposite happens during recovery – investors dash to buy assets before their prices increase.
Greece has not yet convinced investors that it is at a stage of recovery. How can it convince them? Thought public investment with money raised from sale of new bonds. Greece should issue, every year for 3-4 years, €5 billion per year of 5-year or 7-year bonds at an interest rate of 4-4.5% and put all the money raised in a “Development Fund.” Greece should ask the large European countries (Germany, France) to put €1 billion in total to the same fund, and have common governance. The Fund’s money should be invested in prioritized investment suggested by the Ministry of Development (that’s one of its functions). If the Fund is created as outlined, the best possible message will be given to private investors. And, besides the message, injecting 3% of GDP in the market every year will automatically accelerate the economy and will pressure private investors to invest immediately fearing that they will be forced to buy at higher prices very soon. The only hindrance to this plan may come from the IMF, which may argue that issuing bonds increases the debt and makes it unviable. Such a position would be mistaken.
Read full article as published in Greek Reporter
___
Nicholas Economides is a Professor of Economics.