The problem with a sovereign debtor is that the creditors are often too embarrassed to take a look at the assets. While your neighbourhood bank won't be shy to repossess your home if you default, it's considered bad taste or a form of lèse-majesté to send bailiffs to collect the presidential limo or ask for the keys to the royal palace when a nation misses a payment deadline. So it is with Greece and the frantic talks among the euro zone member states about the new Greek government's demand that a large part of a €240-billion ($339-billion) Greek rescue loan should simply be cancelled.
Alexis Tsipras, the new Greek Prime Minister and leader of Syriza, the left-wing party that won the largest share of the vote in Sunday's election, insists there will be no default on Greece's obligations and no Grexit (Greece quitting the euro). However, he says it is unrealistic to expect Greece to repay such vast sums and he refuses to implement further austerity measures – Greeks have suffered enough, he reckons, with huge cuts in jobs, wages and services.
In response, there has been a chorus of indignant protests from euro zone governments, led by Germany, the Netherlands and Finland. Behind the scenes, numbers are being crunched in an effort to find a face-saving formula, a default that looks like something else, another round of "extend and pretend" – reducing interest payments and extending the maturity of a loan.
Such fiddling is a waste of time and at the very least, Europe's finance ministers ought to accept that Mr. Tsipras is at least partly correct. Greece's €320-billion of public debt, equivalent to 175 per cent of the entire economy, is a mountain that cannot be climbed and a crippling burden that will prevent recovery and prolong the pain.
However, cancellation is not an option. Greece cannot be offered debt forgiveness without equivalent terms being extended to Ireland, Portugal, Spain and any euro zone economy that gets into trouble. Debt markets would rightly shun euro government debt and the currency would ultimately fail, turning a local problem into a continent-wide disaster. Instead of sweetheart deals, Greece needs to be offered something tough but fair, a deal that would rescue ordinary Greek citizens from penury but punish the state for its profligacy: the solution is therefore a massive transfer of Greek state assets to creditors.
When companies become insolvent, lenders will expect to be offered equity in exchange for debt as part of a restructuring of the company's balance sheet. It puts the business back on an even keel with reduced borrowings and interest payments. At the same time, it provides creditors with an upside: the opportunity to own an asset (a share in the company) which, as the business recovers, will increase in value and can be sold. There is no reason why a nation should not pledge its assets in lieu of debt repayment where those assets have intrinsic worth or generate income and which may be expected to increase in value with economic recovery. The only objection is politics and national pride, a sentiment that Greece's politicians mortgaged long ago.
Unfortunately, the Greek privatization program, launched in 2011 with the objective of raising €50-billion to reduce debt, has been an almost complete failure. Not for lack of buyers, but for delays, political interference and this week by the new government's declaration that it was cancelling the sale of the Port of Piraeus and PPC, the state power utility.
In response, the Troika (the European Commission, the European Central Bank and the IMF) should call the bluff of Mr. Tsipras. On the table should be a debt-reduction deal based on the wholesale transfer to Greece's public creditors of ownership of the entire portfolio of assets held by Hellenic Republic Asset Development Fund. These include the ports, airports, state gas and power utilities, stakes in industrial companies, such as Hellenic Petroleum, Hellenic Post, and assorted infrastructure and undeveloped land holdings. Indeed, the portfolio should be expanded as far as possible to include government-owned real estate, government buildings, and trophy assets – even entire islands might need to be considered. The bigger the asset pool pledged to the creditors, the larger the debt haircut.
The pledged assets would be managed independently from Greece to generate income where appropriate, and to maximize value. With a view to a swift creditor exit, the assets would be subject to put and call options such that the Greek state or the creditors could buy or sell when a target value was reached. Corporate assets could ultimately be sold through share offers in Greece.
One advantage to the asset pledge solution is that both sides would have an incentive for a quick resolution and recovery. The EU has no interest in owning large pieces of the Greek economy and the Greek government will be anxious to end the political humiliation by taking positive economic reforms and accelerating debt recovery from recalcitrant taxpayers. Objectors may question whether the pledged assets truly equate with the value of the haircut, but in terms of years of long-term recovery, that is largely irrelevant. By pledging rather than selling outright, the portfolio will avoid the discount of a distressed sale by a bankrupt country.
More importantly, the asset pledge would satisfy the principle of fairness to other member states. No other euro zone member government would reasonably contemplate such a massive transfer of state assets in order to secure equivalent debt relief. It would be seen, rightly, as a loss of sovereignty and a national humiliation. It was fear of that loss of sovereignty that persuaded the Irish government to accept the harsh austerity regime prescribed by Brussels.
The question, of course, is whether Mr. Tsipras has the political courage to accept that a massive pledge of Greek assets to foreign government creditors is the best way out. He will bluster and balk, of course, but what he will need to consider is whether his government and, indeed, whether individual Greeks and their families, are willing to endure even more years of grinding poverty for the sake of a little national pride.
Carl Mortished