Thursday 10 April 2014

Is the New Greek borrowing prudent?

The Greek government’s intention to access the markets in April was known for some time now. Armed with an improved fiscal and current account position the Greek government planned and executed a market comeback.  At the same time the markets have reached new levels of irrational exuberance especially in the peripheral countries fuelled by rumours that the ECB is going to start QE possibly before the summer ends. Greece only had to blink to borrow 3billion at the very competitive 4.95%pa.
Greece stopped accessing market funding because it could not afford to pay the high interest demanded, and the absence continued even after the PSI restructuring which betrays the total failure of the exercise. It is also true that Greece cannot afford to refinance a significant part of its debt with 3 or 4 per cent spread over the money it gets from the bailout loans. In other words, it was done more for marketing and public relations reasons rather than as a prudent liability exercise. And that is not necessarily bad; marketing and PR is part of liability debt exercise if we are to believe the FED and the ECB. Greece has also lost its prerogative to issue under Greek law probably for many years. All borrowings are done under English law to safeguard investors from future PSI reincarnations which also serves as a warning to other investors buying European government bonds issued under domestic laws.

There is no doubt that the Greek government scored a victory. That victory however, is mitigated by the fact that Greece never bothered to explain to the investors and also to the Greek taxpayers why and for what they needed the 3bln. It would be nice especially in a European democratic country to justify the reasons for this extra borrowing. For example, are there any urgent social needs that need to be covered immediately? Does the state consider child poverty which is on the increase a major problem and it does not mind paying 4.95% to solve it? Are there any projects to combat unemployment that need financing, or, investment projects that would yield a higher rate of return?
As everyone knows all of the above are real urgent needs, but the reason the government chose to borrow 3bln are more connected with public relations and the forthcoming European elections. The Greek government needs to show that the economy is on the up and that confidence is returning. The same goes for Greece’s European creditors. They too need to show to their taxpayers and electorates that their money was well spend.
However, public relation illusions are short lived and usually expensive. In the long run it is cheaper to solve the problem rather than continuing the illusion. The European taxpayer does not stand to gain from this in the future.
If the intention of the Greek government is to turn the page, it better change the book on how it runs its debts. Prudency, transparency and accountability were not synonymous in the past with Greek debt liability policy but should become the gospel policy of Greece.
Few simple measures are needed in order to reassure the markets but most importantly the taxpayers that bad past behaviour would not be repeated. Firstly, a debt ceiling needs to be imposed and breaching this would require a higher parliamentary majority of 2/3. Secondly the parliament needs to approve every single borrowing exercise independently. Thirdly, every euro borrowed needs to have an explanation attached on how it is going to be used. No more for the “general needs of the government”. In the past, borrowing was done in lieu of collecting taxes and for politicians to avoid taking the hard decisions. Lastly, there needs to be an audit at the end of the year with automatic and irrevocable remedial actions or penalties. In other words, practice transparency, accountability and audit.
There is no doubt that Greece needs to access to markets but opportunism should not be the driving factor. Greece needs to borrow for growth not for votes. Over-indebtness concerns all European taxpayers not just the Greek ones. Because when the time comes they would foot the bill.