Economist: Greek capital controls won’t be lifted before mid-2016

Dr. Nikolaos Georgikopoulos

The capital controls imposed on Greek banks were unavoidable, and will not be lifted before the second quarter of 2016, Dr Nikolaos Georgikopoulos said in an interview with EURACTIV Greece.

Dr Nikolaos Georgikopoulos is a visiting research Professor at New York University – Stern School of Business and a senior research fellow in financial economics at the Centre of Planning and Economic Research (KEPE). He spoke to Sarantis Michalopoulos.

Athens decided to call snap elections after a referendum that seriously affected the already hit Greek economy.  EU partners believe that this election could broaden political support for the latest bailout agreed between Athens and its international creditors. Does the business sector share this view?

Obviously, the economic stability in a country, such as Greece, that has been in a recession for a long time, is very difficult to be fully restored, if there is no political stability. This is a key element for a nation to achieve sustainable economic growth. In this context, the upcoming elections could broaden support for the latest bailout agreement between Greece and its official creditors, if the outcome of the elections allow the formation of a strong-Europhile coalition government which will quickly and fully implement all the measures agreed in the latest Memorandum of Understanding (MoU). If not, the upcoming national election will further deteriorate the economic situation in Greece in the near future.

Political developments resulted in increasing the instability of the Greek banking sector, especially after the capital controls. Do you foresee when the Greek banking system will return to normality?

Unfortunately, it will take quite a lot of time. In order for the banking sector to be able to function properly and provide liquidity to the Greek economy, the following steps need to be taken:

1.      Greece has to remain a full and uncontested member of the eurozone.

2.      The new (third) economic and financing program approved recently by the Hellenic Parliament must be fully implemented by strictly following the schedule that had been fixed.

3.      Political uncertainty needs to be diminished. Although, as I mentioned above, my main concern is that the upcoming national election, and the period needed to form a new coalition (or a salvation government), in order to fully implement the signed agreement (i.e. the third MoU), will create more volatility in the Greek financial market, and will further worsen the economic situation in the real economy.

4.      There is no doubt that the Greek banks must be recapitalised as soon as possible and definitely before the end of this year.

5.      The Greek banking system (as a whole) needs to find a drastic solution to deal (at once) with the most critical problem it is currently facing, which is the huge and increasing number of non-performing loans.

6.      Capital controls should be gradually lifted after the recapitalisation of the Greek banks. The Greek administration should be able to fully lift all the restrictions in capital movements imposed on Greek citizens and businesses, when they regain trust in their own financial system. The key signal that confidence has returned to the Greek banking system is when the total amount of deposits, which had flowed out of Greek financial institutions since January 2015, has been put back into the Greek banking system. Hence, capital controls will be fully lifted from the Greek economy not earlier than the second quarter of 2016.

How do you think this can happen? Will the liquidity of the companies be prioritised, or the withdrawals from the ATMs?

The case of capital controls has been discussed extensively and served as a means of protecting the liquidity of the system in case of acute deposit withdrawals. Capital controls mean some imposed limits on the amount of daily deposits that a customer can withdraw and were implemented in Iceland and in Cyprus during the current crisis and recently in Greece.

Capital controls could be triggered if the ECB does not continue to extend ELA funding to cover the outflow of deposits, judging that negotiations may not reach a desirable outcome. This is an important tool in order to avoid banks collapse.

The collateral pledged against ELA funding is mostly government bonds and treasury bills. In case the Greek government is unable to repay a debt obligation on time, this could be received as an indication that Greece is not eligible for emergency funding because the guarantor is insolvent. This could also trigger the ECB to raise the haircut on eligible assets used as collateral.

The imposition of capital controls, although an important measure as a last-resort intervention for the liquidity of the banking sector, will be harmful for corporations due to the restriction of the movement of funds and additional approvals that may be required for such movement. Greek enterprises require raw material from abroad, and payment to suppliers abroad, on time, is vital for their existence.

In a nutshell, capital controls may hurt retail sales, tourism, industry, imports and virtually every other sector of economic activity. Households will also be affected as the movement of funds would restrict the movement of people abroad for studying, jobs and other activities. The time limit for the imposition is unknown, but typically this could last for a couple of days to a couple of years (see Cyprus).

In the case of Greece, as the situation stands, capital controls were unavoidable in order to prevent the Greek banking system from collapsing. Obviously, the companies should be prioritised for the withdrawals from the ATMs, but this is not enough as a measure in order for the companies located in Greece (and especially the SME) to operate normally (prior to capital controls) as there is still a limit of how much cash they can withdraw from the Greek banks.

Berlin insists that €50 billion in revenue from privatisations could be generated. The IMF, though, has a different view. What is a realistic scenario from your vantage point?

€50 billion from privatisations is not realistic given the low determination to proceed with the privatisation schedule, coupled with the low valuations. Corporate assets are more difficult to sell unless the government relaxes its intention to add new conditions to future sales, including the retention of a significant government stake and further safeguards for labour, the environment, and local community benefits. The European Commission has done an assessment according to which €2.5bn could be raised over the 3-year ESM bailout programme. The IMF has done its own assessment whereby an amount of €500 million per year is projected, i.e. €1.5bn for the 3-year period.

According to the IMF, this forecast is based on a realistic assessment of privatisation results to date and future prospects. In order for the privatisation fund to maximise its proceeds, all the necessary structural reforms must be implemented as soon as possible, especially the reforms that will improve international competitiveness and help the economy to recover and achieve sustainable growth by permanently addressing its financing needs.

Which projects will the Greek government prioritise?           

The projects that are related to investments on new technological knowhow are expected to be completed soon, for example, the modernisation of the entire infrastructure of the telecommunications sector, as well as the modernisation of ports and highways. Nevertheless, a series of other projects, which are conceived as being socially and politically sensitive, for example, airports, rail and utilities are more challenging, unless the administration changes its perception on such sales.

Privatisations have always been a “hot potato” even for the previous governments in Athens. Can you mention the reasons why this process is held back? What are its roots?

Even before Syriza came into power, the first two bailouts, being administered from coalition governments from the centre-right and centre-left, failed to achieve their privatisation targets by huge margins. The previous governments were ideologically closer to privatisation, but still actual receipts through the first quarter of 2015 were 94% below the € 50 million target. For example, only €3.2 billion were collected. (The IMF’s fourth Stand-By Arrangement (SBA) review in July 2011 projected €50 billion to materialise through 2015).

There are two reasons for this low score of privatisation proceeds. The first one is political, as the majority of the population views the potential infrastructure sales as socially unjust – a sell-out of the entire country – especially due to low valuations. The second reason is related to the legal obstacles and litigation issues which prevail in the Greek judicial system and immensely increases delays.

There has been a “reshuffle” in the Hellenic Republic Asset Development Fund (TAIPED). What went wrong in the past? Will its new members have another approach in the privatisation process?

The Hellenic Republic Asset Development Fund (TAIPED) has not worked properly over the years – to find buyers at market prices for the state’s assets. Corruption is a problem for all countries, but in Greece it is the main reason for the malfunctioning of various public organisations. For instance, on 20 July, the anti-corruption prosecutor charged top officials at the Fund in connection to the sale of 28 state-owned buildings on 20-year leaseback deals.

Although officials are not facing breach of faith charges due to immunity, they have been charged with embezzlement. Such developments serve as a deterrent for a normal function of the Fund due to the spoiling of its reputation. The new officials helps mitigate the reputation, risk but does not increase its efficiency, due to the continuation of legal and political obstacles.

Is the sale of small Greek islands a reliable investment?    

Small Greek islands are conceived to be the ideal place for international investment, especially for the tourism industry. International investors would be willing to pay substantial amounts in order to acquire them, under the presumption that all bureaucratic hurdles could be managed. Therefore the potential for substantial revenues come hand-in-hand with the modernisation of the Greek administration.

It is highly probable, however, that small islands would still be in high demand by other European rich citizens or/and foreign investors. But there are various geopolitical/political issues that should be sorted out before the Greek admin put up for sale a state-owned small island.

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