With Greece’s centre-right New Democracy party back in power, a bid to find strategic investors for state-controlled banks is back on the government’s agenda – but not until this summer’s Olympic games in Athens are over.
In the March 7 general election, voters opted for change, after almost 11 years of Socialist government. Swept into power by a margin of almost five percentage points, the conservatives have an unexpectedly strong mandate. But Costas Karamanlis, at 47 Greece’s youngest ever prime minister, faces a steep learning curve.
The good news is that Greece’s economy is growing faster than projected. Growth last year reached 4.8% of gross domestic product, the European Union’s highest rate, touching 5% in the final quarter. This year’s projection is 4.6%, driven by high levels of investment in Olympics-related projects and strong consumer demand. Inflation, at 2.5% in February, is close to historically low levels.
But Greece faces a tough challenge to pull off a successful Olympics in August. To speed decision-making, Mr Karamanlis has taken on the job of culture minister, and responsibility for the games.
The opposition Panhellenic Socialist Movement under former foreign minister George Papandreou, has pledged co-operation with the government on Olympics-related issues. The Socialist-controlled public sector unions are also part of this consensus.
While the political truce will speed last-minute preparations, the deadlines are tight. Several important games-related projects have been delayed, among them a E70m upgrade of the 42km route for the marathon race, a E200m glass-and-metal roof to be erected over the main stadium and an E350m tramway linking the city centre with Olympic venues on the coast.
Budget overrun
The E4.6bn games budget covers construction of Olympic sports venues and villages for athletes and media and transport projects including road upgrades, the tramway and a suburban rail link with Athens airport. It already faces overruns amounting to several hundred million euros, according to one senior Greek banker. And the E600m security budget for the games, already three times higher than for Sydney in 2000, could rise to E1bn following last month’s terrorist attacks in Spain.
One bright spot is that Athoc, the organising body for the Olympics, expects to balance its own E1.9bn budget for running the games. Almost half the funding comes from the International Olympic Committee, mainly from the sale of international broadcasting rights, and the remainder from the Greek government and local sponsors, topped up by the proceeds of merchandising and ticket sales.
Yannis Spanudakis, Athoc managing director, says: “We’re already assured of more than 90% of targeted revenues. In some areas, such as merchandising, sales are exceeding forecasts by a big margin.”
But the need to focus on the Olympics means that fiscal policy is on hold. New finance minister George Alogoskoufis says: “The overriding priority for the next few months is completing all the facilities for the games. We’ll examine the question of fiscal tightening later in the year.”
However, the finance ministry will run an audit of public finances to determine the extent of spending overruns and off-balance-sheet funding for loss-making public sector companies. The European Commission has already questioned the outgoing Socialist government’s projection of a budget deficit of 1.2% of GDP this year.
EC criticism
Criticising Greece’s update of its stability and growth programme, the EC said: “Greece has postponed for another year the effort towards limiting its fiscal imbalances.” Mr Alogoskoufis says the deficit “will certainly come in above 2% of GDP” and could approach the 3% of GDP limit set by the eurozone stability pact.
A successful Olympics could give tourism, the country’s largest industry, a medium-term boost and put Athens back on the map as a holiday destination. The conservative government is keen to attract high-quality investment in tourism. But this means removing the longstanding hurdles to foreign direct investment of administrative inefficiency and corruption.
According to Transparency International’s latest index of perceived corruption, Greece holds the lowest place among the eurozone countries and even comes in behind several of the new EU members from central Europe.
“Foreign direct investment inflows are currently close to zero because of the burdensome bureaucracy and lack of transparency in the regulatory framework,” says Miranda Xafa, economic adviser at Piraeus Bank.
At the same time, investment outflows have increased. Rather than build new plants at home, many Greek companies have acquired factories and moved equipment to the low-wage Balkan countries to the north.
Mr Alogoskoufis says the government will streamline the administrations and codify legislation to promote investment, both domestic and foreign. He has also pledged to overhaul the tax system and reduce corporate tax rates from 35% to 25%, bringing them closer to rates elsewhere in south east Europe.
New Democracy pledged during the election campaign to deliver growth rates of around 5% yearly that would reduce the unemployment rate from around 8.8% to 6% and bring real convergence with Greece’s eurozone partners. Greece can count on continued high flows of EU structural aid until 2007 – equivalent to more than 3% yearly of GDP. But the accession of 10 new member-states, almost all of them poorer than Greece, will bring a significant reduction in funding from the next structural package.
Shrinking funds
Greece’s share of funding could shrink from E26bn under the current package to between E13bn and E17bn, depending on the total amount allocated by the EC and the quality of programmes submitted by the government. After a decade of focus on infrastructure improvements, education and training will become a priority, says Mr Alogoskoufis.
The conservatives are committed to completing market liberalisation – the energy market is one priority – but have still to show their hand on the thorny issue of privatisation. The Socialists opted for partial privatisation by selling minority stakes in public corporations through the stock exchange but kept control of management. Following the change of government, a raft of senior managers at public utilities were due to be replaced by conservative appointees.
One of the first decisions involves the future of Olympic Airways, Greece’s loss-making state carrier, which was restructured last November after three failed attempts to find a strategic investor and renamed Olympic Airlines. The EC is investigating the restructuring on the grounds that the carrier may have received illegal state aid.
The Socialist government raised over E3bn last year through privatisation offerings to help write down public debt, the third-highest in the eurozone at 103% of GDP. But one large public offering due to take place before the election, the sale of a 30% stake in Hellenic Tourism Assets, a holding company for state-owned real estate and tourist properties valued at more than E10bn, had to be postponed because of legal obstacles.
The conservatives say they will give priority to selling strategic stakes in two state-controlled commercial banks – National Bank of Greece and Emporiki Bank, the former Commercial Bank of Greece, which was rebranded in 2003. Last year the government raised E488m from the sale of an 11% stake in National in an offering that was more than twice subscribed. The state currently holds 5% of National directly and controls another 20%, which is owned by a group of public sector pension funds. As the country’s biggest bank with a sizeable presence in the Balkans, National could be an attractive investment prospect.
France’s Credit Agricole already holds a 10.5% stake in Emporiki and would increase it to 33% if the issue of unfunded pension liabilities can be resolved, according to Yannis Stournaras, the chief executive.
“Pension liabilities are a problem across the banking system. If we can establish a common pension system for bank workers, foreign partners will come into the market,” Mr Stournaras says.
The Postal Savings Bank, with a deposit base of E9bn and loans of only E1.5bn, is also due to be sold. With deposit growth flat and demand for retail loans increasing at rapid rates, Postal’s resources – including an E7bn bond portfolio of high-yield issues approaching maturity – would provide a useful boost for any of Greece’s big three banks. National, Alpha Bank and EFG Eurobank have all made clear they would be interested in bidding.
Foreign sale
However, the Socialist government pulled off the first sale of a Greek bank to a foreign buyer during its final weeks in office. Société Générale of France agreed to buy a 22.3% strategic stake in Greece’s General Bank for E36m and would increase its stake to over 60% through a E89m capital increase later this year.
The deal followed an unsuccessful privatisation attempt last year in which SocGen, already active in the Balkans, had taken part. General Bank, controlled by the army pension fund has a market share of less than 5% but has a sizeable network of 106 branches throughout Greece. In line with Greek banking practice, there would not be any redundancies, but a voluntary retirement scheme would be implemented.
