Question and Answer Session: The Greek Debt Crisis: Prospects and Opportunities

C. Fred Bergsten: Mr. Minister, thank you very much for those very helpful and illuminating remarks. And we also thank you for being willing to answer some questions from me, my colleague Jacob Kirkegaard, and our audience. They will be very interested to ask you for some further elaboration on the points you made.

I would also like to introduce two of your colleagues that are joining us on the platform, Mr. George Zanias, the Chairman of the Council of Economic Advisors of the government of Greece, and Mr. Petros Christodoulou, the General Director of the Public Debt Management Agency.

E. Venizelos: The key person in Greece, Mr. Christodoulou. He is the first responsible for the situation.

C. Fred Bergsten: He will get many questions, I am sure.

Mr. Minister, let me start off by asking you a bit about the domestic politics of this issue in Greece. You have outlined the very ambitious adjustment program, reform program that your government has adopted. You have now agreed with your European colleagues and I presume with the International Monetary Fund to carry out that program.

We are all aware – we read the newspapers, we watch television – we have noticed that there has not always been unanimous support for your program at home. So talk to us about the domestic politics. How will you be able to ensure effective implementation of the program? Do you anticipate that there will be widespread support, now that the package has been put together in Brussels last week? Give us your assessment of how it is going to play out in Athens and throughout the country.

E. Venizelos: Thank you very much for this opportunity. As you know very well, the main difference between the United States and Greece on the institutional level is that in Greece we have a traditional parliamentary system of governance, within the institutional frame of a European continental parliamentary system. The relationships between government, governmental majority in the parliament and the opposition – first of all the so-called "major opposition," the main party of the opposition – is always very controversial, because this contradiction is vital for the existence of the opposition.

During a conventional period, we are ready to accept this rule and this practice. But during a period of historical and existential crisis, it is absolutely necessary, both for the government and for the opposition, to organise a common national platform for the reconstruction of the state, of the civil society, of the national economy, and also of the brand name of our nation.

Here, in Washington DC, I am the representative not only of the Greek government and of the Greek ruling party, but also of the Greek political system. I am here also as a representative of the opposition. And I speak before you not only on behalf of my friends of PASOK, but also of my friends of New Democracy and the other parties of the opposition.

We have some very important and very constructive proof of consensus. For example, during the last main voting in the parliament about the privatization program, the majority was very vast. It was a majority of two-thirds. And this message, the message of consensus, the message of co-responsibility and of cooperation, was very useful and very fruitful for our work and for our negotiation during this last summit in Brussels, and also very useful for the construction and the approval of the new program.

We have without doubt a problem of social cohesion. We have a problem with the public opinion. It’s very difficult to implement a program with sacrifices. It’s very difficult to cut revenues. It’s very difficult to reduce pensions. It’s very difficult to organise the new opportunity for the country with huge unemployment.

It’s very difficult to present a new national narration before the young generation. And because of that, we need the so-called national unity in Greece. In Greece we talk very often about national unity – national unity is the political consensus – and about social cohesion. Social cohesion is the strong core of the necessary sensitivity for the implementation of a strong policy with perspective, with hope for the future. This is something very important.

I don't believe in the linear approach of history, but we must re-establish the hope and perspectives for the new generation. This is absolutely necessary, and this is a historical message, a national message. It’s not a message from the government, but a message from the Hellenic nation to the international community.

And this meeting, thanks to you, is a great opportunity for me on behalf of the Greek nation to send this very clear, this crystal-clear message.

And this is a message of commitment, because without this political international commitment, without delivery, without the strong and systematic implementation of the program, it’s not possible for us to present results and also to preserve the necessary support from the international community.

The commitment, the delivery, the execution of the program, the implementation, is our contribution to this very huge and very ambitious program. Thank you.

C. Fred Bergsten: Thank you very much. You mentioned the privatisations, and I’d like to ask a little more about that, as one specific element of your program. The IMF and others have estimated that you have a very large amount of assets that might possibly be privatised, much more in fact than your programs have included so far.

So looking for optimistic possibilities, is this an area where you might over-perform, where you might be able to raise more revenues and achieve more success?

E. Venizelos: This is my personal target.

C. Fred Bergsten: Tell us a little bit about that. How do you see the privatisations, the timing? What elements would be in the forefront of that effort?

E. Venizelos: The privatization program is first of all a program of structural changes. The Greek state, i.e. the Greek public sector, is a traditional one, with unacceptable dimensions, according to a modern model for the organisation of the state and the public sector.

The program of privatization of public entities, of entities of the so-called general government sector, the wider public sector, is a program of structural changes, because we need a cleverer, more functional and less expensive state.

This program of privatization as program of structural changes is absolutely vital for our budget, and also absolutely vital in order to achieve the main fiscal target for a primary surplus as soon as possible, from the next year.

But we have also the commitment and the obligation to contribute in the program for the financial needs of our country during the period until July 2014, because the new program has three main pillars:

• The first main pillar is the new official support from the Eurozone, from ECB, from EFSF, and also from IMF.
• The second pillar is the Private Sector Involvement.
• The third pillar is our own contribution through privatisation.

We need an amount of € 28 billion by July 2014, for financial reasons but also for structural reasons.

We have also a second stage, an additional amount of € 22 billion from 2014 until 2015. This second stage, this second chapter, is also very important for financing the new debt buy-back mechanism. This new mechanism under the auspices of EFSF is a very important mechanism because we need a cut, reduction of the nominal burden of our public debt.

The list of privatizations is very ambitious but also very functional. I can make another distinction between privatization of entities, of so-called public companies, or of public rights, and the privatization on the very attractive field of the real estate, because the property of the state is huge. We have some very ambitious estimations and we also have a very big real estate property of private entities. And this field, the field of real estate, is also very important for foreign investors in Greece, in combination with our main sectors of our real economy: I always start with tourism, but also for energy, on the field of energy the privatization program is very attractive.

And we can also organise new fields; we can prepare new offers. But we take the role of seller. We need buyers, because in order to construct a new market it’s absolutely necessary to organise these relationships between offer and demand, and because of that this occasion is very important for me to make this public announcement before an American audience of high quality, because we need not only the support of our European partners but also the support from the United States, and first of all the support of our Greek-American people here in Washington DC and in the United States.

C. Fred Bergsten: So all those who would like to buy can come up to the front at the end of the meeting. We at the Institute will ask only for a 10 percent finder’s fee, as part of the arrangement, Mr. Minister.

Let me just ask one more question, and then we’ll open it up. The European Summit last week, we, here, thought made a major shift, because up till that point the focus seemed to be almost totally on austerity, on trying to bring austere policies into place. But last week the Summit talked about a comprehensive strategy for growth and investment in Greece, trying to encourage some of the things you said in your remarks about getting the economy growing again.

Elaborate a bit on that. How soon do you realistically see a prospect for resuming positive growth? And with the kind of pro-competitive steps that you are trying to take, what might be a reasonable growth rate to expect for Greece, over the coming five years or so?

E. Venizelos: As you know austerity is the bad name for financial and fiscal reconstruction and also for the competitiveness of our state and of our national economy. But for the needs of this discussion I can use, like you, the term austerity. Austerity is the precondition for our final target. Our final target is to achieve our financial independence, and also to re-establish the brand name of Greece.

Without a sustainable public debt, it’s not possible to implement a program of austerity or of reconstruction and competitiveness, with a result and with perspectives.

We need a sustainable public debt in order to preserve the sacrifices of the Greek people and also of the Greek national economy. And now we have a very important and very constructive common understanding with our partners - with the Eurozone, with the European Commission, with ECB, with IMF - about the need and the priority to make the Greek public debt sustainable.

And now we have new instruments, new measures and new guarantees for the sustainability of the Greek public debt. This is the precondition for the successful implementation of the austerity program.

On the other hand, the privatization program is a program of structural changes, and also a very important fund, so-called fund, for this new debt buy-back mechanism, and also for the necessary breakthrough. Because without new elements and new instruments it’s not possible to make, to organise, this breakthrough.

C. Fred Bergsten: OK, let me ask my colleague, Jacob Kirkegaard, if he has a follow-up question, and then we’ll open it up to the floor.

J. Kirkegaard: Well, thank you, Fred, and thank you, Mr. Minister, for your candid set of remarks.

I guess just following up on Fred’s question regarding the prospects for growth you mentioned the Marshall Plan and perhaps as much as € 20 billion available from the European Commission’s Structural Funds and the European Investment Bank, with very limited, if any, in fact, domestic Greek co-financing requirements.

So I guess I am wondering if you could be slightly more specific about how are you going to make this money go to work? What are the sectors that you envision, where actually you could have the maximum growth-enhancing impact of € 20 billion, as you mentioned up to € 20 billion.

Is it solar energy? Is it infrastructure investments? What are some of the sectors where we can expect the Greek government to try to put this money to work to kick-start growth?

E. Venizelos: Well, thank you very much. I have two points. The first point is that the new element of the public discussion within the European Union about the so-called "European Marshall Plan for Greece" is that according to the new rules of the European Union, especially for Greece, we can use the European funds without national contribution for the first period, for the next five years.

This is very important for our budget, and also for our real economy. This is the main new element; the possibility to use European funds without Greek national contribution. This is the main change.

The second point is about the sectors. The first sector, the first field, is always the different infrastructures, because we have until now some deficits on infrastructures. The second field is without doubt energy. The third is tourism.

And of course we have before us the great challenge for the real estate. I repeat the same answer. I don't know if my answer is clear for you.

C. Fred Bergsten: Thank you very much. OK, the floor is open. We’ve got two standing microphones; we’ve got the travelling mike. And so please identify yourself, and then fire away. Ian.

I. Talley (Dow Jones): Thank you for taking the time to come here. So by your own estimates the debt swap would reduce the debt-to-GDP ratio about 10-12 percentage points. The debt-to-GDP ratio is supposed to peak at 172 percent. Twelve percentage points would make it 160. I am wondering, how is that still sustainable?

And then I’m just wondering if you can give any timing on the bond swap agreement, and did you officially ask the IMF for a second loan today?

E. Venizelos: I start with your first question. This 12 percent of debt buy-back is the first contribution through the program. It’s not an independent pillar of this program, but the additional result for the implementation of this program.

And this is just the first step. The most important point is the creation of such a mechanism, under the auspices and with the necessary financial enhancement of EFSF.

We can use other capitals for a more ambitious debt buy-back. And this is our ambition; this is our target now.

The 12 percent is not the final result of the debt buy-back operation, but just the first step, the first proof about the possibility to organize this operation in the secondary market.

We also have some other very important buffers. We have the possibility to use the revenue from the second tranche of the privatization program, € 22 billion after 2014. This is my first answer and my first reaction.

Because now, if I may, the first point for us, the urgent point, is to implement the new program, to organize as soon as possible the PSI. The PSI is now under Greek ownership for the organization of the procedure. We have the ownership of the procedure.

In cooperation with our European partners, in cooperation with IMF, in cooperation with IIF, in cooperation with the coordinators and with our legal and financial advisors, we are ready to start as soon as possible, because we must clarify the situation and we must implement the new scheme.

This is an innovation. This is totally new. And because of that, we must cooperate with all the critical factors, because without the mobilisation of the international community and with everybody’s good will, it’s not possible to implement this ambitious program. This is our first obligation.

The second target is to implement our own program, through the domestic political life in Greece. And just after that, we can prepare the second, the third and the other steps.

We must go ahead. We must go ahead on fast track, and because of that I insist in the keywords: implementation, delivery, and also readiness to implement this new scheme, because now we have a new momentum, and we must exploit this momentum.

I have the impression that Professor Zanias and Mr. Christodoulou have the necessary knowledge and experience to give an answer for your next, second, question, about the banking balance. Professor Zanias.

G. Zanias: If I can say something on the sustainability, and maybe then Petros can take it up from there, as you said, you are going to start from a debt level of 170 percent.

E. Venizelos: The gross debt, because we must make also the distinction between gross and net debt. This is something very important for the viability and the sustainability of our public debt.

G. Zanias: …which is considerably lower, and the markets also look at that. Now, if we take 22 percentage points out of that due to privatisations, this takes us to 148. Then if you take another 10 percentages due to debt buy-backs in the program, as well as bond exchanges below par, this takes us to 138. So we start from a stock level of 138 percent, if we take all these one-offs.

Then three variables work here: interest, primary surpluses and growth.

Let’s start with the interest. If you have seen in the newspapers, the net present value of the PSI, private sector involvement, is about 21 percent. Now, say 10 percent of that is because of bond exchanges below par. The remaining 11 percent is lower interest rates.

So the private sector will contribute with somewhat lower interest rates. For example, in the next 4-5 years I think it’s going to be around 4 percent; this is the agreement with the private sector.

Now, the most important thing, however, that has to do with debt servicing, and the interest rates applying to debt mobility, has to do with interest rates of the official sector of the EU. We have a little more than € 100 billion now.

E. Venizelos: 3.5 percent.

G. Zanias: A little more than € 100 billion – this is a little less than one-third of the debt – which will be given to us at the rate of 3.5 percent. Then we have another about 40 percent from last year’s program, which will also be at 3.5 percent. So we are talking about at least 40 percent of the debt that is going to have an interest rate of 3.5 percent. We are talking about Greece here borrowing as a triple-A country.

E. Venizelos: Through EFSF. This is the enhancement.

G. Zanias: And we still have some buffers, as the Minister said. For example, we have already borrowed € 50 billion from the official sector, which is not at lower interest rates but may come later. If this comes in, then we are talking about 60 percent of the Greek debt at 3.5 currently, plus, you know, the lower interest rates from the private sector.

Now, let me go to the second variable that affects mobility. This is the primary surplus. The primary surplus was one and a half years ago at -10 percent. At the end of this year it is going to be -0.8 percent, almost, very close to zero.

This change of more than nine percentage points in two years took place in an environment of severe recession. If you take the cyclically adjusted primary surplus, then you will see that this takes us to about +2.5 percent.

So in real terms we are talking about a 12.5 percentage points change in two years.

We are aiming at reaching 5.5-6 percent. We are 3-4 points away, and we have covered this distance only within the first two years.

If you look at other countries, for example the UK has a primary surplus at the end of the year of -3.5 percent. Ireland has -5 percent. So we are making a lot of progress here, too.

And then let’s take growth. Now, growth is probably the most important variable. Where can this come from? I think there are at least four advantages that Greece has over the average of the Eurozone.

The first advantage is that Greece has been the most regulated economy in Europe, probably the "last communist country" in Europe. I can tell you many examples about that.

E. Venizelos: We must avoid this kind of discussion.

G. Zanias: We must avoid that. I can give you a number of examples. For example, the number of public transportation trucks today is the same with 1971. That is 40 years. You know how many times GDP has increased since then. And a number of all these are liberalised now, for example.

So, the impact of deregulation on the economy is the first source, over and above the average of the Eurozone.

The second thing is that Greece is the country with the greatest state ownership and public intervention in Europe.

Now, by selling all these assets, apart from reducing the stock of debt, we are introducing efficiency also in the economy. No other country in Europe has this advantage that Greece has.

Then for example we have the lowest labour participation in Europe, I think between 6 or 7 percentage points lower than the average in the EU.

And I’ll give you a fourth factor that I think can contribute a lot. We have the largest underground economy. Why this may be an advantage? Because this is a big potential to pull resources from, and in this way lower the average taxation of the formal sector. Thank you.

P. Christodoulou: The answer to your last question about the PSI and the timeframe. I appreciate that such an operation of monumental size is taking time to put together. There are very many parties involved in Europe, on this side of the pond.

And I think by the middle of this week there will be a press release that will cover the main structure and body of the team that will eventually carry out this effort.

Speaker: I think someone is asking for the IMF loan request.

P. Christodoulou: There has not been a request, and even had there been a request you wouldn’t know it now, anyhow. So it’s a good try.

C. Fred Bergsten: Okay, next question.

B. Potter (Australian Financial Review): Thank you very much for the opportunity. I most likely missed it at the outset, if you mentioned it, but I wondered what your reaction to the Moody’s downgrading Greece’s sovereign debt rating to, I think, two notches above default this morning.

And I am also curious to know: In your privatization program you include some… I read a year or two ago that Greece had on order from a German defence manufacturer; some state-of-the-art military submarines, which it was not able to pay for. And my country is proposing to spend a lot of money manufacturing naval submarines domestically, when they could perhaps be buying them in the open market if they are available.

So, I would be curious to know if you could confirm that you would be open to offers on those submarines. Thank you.

E. Venizelos: We can start with your first question on Moody’s. The new element is the very positive motivation of the last announcement of Moody’s. We have a new bad rating, with a very good and hopeful motivation, because the international financial community understands very well and accepts the new scheme for the private sector participation and also the huge volume of the new official support program.

For the period of transition from the old program to the new, we have this problem with the rating agencies, but for the first time after many months we have a positive and constructive approach for the perspectives of the Greek economy. And this point is something very important for us, because for the first time after two years we have positive signals on the part of the international financial community. This is something very important for us.

It’s not possible for me to understand very well your second point on the submarines program, but this is a very old story. It’s not an initial choice, but a huge effort to clarify an old story, and also to reorganise a very important industrial sector in Greece.

More generally speaking, our relationship with the German industry is very good, very constructive, and I am in contact with my counterpart, Dr. Schäuble, in order to organize the involvement of the Greek private sector in the so-called "European Marshall Plan."

And we are waiting for a similar participation from the part of the American private sector. This is now the new field, the new challenge, and our invitation. Because we are here not only to make contacts and talks with IMF, with Mme Lagarde or with Secretary Geithner, with the American administration, but also with the American private sector. Because without the real involvement of the American private sector it’s not possible for us to implement our program, to make delivery for the privatization, and also to achieve our financial targets.

This is my invitation, this is my commitment. It’s a great opportunity for investors from the United States to participate in this new era for us.

Journalist:

 Mr. Minister, I think it was terribly important, the indications you gave about the reduction of the debt ratio, the indication you gave about the assets, so you need to look at them now. I think getting the story out about debt sustainability would be very helpful, because I think the dominant view remains that the debt is unsustainable, and that there will be another round of this a year from now.

This is the particular question I have: It’s a little bit difficult to see how the program isn't over-financed. Logically, the July IMF document had things working out. Basically the public sector was paying off amortisation to the private sector.

The new program has the same amount of public money coming in. It’s got ten-year grace, so you don’t have to worry about amortising the public money. And you’ve tied up the private money. So it looks to me like there is going to be a huge reserve fund, because you're going to have more money than you need.

Is it right to interpret what you have said that you may be using some of that reserve fund to do buy-backs? Or am I missing something?

P. Christodoulou: Yeah, if you analyse the new loan, the € 109 billion, you see that in there you have some deficit financing to cover. We have the money that we need to borrow to buy the credit enhancement; that’s € 35 billion. And you have € 20 billion for the beefing up of the bank capital, so the domestic financial stability fund will go from the, under the current scheme, € 10 billion size to € 30 billion size. And there will be the € 20 billion minimum of debt buy-backs. So that’s all adding up to € 109 billion.

Now, you appreciate these numbers were put together this past week with a sizeable number of governments sitting around the table and putting down some numbers, so it may be off two or three billion, up or down, in each one of these numbers, right?

But the key thing is that, in a moment of crisis, Europe did get together with so many governments and got some numbers on the table and got agreement to them.

I don’t underestimate that. I know some other locations and jurisdictions were a single government cannot get their decision. No, I don’t talk about this, but in very many other jurisdictions.

E. Venizelos: The new program is not just a loan but a more sophisticated and more complicated scheme, because we have also € 45 billion from the first loan facility, before the new mechanism. And we need indeed also some capitals for the recapitalization of our banking system, a very traditional banking system without many exposures, like the Irish banking system.

And finally, we need the public support in order to organize the necessary enhancement for the Private Sector Involvement. This is a very good and very balanced combination between public and private sector. This is the new element, the new feature, of this program. And this is an innovation. We must now implement a totally new model. And because of that we have the necessary decisions but we also need the necessary know-how and expertise. And because of that we are here today, because here we can better organize our relationships with the economic and financial community globally. And because of that, after my meetings here in Washington DC, I am very optimistic about the implementation of the program and about the perspectives of our efforts.

J. Hoagland (Washington Post): Mr. Vice President, thank you for your presentation today. I wanted to ask you to expand on a couple of remarks that you have said specifically, but to do that I wanted to ask you first about the general context of the European aid package.

It’s often said that some countries in Europe – Germany is often named – are actually trying to engineer a cultural change in Greece, to make Greece more like northern European countries. The general question: Is that an acceptable goal for Greeks?

Some specific points have to do with your remarks about American investors and transforming Greece into an "investment-friendly country"; this was the phrase you used.

Could you tell us what it is about Greece today that is not investor-friendly, how you propose to change it, and how long it will take?

E. Venizelos: Thank you very much. I start with your first question, because in my capacity as professor of Constitutional Law is easier for me to give a practical and complete answer.

The first problem is the instability of the legislation, not only the taxation system but also the administration support. The administrative cost in Greece is very high. According to the last estimation of our main think tanks, the administrative cost is about 10 percent of GDP.

The same goes with the so-called structural overspending. According to the last academic studies, this overspending is about 30 percent, in comparison with the best western country in this field.

Another very important factor is our administration of justice. We need a faster judicial system, with some more flexible procedures. And this is something also very important for every investor in Greece.

Stability of legislation, a cleverer and more flexible administration and a faster justice system is the triangle of our problem. And the three priorities are in the list of our efforts for an investment-friendly country.

Your first point is the result of your very systematic knowledge on Greece. This pedagogical approach from the European Union is obvious. As you know, Greece is a country between the Occident and the Orient. It is an Orthodox country in a European Union with a more Protestant approach about the economy and about discipline.

We are absolutely open and ready to accept other mentalities and other approaches. We must preserve the necessary flexibility and also the necessary openness, but on the other hand we need this discipline, we need this more systematic approach.

And now we are ready to organize this combination, to incorporate new elements and also to preserve and to modernize the traditional and structural element of our mentality.

This is not a confrontation between two different cultures, but without doubt we must learn from our participation in the European Union. And also we must exploit this opportunity, in order to re-present the profile of our country.

Greece is the most important country for holidays, but also a very productive country, a country with very important possibilities, with productive potential. And, according to the expression of Prof. Zanias, we must transform our structural problems as advantages for the new era.

This is our target now. This is a very complex target, because we must work on the field of the economy, on the field of our fiscal system, on the field of our public administration, on the field of our civil society, on the field of the national mentality. This is an historical effort, but we are here in order to implement a very difficult program, and in order to achieve a difficult but not impossible mission.

This is also the motivation for the acceptance of the proposal of the Prime Minister to appoint me as new Minister of Finance. After the experience of the Ministry of Defence, I am now on the field of the real war. The real war is the economic war, and I am here in order to win in this war.

C. Fred Bergsten: On that note, Mr. Minister, we have reached our closing hour. Apologies to those who had questions. We could go on all night, but we want to thank you very much. This has been extremely helpful. We appreciate your remarks, those of your colleagues. We thank you for joining us at this very intense time for you. We appreciate your candor. We wish you the best of success in carrying forward your program, in winning full cooperation from your partners around the world, certainly including here in the United States. And we look forward to continuing to work closely on this with you. Thank you enormously for this evening.

E. Venizelos: Thank you. Thank you very much.