Greece's Tsipras Could Still End Up PM

Elections have become a national sport in Greece. The country has had five different prime ministers within the last five years.  My prediction is this fact number is not going to change anytime soon.

Greek Prime Minister Alexis Tsipras has resigned as well as called for new elections in a bet to consolidate his power and push through the country’s bailout deal.

Odds are Tsipras will arise a winner in the elections, expected to take place on September 20. This isn’t a testament to his leadership skills, but rather due to the vacuum of leadership in Greek national politics. Disastrous management of the country over the last 40 years discredits opposition parties, such as New Democracy and PASOK.

Only the centrist To Potami party could emerge as a competitor to Syriza. As they say – keep the enemies close. Therefore, in the event that Tsipras does not emerge as a obvious winner to form a government by himself, I expect him to form a coalition government with To Potami.

Either way, the new elections give Tsipras another opportunity to get Greece’s financial house in order.

How we got here

Seven months ago, I suggested that the Ancient greek government’s actions – or inactions – would destroy an enormous amount of value. Regrettably, I was right.  My conservative estimate is that the average Greek employee would need to work one more year and a half to make up for the value in the economy ruined in the last year.

One can arrive at this conclusion by examining data from the Athens Stock Exchange, IMF, Financial institution of Greece, Eurostat, OECD, and Western Commission: €30 billion had been lost in government financial institution holdings held in the Hellenic Financial Stability Fund. Another €Thirteen billion was lost within non-bank equity holdings. The €26 billion recorded by the IMF within non-financial assets held for privatization ruined about €10 billion of worth. The sum is €53 billion in losses.

One must also account for opportunity costs due to sources such as lost tax revenue and increases in unemployment benefits. This is difficult to estimate, but one simple computation for the former would be to assume that a 5% GDP contraction would proportionately contract tax revenues by the ratio of tax income to GDP, which in 2013 was close to 33%. Given a GDP of €One hundred and eighty billion this would translate into an additional €3 billion of deficits.

Of course, actual tax losses could be much higher if Gross domestic product losses persist for multiple years. Even ignoring this loss, as well as increases in unemployment benefits and any possible losses from the new bank recapitalization, €56 billion of deficits mounted.

This amounts to €16,000 per each of Greece’s approximately 3.5 million employees.  With an average net salary close to €900, this amounts to a full 18 months of hard work.

How to undo the damage

This worth destruction is reversable if Greece changes its focus.

Greece requires a turnaround, and with any turnaround strategy, focus is key. Exactly where they sell milk or bread or whether the stores may open on Sundays, is not going to place Greece in a trajectory of growth. The IMF and the European partners are dead incorrect, in my view, to focus on these issues rather than the elephant in the room.

The elephant in the room is the public sector, which has a budget of close to €80 billion and 650,Thousand employees.

Increasing accountability and improving governance in the public field could have massive economic consequences because it could restore self-confidence and trust in the country.

A 100-day plan

Here is a 100-day plan on how to achieve this:

The Ancient greek government can increase the transparency and management of its assets and liabilities by reporting an up-to-date stability sheet of its accounts (which is currently does not). Thus, it should adopt accrual accounting as well as International Public Sector Sales Standards. Within 30 days, the government should then report its net debt position under international standards. This is reduced than the frequently reported yucky debt number that uses minimal value. The former is lower than 50% of GDP while the latter is close to 180%.

The government ought to then relentlessly educate credit rating agencies that its net debt does not justify such a low credit rating. Having secured European Stability Mechanism financing and having such a low net financial debt number justifies a better credit score. A BB credit rating would be perfectly possible within 100 days.

The federal government should do whatever is necessary for Greek government bonds to become included in the European Central Bank’utes quantitative easing program. This will enhance liquidity and set the foundation with regard to economic growth.

With a commitment to transparency, a better credit rating as well as being part of ECB’s quantitative easing, my personal estimate is that 10-year Greek federal government bonds could trade near to 3% yield within 100 times. Now they trade close to 10%. This could open the doors for Greece to tap the market and issue a bond.

Within this sequence of occasions, it would be realistic to expect the 50% increase in the Athens Stock Exchange index leading to a gain of approximately €15 billion.  Greece used to have GDP-per-capita amounts almost double that of the poorest countries in the European Union. Now it has just 20% greater than them.

New elections will give Tsipras a second opportunity to reverse that trend. Let’utes hope he does not waste this again.

Tsipras' second chance: A holiday in greece to hold elections is republished with permission from The Conversation