Former FinMin Luka Katseli claims Greek state debt is unsustainable and proposes solutions regarding its haircut

Mrs. Luka Katseli claims that the Greek state debt is unsustainable and proposes solutions regarding its haircut, as well as the exit of the country from the “triple trap” of productive disaggregation, excessive indebtedness and poverty.

She explains which should be the priorities of the new government resulting from Sunday’s elections and the strategy Greece has to follow regarding negotiation with lenders.

She also talks about next day as far as the banking branch is concerned and what should be done so that the banking system is stabilized. She is in favor of the establishment of the Development Bank and proposes a solution for new residential loans that will become an issue for discussion.

QUESTION: The settlement of Greek debt is the major issue during the election period. What is your opinion? Is a bold extension of the redemption enough or is a “haircut” needed anyway?

First of all, we should admit that the debt is unsustainable since the payment of amortization of €291 billion within the following 15 years is not feasible. The policy of forced austerity and internal devaluation has led to a productive disintegration, resulting in the appearance of no prospect of high recovery rates of the economy that would enable the payment of accumulated debts, while debt has risen to €320 billion. The “steam engines” of economic recovery have been turned off. Greece is trapped in the triple trap of productive disintegration, indebtedness and poverty.

Getting out of this trap requires simultaneous dealing with the following three priorities. If the productive basis of the country is not restructured and the domestic added value – as well as new wealth – is not created, a new indebtedness crisis will come, even if the current debt is totally cut. On the other hand, if there is no substantial impairment of the existing debt burden, the resources allocated to the recovery of investment and economic growth will be minimal while the burden of debt shall act as a barrier to their real potential investors and support speculators. An extension or decrease of debt, by itself, shall provide a temporary relief. Finally, if the humanitarian crisis and the poverty of a large part of population are not encountered, the purchasing power of middle class will remain anemic; red loans will be piled up to banks and shortfalls in state and social security funds, while the productivity of human capital of our country will be continually reduced.

Therefore, the new Government needs to present a coherent National Reconstruction Plan that will promote proposals, measures and substantial reforms that shall respond to the aforementioned challenges as priorities. Priorities: a) increase of investments and firing of a sustainable production and technological transformation of the economy, b) substantial impairment of accumulated debts, and c) tackling poverty and humanitarian crisis. This Plan should become the basis of our economy policy and the new negotiations framework for our partners.

QUESTION: Why hasn’t that happened so far? Who may be potentially allies and “enemies” of the Greek side regarding new negotiations?

From the beginning of the crisis, no Government has raised an exit plan from crisis, let alone a National Reconstruction Plan. Negotiations have been focused so far on serving our current debt obligations, that is to promote the interests of our lenders. Simply, the amount of annual amortization payments that had to be repaid identified, for both the Government and Troika, the level of primary surplus, the amount of revenues from privatization and of borrowing from our lenders that should be diverted to repay debts. That is why the 90% of €240 billion borrowed was returned to them. The required primary surplus to pay off debt determined the necessary policy measured for its achievement: spending cuts, public investment, increased taxation and selling public assets at any price. This strategy quickly proved completely wrong and hopeless: the deep internal recession caused inflated external and internal indebtedness, dependence on lenders and complete destabilization of the economy. It lead to PSI, which instead of reducing the burden of accumulated debt was converted, via recapitalization, into a massive redistribution of resources from Greek and European taxpayer, pension funds and public entities to banks.

This newly determined strategy should start vice versa. It should identify the measures needed to achieve positive and increasing growth rates in coming years and tackle the humanitarian crisis; determine, a realistic primary surplus – compatible with the achievement of these objectives, and on the basis of calculating the funding of the programme from its own resources to present the financing needs of the country as well as alternative scenarios of impairment or/and debt restructuring.

The impairment can be achieved in many ways. There is no doubt that remission of debt would be the most appropriate solution. The impairment can be made in other ways, e.g. equity of the debt, that is exchange of part of the debt by participating in investment projects, or development programmes or through issuance of development bonds and/or through combinations of solutions including elongation and reduction of interest rates. Therefore, there are possibilities and choices that should be recommended to our creditors. The certain thing is that these will bring both the country and Eurozone in a better situation than we are experiencing today.

QUESTION: What, in your opinion, should be the architecture of the Greek banking system, especially since the Greek economy has been characterized as “bank-centered”? And how necessary is it to create a Development Bank?

The basic mission of banks is to finance with the funds trusted by depositors, businesses and households to promote investment and stimulate economic activity.

Unfortunately, after the abolition of the distinction between commercial and investment activities in 1999, as well as growing competition, most banks started hunting big returns for shareholders and senior bank officials through toxic financial products of high risk, questionable practices and unfair charges.

The financial crisis came as a consequence of the lack of prudential rules and proper regulation.

In designing a new architecture for the Greek Banking System there should be provision for a) adequate capitalization of Banks and consolidation of their portfolios, b) necessary channeling of resources liquidation into the real economy so that to fund development activities and exports, c) ensuring healthy competition within the banking pillar, and d) strengthening supervisory rules and mechanisms.

Therefore, as there is a high degree of concentration in the banking branch, there is room and need to create a Development Bank of Public Interest.

As Minister of Development, I had moved to the designing of this project by collaborating with the European Investment Bank and the German Development Bank KfW. Such a bank can finance large-scale investment projects, provide guarantees, undertake corporate restructuring projects and contribute to the productive and technological transformation of the economy through the acquisition of shares in innovative or high value-added activities. Furthermore, a branch of the Development Bank could be a branch of special purposed for Small Businesses. In collaboration with the European Investment Fund, it could provide guarantee, small loans, consulting service, namely integrated solutions-package for Small Businesses, which – though they are the backbone of our economy – is practically out of the banking system.

QUESTION: Does the law that bears your name (Katseli law) for indebted households and companies need to be completed or changed? What are your proposals?

The crisis and deep recession have exaggerated the problem of indebtedness. Even healthy and viable businesses that do not have access to the bank funds cannot finance basic operational needs. Thousands of small businesses and households cannot pay their loans due to the unsustainable conditions applied today.

The settlements that have been passed by the recent Law 4224/13 lay the terms and conditions of the necessary restructuring of loans at the discretion of the banks. Therefore, legislative initiatives must be undertaken to extend the scope of L. 3869/10 for indebted households and those with commercial activity as well as those with temporary and not only permanent weakness of debt payment; combined with the modernization of bankruptcy law. At the same time, there needs to exist a legislative initiative, a modern regulatory framework for the management of delayed debts or/and red loans to banks so that to guarantee transparency and accountability in the process of restructuring. Finally, as to improve the implementation of L.3869/10 for indebted households, initiatives should be taken so that the problem of long waiting of pending cases is solved.