Vox
June 22, 2011
Protests continue in Greece as its leaders debate the latest suggestions for dealing with its crippling debt. One proposal is for Greece to privatise several of its assets. This column argues that privatisation is a mirage. If solvency is the problem, privatisation will only make matters worse, especially if it has to be done at distressed prices.
Large-scale sales of public assets by the Greek government are the latest straw to which policymakers are trying to clutch, as the Greek debt saga threatens to drag down the European economy. However, privatisation is a mirage.
Privatisation can help when the problem is one of liquidity. If the problem is one of solvency, privatisation will only make matters worse, especially if it has to be done at distressed prices (Manasse 2011).
The government of Greece has officially promised to raise €50 billion (close to 20% of GDP) by 2015 through sales of public assets and privatisation receipts of €30 billion are the cornerstone of the second Greek rescue package from the EU/IMF/ECB that is being finalised these days. It is highly unlikely that the full sum will be realised, but the real question is whether privatisation is in principle a useful way to reduce public debt. The short answer is no.
That privatisation cannot solve a solvency problems should be clear from first principles. By selling assets the government can obtain funds to reduce its debt service burden, but it also loses future revenues. A priori the two should cancel out each other without a net gain or loss. But large-scale privatisation to reduce short-term debt (by paying maturing bonds in full) will actually increase the risk premium on longer-term debt.
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