That’s just one of the helpful suggestions from the securitisation team at Barclays Capital to Greece, which of course is struggling to meet its fiscal shortfall.
Others include raising revenues by selling off state assets a la Poland, reducing tax avoidance, cutting wages and increasing the retirement age.
Of course, the analysts admit, some of these are easier said than done.
Wage reduction could result in price deflation, while a rise in the retirement age might be met with widespread opposition and strikes, say the analysts.
But there’s also the option to immediately cut expenditure. As the BarCap team advises:
A reduction in transfer payments could be achieved by any number of means, but increasing the retirement age (to reduce pension payments) and reducing unemployment benefits would first and foremost come to mind.
Our economists also point to potential savings by reducing healthcare entitlements. There may be additional ways to reduce pension benefits and a crack-down on unemployment benefit fraud (if any) might succeed in reducing outgoings as well.
In fact, pension reform may be especially important in light of the Greek demographic trends, and negotiations around pension reform are due to start in April. However, to what extent corresponding legislation can be enacted, and how soon, remains an open question. Suffice it to say that voters tend to grow fond of their benefits and would historically appear rather reluctant to give them up. Certainly, any such reform attempts come with the risk of strike action on a broad front, with a corresponding negative impact on production and hence government revenues.
But never rule out currency redenomination itself. As the BarCap analysts put it:
In order for Greece to raise revenues via seigniorage, it would have to leave the Eurozone – ie, re-denominate all the country’s financial assets and liabilities into a new domestic currency controlled by the Bank of Greece.
In such a scenario, the Republic’s external debt would likely also be re-denominated into the new domestic currency, a new Drachma perhaps, in order to be repayable. Given that such a re-denomination would be motivated by the prospects for seigniorage, inflation expectations would likely rise – and the new Drachma may fall in value to the Euro, quite possibly resulting in real losses on any outstanding, re-denominated government debt.
Although in all likelihood, because confidence in a new drachma currency would not be high, raising drachma-denominated debt would neither be cheap nor easy for Greece, say the analysts. The alternative of raising hard currency debt, meanwhile, would only expose the country to exchange-rate risk — limiting the benefits of redenomination.
That said, collateral might perform better under a redenomination scenario than any other, according to BarCap. Alas, it wouldn’t necessarily translate well for Greek ABS investors — lacking drachma-to-euro currency swaps in their structure, investors would lose out on drachma depreciation incurred.
The conclusion after all that? An EU bailout please, say BarCap:
Needless to say, like most investors in Greek bonds – be it Greek government bonds, Greek corporate bonds, or Greek ABS bonds – we are hoping that concrete external support will be forthcoming for the Hellenic Republic before the situation deteriorates beyond the point of no return.
Related links:
How to borrow €1bn without adding to your public debt figures – FT Alphaville
Greek woes revive seven-year old Goldman swap story – Risk
That Greek CDS trigger – FT Alphaville
Euro break-up: Not necessarily a credit event – FT Alphaville