Saturday, May 29, 2010

Working with Flaws

Having followed Greece’s financial crisis for the last five months, I realize today that a feasible solution will not be defined for Greece’s woes (or for Spain’s and Portugal’s for that matter) until leadership approaches the issue not just as a financial problem but as an economic one. Country members must find their flaws and accordingly redefine their strategy and their competitive advantage. While German leadership has been honing in, constantly updating Germany’s competitive advantage, the rest of Europe is complacently lagging behind.

No one can compete with Germany’s foresight to deleverage during the pre-crisis years (up to late 2007, early 2008 when most corporates in Italy, Greece, Spain, and Portugal experienced substantial rise in leverage). In retrospect, Germany’s strategy raises an array of issues worth examining further. For example, the German government followed a contrarian strategy within the European markets and adequately reinforced its fiscal and political power within that context.

Simon Nixon (“Why Concern for Greece Wasn’t Just a Singular Worry,” The Wall Street Journal, February 12, 2010) argued that as “the global debt pile from the credit markets [is transferred] to the banks, from the banks to sovereigns and now from weak sovereigns to stronger ones […] once this transfer is complete, the dept pile will have nowhere else to go.”

This means that even though Germany has undertaken a Herculean load of Greece’s debt, the times call for a re-examination of all of the country-members’ flaws as springboards for potential growth. Namely, it is not a fiscal policy that will save country members but rather a structural policy that aims at redefining sovereign strategic aptitude. For Greece this could mean the following:

Look for flaws in the way the public sector works and correct that with a series of privatizations. It has been reported that the Greek socialist government hired investment bank Lazard to advise the country on its public finances. Having worked on the privatization of the state carrier Olympic Airways, Lazard could be the bank restructuring railways and the gaming industry along with other privatization initiatives.

Up to that point, working with flaws (in identifying areas that can be improved and restructured) is a macro-approach to Greece’s financial problem. The micro-approach requires looking at small businesses across sectors and their odds for survival. The odds are not good. The corporate sector is in a particularly difficult position as banks are reducing their capitalization ratios. The prospects of investment from within Europe are minimal. Additionally, this means that the ailing public sector is facing a road to privatization that is going to be long, arduous, and unpredictable.

It’s not just the lack of capital infusion that is hurting corporates and small businesses at the moment but also the respective legal frameworks, most of which antiquated and with an equal share of blame as culprits for the current financial crisis. In Greece, it takes a little over $10,000 to obtain a permit to start a new business, whereas in the US a business owner can incorporate for about $350. But if there are no small businesses, if the public sector contracts, if large corporates have no access to capital how is the economy going to recover? Ideally, a side effect of the current crisis would be a reform of Greece’s corporate law.

It is great to identify the flaws in each one of the European country members. The mistake would be not to do anything with them.

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