Captured media attention - the opportunity to introduce the Greece’s potential

The Greece’s €110bn joint EU-IMF bailout package approved last year won't be enough to stabilize Greek economy. The country needs to find another €60bn to cover its deficit, repay long-term loans and support banks through 2013. However, the S&P downgraded Greece’s credit ratings to B and increased over 16% ten year government bond yields force Greece to negotiate on another rescue package alongside with considerations on debt restructuring. Thus, what else can Greece do to help itself?

According to the decision of the Greece Interministerial Committee for Asset Restructuring and Privatisations which was made on December 15, 2010, the Real Estate and Asset Privatization programme involves government intentions to transfer operational management of the country’s strategic communications: airports, railways, motorways, marinas and ports through concession agreements, search for the best available privatization options for its stake in energy and natural resources supply and operations such as natural gas suppliers and natural gas network operations, water suppliers and nickel mining operational improvements as well as the selection and privatization of major real estate assets. The estimated incomes from the Asset Management and Privatization programme amount €7bn within the 2011-2013 period and that is not sufficient to meet outstanding Greece debt obligations.

The privatization programme may be more successful if assets were sold according to the potential increase of its values after assets’ restructure and operational improvements. Thus, the country would benefit more by suggesting investment opportunities rather than sales of its real estate assets. Moreover, when media capture attention to Greece, it is the right time for the country to take the opportunity and present the guidelines of its economy development trends, advantageous of produced domestic products and provided services as well as to promote investment opportunities in private sector.

Get out from the systematic dependence

According to the article “Bank caves in over PPI mis-selling” published in the Financial Times on the 9th of May, the customers of the Lloyds Banking Group, Barclays, HSBC and Royal Bank of Scotland massively require compensation for mis-sold loan insurance. Some analysts estimated that the compensation may reach £ 8 bn and that this mis-selling case may be the biggest in the UK. It also may imply that customer protection instruments are used in full scale and the tendency to back up financial decisions by insurance is prevailing.

Financial safety nets that involve liquidity support, deposit insurance, investor and policyholder protection schemes and crisis management policies are designed to maintain customers’ confidence and protect them from the financial institutions failure. However, it seems that those risk minimization measures work well only to soften temporary disturbance and illiquidity. Managers may be encouraged by insurance to take excessive risks and increased liquidity may boost inflation. Moreover, in case of the exaggerated instability the higher insurance premiums are imposed to adjust risk to the sectors’ interconnectivity and additional costs are experienced due to tighter supervision.

So, while integrity of financial institutions supports the economy development, the same interconnections may be treated as a cause of systematic risks. The inter relations, like a chain of separate elements, create domino effect. Once the significant part of the system becomes weak, it pulls dawn the other elements.

The possible solution to manage systematic risks efficiently could be the release of connections between financial institutions that facilitate a pull back from the systematic dependence. The way, when participants do not depend on the destructive circumstances, flexibly allocate assets and hedge market risks from high volatility.

Interest rates versus inflation

What is the right interest rate for the low growth and high inflation regions? This is the main issue to consider for the central banks in Europe and US. Moreover, is the increased nominal interest rate an appropriate measure to manage inflation when financial stability is rebuilt by the increased money supply?

According to the Federal Reserve Board’s and Federal Open Market Committee’s press release in April 27, the FOMC decided to maintain the Federal Fund Target Rate at 0.25 %. Similarly, according to the press conference held in May 5, the Governing Council of the ECB agreed to keep the key ECB interest rates at 1.25 % after the 25-basis point increase on 7 April 2011. The governors of central banks promised to monitor the inflation and commodities' prices closely and respond to arisen inflationary pressure respectively.

Considering the current US’s and Europe’s economic outlook somebody may interpret that a slight, 1-3 % annual GDP growth of the region is a signal of the modest recovery while determined nominal interest rates are lower than the growth of GDP. However, from my point of view, if the projected capital flows of the state were discounted by the adjusted rate for inflation, it might appear that the current costs of output exceed the future benefits and the net present value is negative.