Friday, April 22, 2011

Greece Inc. A Broken Company

by Alessandro Pasetti and Robert Armstrong

Wall Street Journal

April 21, 2011

There are two kinds of corporate debt problems: those that can be solved with revenue increases and cost cuts, and those that only a restructuring can remedy. If Greece were a corporation, not a sovereign debtor, it would be faced with the latter kind.

Stated in corporate terms, Greece’s main issue is core operating losses. The country’s primary deficit, which excludes interest expense, totaled €12 billion in 2010, according to Ministry of Finance projections released last week (the projections exclude the impact of any fiscal intervention).

Given a revenue base of about €92 billion, that in itself might not look overwhelming to a corporate turnaround artist. Boost revenues by a little over 6%, and cut expenses by the same amount, and you are nearly out of negative territory. This might even be feasible, with a little help from a cyclical upswing in the economy.

But Greece had a 2010 fiscal deficit— the primary deficit plus interest expenses—of more than €25 billion, due to a gross debt burden of more than €300 billion. Now executives must push revenues up 12%, and cut costs by the same amount, to stop bleeding money. This might be conceivable for a corporate CEO. However, in the business of running a nation, as you cut spending, you take a short-term hit to GDP growth, and therefore revenues (tax receipts).

To say that Greece Inc. is in a very tight spot is an understatement. It must generate enough free cash to actually pay down the principal on its debt. To do this over a period of 50 years would require generating a fiscal surplus—a profit after interest—of €6 billion a year and devoting it entirely to debt retirement.


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