Thursday, May 26, 2011

More on Europe’s March Towards Non-Lethal Suicide

Non-Fatal Suicide (def):  A set of actions, policy decisions, strategies and positions taken by a business, regulatory agency or government which are so self-destructive that they would cause the demise of a lesser organization, but only inflicts huge but non-fatal harm to an organization that is strong enough to withstand the self-destructive behavior

Europe moves upward and onward in its zeal to destroy the Greek economy and in doing so severely damage the prospects of European economic recovery, cohesion and tranquility going forward.

The Dismal Political Economist has commented earlier on Europe’s hell bent intention to act against its own best interests in dealing with Greece, Ireland, Portugal and maybe soon to be Spain.

Now the latest plan is for the Europeans to force Greece to sell off its state owned assets and use the proceeds to pay down debt.  This seems reasonable, until you examine the proposal in detail.  Then it looks like pure idiocy.

To illustrate, let’s assume that Greece has $50 billion saleable state assets.  Now the reason that these assets, various state owned businesses, would be worth $50 billion is that they earn a rate of return.  If private interests value them at $50 billion, then the pre-tax rate of return is probably in the 16% range or above.  This means these state owned companies throw off at least $8 billion in pre-tax income.

If they are sold, and Greece uses the money to pay down European Community debt, they may save about 6% a year.  This is savings of $3 billion on a $50 billion pay down.  So at the end of the day Greece gives up $8 billion of annual income in return for savings of $3 billion.  Immediately the country is $5 billion in the red, this year, next year, and each year forever.  So Greece’s ability to pay off future debt and reduce its budget deficit takes a huge hit.

It’s nice to see Europe has their best minds at work on the problem.

1 comment:

  1. The flaw in your assumption is that you are assuming that the private sector purchaser would run it as inefficiently as the Greek government currently does.

    In fairness, I will point out the flaw in the assumptions that this ideas proponents have made? Who in their right minds has money to invest in Greek assets and is willing to risk it without getting a substantial discount to market value?