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Thursday, July 14, 2011

Letter to Prime Minister George Papandreou

Dear Mr. Prime Minister,

we have in common that we both studied at Harvard. I am not Greek but my wife of nearly 40 years is, and because of that I have developed deep sentiments about Greece and Greeks. This is why I want to make some suggestions to you.

First, I have had 7 years of personal involvement in the Latin American debt crisis during the 1980s; so I have some idea of what I am talking about. I witnessed Chile being turned around from a corrupt, planned, communist economy into a successful market-based economy even though Chile, after Allende, was in a much worse economic situation than Greece is today. There is absolutely no reason why Greece could not manage a similar turn-around. Below are my points in bullet form. If you are interested in details, I have made links to my blog. And if you really want advice from an expert, contact William R. (“Bill”) Rhodes.

1) Without a flourishing private sector economy, Greece will face doom, and I really mean doom (civil disobedience; civil unrest; perhaps even a challenge to democracy).

2) Everyone knows that the existing economy needs to be restructured from A-Z. Please be mindful that such a process takes years (if not decades). Greece does not have the time to wait for that! (even though that process must be started).

3) In over 30 years of management (including several restructuring challenges), I have learned the following: “Don’t try to turn a complete chaos to normality at one time. That does not work. Instead, create ‘pockets’ of new situations where everything is the way it should be. Over time, these successful new situations will rub off on the existing chaos”.

4) You know very well that Greeks hold phenomenal amounts of liquid assets in foreign bank accounts. THESE GREEK ASSETS ARE THE ANSWER TO GREECE’s FUTURE!!!

5) Some of these funds will very quickly return to Greece if they find an investment framework which offers them the same security as Switzerland does and much better returns than the 2% which Switzerland presently offers.

6) You have to pass a new Foreign Investment Law of constitutional rank and you have to ask the EU to guarantee compliance with it. The foreign investor should not be expected to carry any political risk.

7) This law must guarantee the foreign investor everything which he requires before investing his money in Greece. If you want an example, let yourself be briefed about Chile’s Foreign Investment Law of the late 1970s (security of investment, payment of dividends and capital repatriation; internationally competitive tax incentives, costs and labor regulations; etc.).

8) You cannot apply this new law to the whole country because that would trigger a revolution. Thus, you must initially apply it selectively. My proposal would be to establish Free Trade Zones where that Law would apply. Alternatively, one could “mark” foreign investments under that Law regardless where they are made. They have to be new investments, however, and they have to be financed with equity capital from abroad.

9) To get off to a quick start, the new foreign investment should be made in the production of products which are presently being imported but which could just as well be produced in Greece if the economic framework were “right”. The foreign investor would find an economic nirwana: he already has a market for his products and he can produce these products at internationally competitive terms.

10) Picture the following: while the new Foreign Investment Law is being formulated, you ask your experts to prepare bid information for, say, 50 possible new investments for import substitution. Before you go public on that, you line up 2 or 3 investors of good renown who will go for it right away. And once the Law is ready to be passed, you simultaneously announce a bidding process for investment opportunities and you mention in passing that the first 3 projects are already placed. The Chileans succeeded in developing a run on foreign investments in their country (“before the door closes again”). Why could you not accomplish the same?

11) At the same time, you have to pass new laws to stop the financial drain on the country. Between December 31, 2009 (1-1/2 years ago) and March 31, 2011, the gross foreign debt of Greece remained unchanged at 408 billion EUR. What happened to the billions and billions of Euro which entered the country during the above period? They left the country as debt service; as payment for imports; and as massive official capital flight (via bank accounts).

12) You have to reduce those 3 outflows in order to stay in business: reschedule debt; curtail imports and replace them with domestic production; and stop official capital flight altogether (control of capital outflows).

13) Regarding the debt: you as the representative of the debtor country have to take the initiative for proposing solutions into your own hands. You cannot allow third parties (EU-politicians, ECB officials and bankers) to negotiate something which concerns above all your own country. If Greeks perceive that “foreigners” imposed something on them and that you agreed to that, you will not be Prime Minister for much longer.

14) You cannot take that initiative before you have something to bring to the party. What you have to bring to the party is an absolutely convincing developing plan for the Greek economy (seek the advice of every expert you can find!). A plan which promises that, over the years, Greece will become a value-generating member of the EU. A plan which no thinking person can object to.

15) And when you present that plan to your creditors and after they have applauded, you present your requests.

16) Those requests should be based on the wisdom that one cannot draw water from a dried-out well. Greece can only repay foreign debt if foreigners first give Greece the money to do that. Even a high school student will understand that this does not make sense.

17) Thus, you request the foreign creditors to consider the money spent over the last 10 years and the debt which exists now as “spilled milk” which has to be rescheduled out to at least 20 years (including most of the interest). That way, you can reset the clock to zero hours and start from scratch a second time.

18) All you have to ask is to be given a “2nd Chance”. All you need to convince your creditors of is that, if that 2nd Chance is used well, the “spilled milk” may – at least partially – become good milk again in about 20 years’ time. And you certainly would involve your creditors in the planning of how to structure that 2nd chance so that they feel responsible for the success thereof as well. But you have to call the shots!

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