*ConfldenLlal, publlc release 31 CcLober 2011

1

Greece: 1he Way Iorward
WhlLe aper - London, CcLober 27, 2011

8ackground
Cn 14 and 13 CcLober 2011, a group of senlor sLakeholders, many belng Creeks or of Creek orlgln,
gaLhered aL Lhe London 8uslness School Lo dlscuss Lhe Creek Crlsls. 1he group lncluded:
Ms, former mlnlsLers of llnance, Labour and Lconomy and economlc advlsors Lo Lhe Creek M
from boLh ASCk and nu.
Senlor pollcy-makers and advlsors boLh from Creece and Lhe Lu, former senlor lMl execuLlves,
and parL of Lhe currenL and former leadershlp of Lwo cenLral banks.
Senlor bankers from Creece, Lhe uk and conLlnenLal Lurope, senlor lawyers speclallzed ln
resLrucLurlng and Lax lssues, Lurnaround advlsors, and execuLlves from lndusLry and consulLlng.
Academlcs from conLlnenLal Lurope, Lhe uk and Lhe uS, wlLh experLlse ln economlcs, flnance,
banklng, sLraLegy, and pollLlcal sclence.
Cur dlscusslons covered Lhe managemenL and ramlflcaLlons of a poLenLlal Creek defaulL, Lhe
managemenL of Lhe Creek flnanclal secLor ln Lhe evenL of defaulL, and how Lo resLrucLure Lhe Creek
publlc admlnlsLraLlon and economy.
A remarkable consensus on fuLure dlrecLlons emerged, and Lhe lnLenLlon of Lhls WhlLe aper ls Lo
propose sLrucLural recommendaLlons. Cur prlmary lnLenLlon ls Lo lnform Lhe dlscusslons among Lhe
Lu, Lhe lMl and Lhe Commlsslon, and Creece.
We propose some conLroverslal buL necessary pollcy cholces. 1hese vlews do noL always represenL
Lhe enLlreLy of Lhe parLlclpanLs, buL Lhey have been lnformed by Lhe group dlscusslons.


Mlchael C. !acobldes 8lchard orLes ulmlLrl vayanos
Slr uonald Cordon Chalr of rofessor of Lconomlcs rofessor of llnance
lnnovaLlon & LnLrepreneurshlp London 8uslness School London School of Lconomlcs
London 8uslness School resldenL, CL8 & ollLlcal Sclence
*ConfldenLlal, publlc release 31 CcLober 2011
2

Lxecut|ve summary
Creece ls balanced on a knlfe-edge, wlLh a weak publlc admlnlsLraLlon, amblLlous LargeLs for deflclL
reducLlon and a macroeconomlc conLracLlon. We suggesL LhaL a seL of new prlorlLles for Lhe 1rolka
and Lhe Creek governmenL (and pollLlcal forces allke) can be of help, Lhrough Lhe followlng urgenL
acLlons.
We propose independent outhorities wlLh a clear responslblllLy , worklng Lo focused
key erformance lndlcaLors (kl). 1he maln ones would be: 1ox 4ssessment ond co//ection
4uthority, keforms 4uthority, neo/thcore 4uthority, and corruption lnitiotive. 1hey would
reporL Lo Lhe Creek arllamenL whlle updaLlng credlLors and Lhe CovernmenL.
1he credlLors and Creece allke should focus on Lhe rotiono/itotion of pub/ic outhority desiqn,
glven dlglLal workflows, and inteqrotion of kPls in the resource o//ocotion process. llrlng
underperformlng clvll servanLs musL be allowed. ermanenL undersecreLarles of SLaLe are
proposed Lo supporL capaclLy and lncrease conslsLency.
1ox ond customs & excise evosion musL be addressed head-on. ulsLance beLween rheLorlc and
reallLy suggesLs a need Lo sLarL afresh, obo/ishinq current structures ond institutinq new ones.
SLrucLural reforms lncludlng f/exib/e l1 procurement, judicio/ reforms, ond performonce-bosed
controcts are essenLlal.
Advances ln Lerms of accounLablllLy and Lransparency sLall ln lmplemenLaLlon. lor example, Lhe
promlse of e-procuremenL and cosL-savlngs sysLems has yeL Lo dellver full resulLs. lor Lhls reason,
we suggesL LhaL /oons be mode conditiono/ on structuro/ reforms.
1he focus of Lhe 1rolka on operaLlonal measures wlll help /eqitimite the reform proqromme and
ellclL buy-ln from Creeks, who are faclng severe hardshlp. creotinq o sense of moro/ justice ls
paramounL, especlally glven Lhe LurbulenL pollLlcal cllmaLe and lncendlary soclal envlronmenL.
kevokinq side-poyments of qovernments to interest qroups (e.g., Lhe lndefenslble t700m a year
subsldy from publlc funds Lo Lhe LlecLrlclLy Company penslon scheme) wlll help bulld credlblllLy
and address soclal falrness.
Privotitotions should be pursued Lo resLrucLure Lhe economy. 1haL cenLral ob[ecLlve should noL
be obscured by a mlsplaced focus on LargeLs for flscal recelpLs . We also propose Lhe change of
Lhe prlvaLlzaLlon process Lhrough Lhe use of debt finoncinq. As uncerLalnLles on zonlng and LlLles
are reduced, or more asseLs or companles are added, Lhe debL capaclLy (wlLh Lhe asseLs as
collaLeral) can lncrease as well, and access ouLslde fundlng before credlL raLlngs allow Lhe Creek
governmenL Lo do so. 1he prlvaLlzaLlon fund should be bolsLered subsLanLlally Lo lncrease value ln
asseLs under lLs managemenL.
Assumlng a subsLanLlal soverelgn debL resLrucLurlng, bank recaplLallzaLlon wlll be needed, and
our maln concern for Lhe banklng secLor ls how the bonks wi// be qoverned - ond protected from
po/itico/ inf/uence. llnanclal supervlslon musL be sLrengLhened and expanded as soon as posslble.
1he auLhorlLles should conslder more exLreme soluLlons such as Lhe lnsLlLuLlon of an u
jurisdiction, lf Lhls can be made compaLlble wlLh Lhe Creek consLlLuLlon. 1hls could be a
complemenL Lo sorely needed changes ln Lhe judicio/ system.
*ConfldenLlal, publlc release 31 CcLober 2011
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LngagemenL wlLh civi/ society institutions Lo help lnsLll confldence and lnvolvemenL ls also
essenLlal.
1he reform programme musL focus on imp/ementotion ond enqoqe more deeply wlLh Creeks, so as
Lo help sLablllze Creece's economlc slLuaLlon and glve lncenLlves for lnvesLmenL and producLlon.
1here ls an urgenL need Lo focus on operaLlonal measures and resLrucLure Lhe Creek publlc
admlnlsLraLlon. Whlle vlgorous appllcaLlon of compeLlLlon pollcy and reforms of Lhe labour markeL are
clearly lmporLanL, our WhlLe aper focuses on lnsLlLuLlonal change whlch has noL been properly
aLLended Lo. 1he unwllllngness (and posslbly Lhe lnablllLy) Lo change ls endemlc and undersLandable,
and we cannoL wlsh lL away.
Ownership, communicotion, ond enqoqement are cruclal. uebL rellef wlll demonsLraLe LhaL Lhe
programme ls noL abouL proLecLlng Lhe enLrenched lnLeresLs of credlLors. 4nomie ond the disso/ution
of pub/ic order are posslble and exLremely dangerous scenarlos LhaL would be hard Lo reverse. 1hls
alone oughL Lo galvanlze all pollLlcal parLles Lo work LogeLher. Slnce lL has noL, we do wonder lf Lhe
gravlLy of Lhe slLuaLlon ls undersLood. We advocaLe a new approach and hope Lhese proposals wlll
engender acLlon as well as debaLe.
*ConfldenLlal, publlc release 31 CcLober 2011
4

Current |mpasses and the need for structura| reform
Creece ls faclng a perfecL sLorm. SLrucLural problems of Lhe economy and publlc admlnlsLraLlon,
masked and neglecLed for decades buL lald bare by Lhe currenL crlsls, musL now be Lackled. 1he local
flnanclal secLor ls [eopardlzed, buL so ls Lhe global flnanclal sysLem and Lhe Luro lLself. noL only does
Lhe slngle currency lack a mechanlsm Lo deal wlLh soverelgn crlses llke Creece's, lLs sLrucLure
exacerbaLes Lhem. And all Lhls ls happenlng aL a Llme of slugglsh global growLh (aL besL), followlng a
global flnanclal crlsls, and under severe pollLlcal and macroeconomlc pressures.
Whlle we dlscussed debL rellef, we appreclaLe LhaL we have llLLle lnfluence. Sufflce lL Lo say LhaL Lhe
supposed 21 Sl emerglng from Lhe 21 !uly negoLlaLlons mlghL have been lllusory, slnce Lhe acLual
amounL depends on Lhe cholce of dlscounL raLe. lL ls easy Lo see why banks and Lhe lll were pushlng
for such a soluLlon, buL Lhls was Loo good a deal for holders of Creek debL and unsusLalnable for Lhe
CC8 owners ln Lhe long run. ln Lhe shorL run, Lu Laxpayer and lMl loans (whlch wlll have prlorlLy)
have been used Lo pay exlsLlng debL-holders ln full, lncludlng Lhose who boughL CC8s ln Lhe
secondary markeL for a Lhlrd of Lhelr nomlnal value (maklng Lhe !uly Sl a poLenLlal wlndfall for Lhem).
So speculaLors would acLually beneflL from Lhe preservaLlon of an unsLable sLaLus quo, funded by Lhe
lMl and Lu Laxpayers. lurLhermore, Lhe markeL had prlced ln a masslve Creek defaulL. WlLh Lhe new
L8A sLress-LesLs for marklng Lo markeL" soverelgn debL, Lhere ls llLLle value ln malnLalnlng Lhe
preLence LhaL Creece does noL need Lo defaulL. nor would lL be dlsrupLlve Lo Lrlgger credlL defaulL
swaps, lf Lhls were Lhe resulL. 1he 26 CcLober Luropean Councll agreemenL on subsLanLlal debL rellef
appears Lo go ln Lhe rlghL dlrecLlon, buL lL ls noL posslble Lo [udge wheLher lL ls adequaLe wlLhouL
seelng preclse Lerms and conducLlng a serlous debL susLalnablllLy analysls, followlng sLandard lMl
meLhodology. And lmplemenLlng debL reducLlon musL safeguard Lhe lndependence of Lhe Creek
flnanclal secLor. Any resLrucLurlng should cerLalnly oot be llnked needlessly Lo an exlL from Lhe Luro, a
dangerous and undeslrable soluLlon for all parLles.
Powever, a subsLanLlal halrcuL alone wlll noL solve Creece's problems. !usL as ln a corporaLe
Lurnaround, Lhe flnanclal resLrucLurlng should only happen once plans are made for operaLlonal
LransformaLlon. Creece needs Lo Lackle real reforms head-on - Lhe alLernaLlve belng a collapse, whlch
would hurL Creeks and push Lurope lnLo a conLracLlonary Lallspln, especlally lf Lhe moneLary unlon
were Lo dlslnLegraLe.
lL ls crlLlcal Lo Lle Lhe reforms Lo Lhe loans Creece wlll sLlll requlre unLll lL achleves currenL accounL and
prlmary flscal balance. We propose a falrly bold deparLure from Lhe currenL approach of Lhe 1rolka.
1he resL of Lhls reporL ouLllnes Lhe nexL sLeps LhaL are urgenLly requlred.

2ero|ng |n on tax evas|on: an |mmed|ate |mperat|ve w|th f|sca| and symbo||c |mportance
1he sLaLe of LaxaLlon ln Creece ls boLh bad news and good news. 1he good news ls LhaL Lhere ls huge
scope for lmprovemenL: Lhe sLaLe recelves t13-20bn per year less Lhan a base-case" scenarlo based
on Lu-wlde Lax evaslon levels from personal Lax, corporaLe-lncome Lax, and vA1. 8uL LhaL suggesLs a
wlde range of bad news. AdmlLLedly, Creece has some sLrucLural dlfflculLles LhaL make Lax evaslon
more pervaslve, such as a very hlgh self-employmenL raLe and Lhe preponderance of very small
buslness wlLh mlnlmal Lax reporLlng. 8uL Lhls has long been an lssue, and llLLle has changed. 1raclng
*ConfldenLlal, publlc release 31 CcLober 2011
3

back 20 years of budgeLs submlLLed Lo Lhe Creek arllamenL, one flnds Lhe conLalnmenL of Lax
evaslon as a maln LargeL ln every slngle year. Meanwhlle, MlnlsLry of llnance offlclals had recelved
salarles up Lo Lwlce as hlgh as Lhose pald ln oLher mlnlsLrles. 1here ls a wldespread concern wlLh
cottoptloo lo tox ootbotltles, and Lax collecLlons ouLslde Lhose held aL source are aL very low levels.
AudlLlng and punlshmenL of Lax-evaslon suspecLs ldenLlfled by cross-checklng daLa has progressed
very slowly. Lack of progress ls due Lo Lhe lnefflclenL and corrupL naLure of Lhe currenL mechanlsm. ln
facL, lt moy be beyooJ solvotloo - and Lhls needs Lo be recognlzed now.
1he number of Lax-collecLlon offlces ls much hlgher Lhan ln oLher counLrles. 1he assoclaLlon of Lax
collecLlon offlclals ls reacLlng Lo severe pay cuLs wlLh a 'go-slow', and Lhere ls wldespread reslsLance
Lo change, desplLe obvlous lnefflclencles. 1ax offlces are even belng downrlghL unresponslve Lo
currenL lnlLlaLlves, such as demands from Lhe MlnlsLry of llnance Lo engage ln audlLs based on
elecLronlc assessmenL of poLenLlal Lax-evaders. Such fooL-dragglng ls dlsconcerLlng, especlally slnce
subsLanLlal lncomes were dlscovered by Lhe few audlLs LhaL dld Lake place.
1he recenL onllne publlcaLlon of performance daLa for each of Lhe Lax-collecLlon offlces by Lhe
MlnlsLry of llnance Ceneral SecreLarlaL of lnformaLlon SysLems provoked a huge backlash, wlLh no
counLer-suggesLlon of kls LhaL should be Lracked lnsLead. 1here have been no dlsclpllnary, career, or
resource-allocaLlon consequences for underperformance. Lven lf Lhere were Lhe wlll Lo change, and
corrupLlon could be curbed (Lwo very blg 'lfs'), lL seems LhaL Lhe copoblllty Lo change ls slmply noL
presenL.
1hose formerly responslble for Lhe MlnlsLry of llnance have noLed, asLonlshlngly, LhaL even lf all Lhe
Lax-collecLlng auLhorlLles were shuL down, sLaLe revenues would noL suffer noLlceably. MosL of Lhe
Laxes collecLed are wlLhheld aL source or pald Lhrough elecLronlc LransacLlons. Lven Lhe newesL
properLy Laxes are noL belng dlrecLly measured and collecLed - Lhe governmenL relles lnsLead on
elecLrlclLy bllls (whlch are used Lo collecL) as Lhese reporL slze of dwelllngs, wlLh paymenL enforced by
Lhe LhreaL of dlsconnecLlon. 1hls ls hardly a Lax pollcy.
lt ls ptobobly lmposslble to cbooqe socb o system. Oot ptoposol ls to obollsb lt and bulld a new one
based on currenL besL pracLlce, Lhe lnLense cross-checklng of daLa, and Lhe capablllLles needed. lL
should also be based on Lhe sorL of measures - and aLLlLudes - LhaL wlll creaLe Lhe eLhos approprlaLe
for a Lax-assessmenL and collecLlon agency. 1he MlnlsLry of llnance should sLlll seL Lhe rules for
LaxaLlon, buL assessmenL and collecLlon should be carrled ouL by a newly creaLed lndependenL
agency, whlch should have an arm's-lengLh relaLlonshlp wlLh Lhe CovernmenL.
A new admlnlsLraLlve lnfrasLrucLure should be creaLed, wlLh employees on shorLer-Lerm conLracLs and
performance-relaLed pay. WlLhln slx monLhs, all responslblllLles and flles should be Lransferred.
8uslness unlLs wlLhln Lhe new agency wlll be responslble for Lhelr own resulLs, and wlll be able Lo
deflne Lhelr own needs and resource allocaLlon. 1hls wlll faclllLaLe leaner sLrucLures, wlLh flexlblllLy
belng counLerwelghed by Lransparency and accounLablllLy, faclllLaLed by l1. Lach unlL should be
compared Lo oLhers and benchmarked agalnsL Lhem. SLaff should roLaLe regularly across unlLs Lo
mlnlmlze Lhe scope for corrupLlon. 1argeLed lnvesLmenL ln people and l1 (and flexlble procuremenL)
should be made, focuslng on Lhe reLurn on such lnvesLmenLs. Some Lax collecLlon could posslbly be
ouLsourced Lo a [olnL venLure [olnLly owned by CovernmenL, credlLors, and speclallzed flrms, parLlal
use of such channels could also help ln seLLlng an addlLlonal benchmark for Lax collecLlon kls.
*ConfldenLlal, publlc release 31 CcLober 2011
6

CurrenL esLlmaLes are LhaL a hand-off or even a LoLal cessaLlon of Local 1ax Cfflce acLlvlLles would noL
be deLrlmenLal, glven Lhelr llmlLed lncome conLrlbuLlon. Slmllar changes are requlred for Lhe cusLoms
servlce, whlch has an equal repuLaLlon for corrupLlon. Addlng more and more layers of bureaucraLlc
approvals slmply expands Lhe scope of corrupLlon, such pracLlces wlll need Lo be slmpllfled or
[usLlfled. 1he lndependenL 8eform AuLhorlLy, dlscussed below, wlll llsLen carefully Lo proposals on
how Lo reduce corrupLlon, lLs responslveness wlll generaLe a sense of ownershlp and resLore some
sorely needed falLh ln Lhe sLaLe.
AL Lhe same Llme, Creece needs Lax rules LhaL are clearer, less sub[ecLlve, and as such less llable Lo
corrupLlon. 8ecenL examples of Lhe sub[ecLlvlLy of vA1 classlflcaLlons (beLween 13 and 23) or
varlaLlons ln Laxes on heaLlng and vehlcle fuel provlde lnsLances of boLh corrupLlon and Lax evaslon
lnduced by amblguous, corrupLlble, or sub[ecLlve rules.
1he lmprovemenL of Lax collecLlon also requlres elLher Lhe lmprovemenL of Lhe [usLlce sysLem, or,
more plauslbly, Lhe lnsLlLuLlon of a parallel branch of Lhe [udlclary, focuslng on Lax crlmes, whlch wlll
have expedlLed Lrlal Llmes. 1he slow legal sysLem acLs as boLh a shleld and an lncenLlve for Lax
offenders. 1he lnvesLmenLs, lf requlred, should show a remarkable reLurn.
1ax reform ls crlLlcal Lo Lhe success of Lhe 1rolka programme. Plgh-proflle flgures wlLh means clearly
beyond Lhelr lncome musL be prosecuLed by an auLonomous unlL LhaL ls proLecLed from
governmenLal and pollLlcal lnfluence - posslbly wlLh dlrecL 1rolka supporL. 1ax ls a hugely symbollc
lssue LhaL can help Lo Lurn Lhe Llde of publlc senLlmenL and rebalance economlc acLlvlLy.

keform|ng pub||c adm|n|strat|on: from gener|c statements to pract|ce
Creek publlc admlnlsLraLlon ls one of Lhe rooL causes of Lhe problems. noL only ls lL consumlng a
dlsproporLlonaLe share of Cu, buL lL ls also prevenLlng efflclenL resource allocaLlon - ln elLher Lhe
publlc or Lhe prlvaLe secLor. 1he deflclL (and Lhe resulLlng debL) ls parLlally due Lo Lhese underlylng
deflclencles. ubllc admlnlsLraLlon musL lmprove Lhe quallLy of publlc servlces Lhrough compeLlLlon
and dlfferenLlal reward of besL pracLlces and people. lL musL lmprove Lhe llnk beLween Lhe publlc and
Lhe prlvaLe, ellmlnaLlng cllenLellsm, favourlLlsm, and corrupLlon. And lL musL reduce red Lape, supporL
Lhe overwhelmed [udlclal sysLem, remove uncerLalnLy abouL LaxaLlon and regulaLlon, and address
regulaLory capLure.
1hese hlgh-level problems are well known, and boLh ma[or parLles have Lrled Lo address Lhem. ?eL Lhe
lssues remaln and are conLlnually compounded. Cur vlew ls LhaL Lhey cannoL be resolved wlLhouL
ma[or sLrucLural changes. 1hls crlsls ls an opporLunlLy Lo redeslgn Lhe Creek publlc admlnlsLraLlon, lf lL
ls noL Laken, credlLors wlll noL recoup Lhelr caplLal, nor wlll Creece reLurn Lo growLh. Lxperlence Lells
us LhaL Lhe burnlng plaLform" of lnLense budgeLary pressure does noL guaranLee change ln and of
lLself. A flawed sysLem wlll slmply devour lLself. So credlLors should help Lhe sysLem evolve, and ln so
dolng galn publlc supporL.
A number of poslLlve flrsL sLeps have been Laken, and noL all have recelved due credlL. LeglslaLlon on
Lransparency (such as Lhe dl[vgla programme), and Lhe use of e-governmenL Lo puL all relevanL
publlc documenLs on Lhe web, as well as Lhe changes ln Lhe dlsclpllnary code of clvll servanLs, are
lmporLanL Lools for change. 8uL Lhe lmpacL of such lnlLlaLlves ls noL reallzed because Lhey become
*ConfldenLlal, publlc release 31 CcLober 2011
7

mlred ln lmplemenLaLlon. We cannoL expecL change efforLs Lo susLaln Lhemselves when beseL by
enLrenched lnLeresLs, renL-seeklng, and pollLlcally powerful medla ouLleLs.
WhaL can Creece do Lo speed up change and glve a poslLlve shock Lo lLs publlc admlnlsLraLlon? llrsL,
mosL pollcles underLaken ln a mlnlsLry depend on Lhe mlnlsLers, who brlng Lhelr senlor sLaff wlLh
Lhem. 1he lack of senlor clvll servanLs wlLh clear accounLablllLy leads Lo lnconslsLency and mlssed
opporLunlLles for long-Lerm change, glven Lhe shorL Lenure of mlnlsLerlal posLs. 1herefore, we
propose Lhe lmmedlaLe (re-)lnsLaLemenL of ermanenL undersecreLarles of SLaLe on all Lhe maln
porLfollos, each wlLh a handful of advlsors. 1hese senlor publlc offlclals wlll be evaluaLed on Lhelr
achlevemenLs and be accounLable Lo arllamenL, even Lhough Lhey work wlLh mlnlsLers. 1helr
appolnLmenLs, faclllLaLed by an lnLernaLlonal search flrm, should be proposed by Lhe 8oard of Lhe
8eforms AuLhorlLy (menLloned below) and approved by Lhe relevanL arllamenLary commlLLee. 1helr
advlsors should also be chosen from an open call, wlLh Lhe lnpuL of a search flrm, ASL as well as Lhe
opengov lnlLlaLlve could be used as well ln Lhls process. Lu offlclals can help Lo lnform Lhe nomlnaLlon
and selecLlon process, ln keeplng wlLh currenL (besL) pracLlces ln oLher counLrles.
A poLenLlally promlslng way Lo make admlnlsLraLlon responslve and accounLable ls Lo esLabllsh
lndependenL AuLhorlLles: lean agencles focused on followlng up and pushlng for change. 1hls
conLrasLs wlLh some of Lhe currenL experlences of such AuLhorlLles ln Creece. So governance and
accounLablllLy are key, as ls stoffloq tbem wltb wotlJ-closs execotlves wbo ote oot pott of tbe pobllc
oJmlolsttotloo ooJ wbo coo molotolo tbelt loJepeoJeoce, ooJ tesootcloq tbem ptopetly. We propose
a flve-member board, Lwo of whom could be proposed by Lhe 1rolka, and an lndependenL full-Llme
CLC - all appolnLed followlng a rlgorous selecLlon process and conflrmed by Lhe arllamenL wlLh a
super-ma[orlLy rule. arL-Llme board-level asslgnmenLs can also enable Creece Lo beneflL from Lhe
LalenL of lLs dlaspora. lL mlghL even be preferable lf mosL board members do oot have Lhelr prlnclpal
acLlvlLles ln Creece, so as Lo llmlL confllcLs of lnLeresL. CeLLlng Lhe deLalls of selecLlon, monlLorlng,
accounLablllLy, and [ob-speclflcaLlon rlghL wlll drlve Lhelr success.
1he lndependenL AuLhorlLles' recommendaLlons for change musL be heeded. 1helr remlL would be Lo
measure, assess, monlLor and reporL ln an lndependenL manner, and Lo JemooJ tbot octloo be tokeo
ooJ tepott to tbe Covetomeot, tbe lotllomeot, ooJ tbe cteJltots wbeo lt ls oot. 1he advanLage of Lhls
lnsLlLuLlonal lnnovaLlon wlll come from Lhe creaLlon of a focused, accounLable change agenL", free
from Lhe currenL organlzaLlonal sLrucLure and enLrenched lnLeresLs. MoLlvaLlons of Lhe admlnlsLraLlon
Lo comply, or relaLed sancLlons, such as budgeL reducLlons, wlll need Lo be deflned ex anLe.
AccounLablllLy wlll be enhanced by dlrecL reporLlng Lo arllamenL, even Lhough progress reporLs wlll
be senL Lo Lhe CovernmenL and credlLors.
SeLLlng up Lhese auLhorlLles should be lnformed by Lhe successes and problems of currenL
lndependenL AuLhorlLles (e.g., Lhe Lnergy 8egulaLlon AuLhorlLy, Lhe CaplLal MarkeL Commlsslon, Lhe
CompeLlLlon Commlsslon), as assessed by boLh lnLernal and exLernal assessors. Slmllarly, Lhere musL
be an expllclL mechanlsm Lo audlL Lhese auLhorlLles, benchmark Lhem wlLh lnLernaLlonal peers and
have Lhelr records assessed by lndependenL agencles, lncludlng buL noL llmlLed Lo audlLlng flrms.
SLrong, lndependenL leaders are also paramounL for Lhelr success.
We would recommend esLabllshlng Lhe 8eforms AuLhorlLy and Lhe PealLhcare AuLhorlLy, as well as an
AnLl-corrupLlon Agency as a maLLer of uLmosL urgency.
*ConfldenLlal, publlc release 31 CcLober 2011
8

1he 8eforms AuLhorlLy should have four arms or dlvlslons. 1he flrsL of Lhese should be a change
managemenL unlL LhaL follows Lhrough and supporLs all sLrucLural changes ln exlsLlng mlnlsLrles and
organlzaLlons and helps Lo lmplemenL change. 1hls unlL would have Lhe rlghL Lo demand compllance
from any mlnlsLry or organlzaLlon LhaL was reslsLlng change or dragglng lLs feeL, poLenLlally by
affecLlng Lhe flnanclng of non-complylng enLlLles or engaglng ln oLher measures Lo be deflned ex oote.
1he AuLhorlLy would also be free Lo acL on lnformaLlon from whlsLle-blowers" who hlghllghL areas
where change efforLs have sLalled.
1he second arm of Lhe 8eforms AuLhorlLy should oversee Lhe raLlonallzaLlon of Lhe overall porLfollo of
organlzaLlons, maklng recommendaLlons Lo Lhe CovernmenL ln Lerms of merglng, closlng, or changlng
Lhem. lL wlll Lhus collaboraLe wlLh Lhe Cfflce of Lhe uepuLy rlme MlnlsLer charged wlLh Lhese Lasks,
as well as wlLh Lhe 1rolka and Lhe credlLors.
1he Lhlrd arm would engage ln buslness process redeslgn for parLlcular areas of Lhe governmenL. 1he
experlence wlLh Lhe kL (CenLres for ClLlzen SupporL) lllusLraLes LhaL much more cusLomer-frlendly
servlce dellvery can be deslgned ln shorL order. 1he auLhorlLy should also work hard Lo ldenLlfy key
erformance lndlcaLors and ensure LhaL Lhey are vlslble and relaLed Lo resource allocaLlons. lL should
make recommendaLlons for change lf unlLs or organlzaLlons lag behlnd and say how Lhe flow of funds
should be resLrlcLed lf kls are submlLLed laLe or noL llnked Lo performance. 1here should also be
subsLanLlal rewards for hlgh-performlng unlLs or lndlvlduals.
1he fourLh arm of Lhe lndependenL 8eform AuLhorlLy would be a bureaucracy reducLlon unlL. 1hls can
house an lnlLlaLlve slmllar Lo Lhe uk's 8eLLer 8egulaLlon lnlLlaLlve", open Lo boLh clLlzens and flrms
who wlsh Lo propose slmpllflcaLlons of bureaucraLlc procedures. Cnce a suggesLlon ls lodged, Lhe
organlzaLlon ln quesLlon ls requlred elLher Lo adopL Lhe proposed change or explaln why noL. 1hls wlll
make organlzaLlons servanLs of Lhe publlc, noL Lhelr masLers. lL wlll also geL rld of unreasonable and
counLerproducLlve procedures LhaL lmpede change. lor lnsLance, ln Lhe new one-day-process" Lo seL
up a flrm, CALL (ex-1LvL), Lhe merchanLs' lnsurer, can requlre Lhe appllcanL Lo prove Lhey do noL owe
CALL money. Such lrraLlonal behavlour musL be flxed - and Lhose who are frusLraLed by lL can help.
1he second auLhorlLy we propose ls Lhe PealLhcare AuLhorlLy. 1hls wlll asslsL wlLh redeslgnlng and
raLlonallzlng Lhe naLlonal PealLh Servlce, as well as expenses for drug and medlcal devlces. lor
lnsLance, lL would absorb Lhe recenLly creaLed urug rlce CbservaLory, whlch ls now belng shlfLed
from one mlnlsLry Lo Lhe oLher, desplLe dellverlng savlngs of 20 on drug cosLs aL lncepLlon. We feel
LhaL such efforLs Lo reduce cosLs musL be made by a Lruly lndependenL agency, wlLh a clear mandaLe,
collaboraLlng wlLh Lhe prlvaLe secLor lnasmuch as lnLeresLs are allgned. ln Lhe case of Lhe urug rlce
CbservaLory, for lnsLance, lnsurance companles concerned abouL drug prlclng would be lnvlLed Lo
propose ways of mlLlgaLlng drug cosLs or lmprovlng spendlng efflclency. 1hls could help deLer
poLenLlal regulaLory capLure by pharmaceuLlcal companles, whlch have beneflLed from Lhe near LoLal
lack of drug reprlclng ln Lhe lasL Lwo decades, or pharmacles, whlch sLlll have some of Lhe hlghesL
proflL marglns ln Lurope. 1he PealLhcare AuLhorlLy wlll Lhus absorb many of Lhe responslblllLles of
oLher organlzaLlons, such as Lhe naLlonal urug CrganlzaLlon, allowlng Lhem Lo be resLrlcLed Lo
Lechnlcal maLLers. lL ls lmporLanL Lo curLall Lhe economlc power of agencles LhaL may face pressures
of regulaLory capLure. 1hus, Lhe ob[ecLlve of Lhe new auLhorlLy wlll be Lo reporL on Lhe speclflc cost-
sovloqs ocbleveJ ln healLhcare, and also on cllnlcal and oLher healLhcare savlngs achleved. Clven Lhe
*ConfldenLlal, publlc release 31 CcLober 2011
9

excesslve cosLs of healLhcare, drugs, and medlcal producLs ln Creece, and Lhe sheer level of scandal ln
Lhls area, Lhls auLhorlLy could soon yleld reLurns.
We also supporL Lhe esLabllshmenL of a CorrupLlon 8educLlon Agency Lo ldenLlfy and propose
measures Lo reduce corrupLlon LhroughouL publlc llfe, based on besL pracLlces around Lhe world (Lhe
LransformaLlon ln Pong kong belng one example). lL could also Lrack progress, or lack Lhereof, and
reporL Lo arllamenL, and ensure LhaL legal cases are noL halLed.
An lnvesLmenL and lul AuLhorlLy could also be valuable. Whereas several governmenLal agencles do
exlsL (such as lnvesL ln Creece), Lhese have largely been 8 channels for Lhe Creek governmenL. Cur
proposal ls Lo seL up a body LhaL wlll exerL pressure on Lhe governmenL Lo ensure lLs relaLlve poslLlons
ln Lerms of lul proLecLlon, legal lnfrasLrucLure, Lrade or labour pollcles are conduclve Lo lnvesLmenL ln
general and lul ln parLlcular. 1hls AuLhorlLy wlll noL only llalse wlLh Lhe governmenL, buL also wlLh Lhe
ConfederaLlon of Creek lndusLrles, Lhe Creek 8ank AssoclaLlon, and oLher prlvaLe-secLor enLlLles and
Lhe 1rolka. 8eporLlng Lo arllamenL, lL wlll Lrack progress ln faclllLaLlng lnvesLmenL and
enLrepreneurlal growLh, ldenLlfylng boLLlenecks and suggesLlng how Lo overcome Lhem, wlLh Lhe
expecLaLlon of a governmenLal response ln a glven perlod of Llme.
Cverall, we feel LhaL lndependenL AuLhorlLles could slgnlflcanLly help reorganlze Lhe Creek publlc
admlnlsLraLlon and economy, as well as lnsLllllng a sense of confldence ln Lhe sLaLe and Lhe
Lurnaround pro[ecL. A number of Lhe proposed auLhorlLles absorb funcLlons LhaL are asslgned Lo
exlsLlng organlzaLlonal unlLs, slnce Lhese unlLs are noL performlng, Lhey should be scrapped.
lurLhermore, Lhe Creek governmenL should ensure LhaL headcounL reducLlon and reorganlzaLlon are
noL achleved vla some blankeL admlnlsLraLlve rule such as Lhe age llmlL. 1he governmenL should
reLhlnk lLs plans Lo dlspense wlLh older (and more experlenced) clvll servanLs, slnce Lhls rlsks
deblllLaLlng leadershlp and lnsLlLuLlonal memory. 8aLlonal plans, lncludlng successlon, musL be
lnsLlLuLed for layoffs.
llnally, lL ls lmperaLlve LhaL Lhe CovernmenL (and Lhe opposlLlon) agree Lo Lhe lnsLlLuLlon of kls and
lnLer-unlL compeLlLlon as a componenL of budgeLlng. 1here needs Lo be a cleot llok to wblcb botb tbe
qovetomeot ooJ tbe opposltloo most oqtee beLween Lhe kl performance of a unlL (hosplLal, school,
museum, branch of Lhe governmenL) and Lhe compensaLlon and caplLal expendlLure recelved.
lnsLlLuLlons wlLh superlor kls can be rewarded wlLh greaLer flexlblllLy ln Lerms of deLermlnlng Lhelr
budgeL and acLlvlLles. 8oLh sLlck and carroL should be used, Lhe lndependenL AuLhorlLles musL do
whaL Lhey can Lo help.

Cwn|ng the transformat|on process and a change of focus
Whlle many wanL Lo see such sLrucLural changes, Lhey wlll noL happen wlLhouL exLernal pressure, and
Lhe 1rolka can Lake Lhe lead. lL would help Lo acknowledge pasL mlsLakes whlle worklng more
forcefully Lo usher ln sLrucLural reforms, changlng Lhe condlLlonallLles accordlngly.
Cne of Lhe maln lssues so far ls LhaL Lhe Creek governmenL has responded only Lo Lhe flscal LargeLs of
Lhe plan, whlch ls sLarLlng Lo have adverse slde effecLs - such as Lhe recenL emphasls (by necesslLy) on
Lax revenues, as opposed Lo cosL-cuLLlng. 1he dlfflculLles of reduclng Lhe slze of Lhe publlc secLor have
*ConfldenLlal, publlc release 31 CcLober 2011
10

been underesLlmaLed - and, worse, Lhe lnablllLy Lo engage wlLh raLlonallzaLlon ls becomlng
lncreaslngly evldenL. 1he 1rolka lLself has focused excesslvely on flscal LargeLs, Lo Lhe neglecL of Lhe
essenLlal sLrucLural reforms. Moreover, Lhe pollLlcal parLles dld endorse ma[or sLrucLural reforms ln
Lhelr 2009 elecLlon programs, so Lhere ls ln prlnclple a pollLlcal commlLmenL LhaL musL be honoured.
1haL domesLlc supporL for reforms musL be moblllsed.
We recommend LhaL credlLors help by expllclLly refuslng Lo accepL flscally equlvalenL" measures,
whlch usually come down Lo hlgher Laxes as a subsLlLuLe for cosL savlngs. 1hls lmpedes recovery and
growLh and avolds pollLlcally dlfflculL changes whlch clash wlLh vesLed lnLeresLs. 8efuslng Lo acqulesce
may help Lo lncrease publlc accepLance of Lhe programme, even Lhough vesLed lnLeresLs ln Lhe
governmenL, Lhe publlc admlnlsLraLlon, unlons and posslbly Lhe medla wlll reslsL. Scandalous pracLlces
LhaL pollLlclans have accepLed, such as Lhe t700m a year subsldy from Lhe budgeL Lo Lhe uLP penslon
fund, should be Lackled head-on. 1hls mlghL be conLenLlous, buL lL wlll lncrease publlc sympaLhy.
We recommend LhaL Lhe 1rolka loan condlLlonallLy be aLLached Lo Lhe esLabllshmenL of speclflc
sLrucLural changes such as Lhose noLed above and also Lo progress on sLrucLural reforms, uslng
measurable LargeLs (e.g. number of scrapped regulaLlons) and operaLlonal raLher Lhan aggregaLe or
macro-economlc measures. 1hls would represenL a ma[or change of approach and aLLlLude buL could
yleld subsLanLlal dlvldends and avold poLenLlal lnadverLenL slde effecLs.
Leaders, boLh from Lhe CovernmenL and Lhe 1rolka, musL work Lo wlden Lhe ownershlp of Lhe reform
programme. We hope LhaL Lhe opposlLlon wlll reallze LhaL lL ls agalnsL lLs sLaLed prlnclples Lo re[ecL
Lhe baslc sLrucLural reforms Lhe programme enLalls. CurrenL condlLlons should allow for LhaL. lor
lnsLance, debL rellef should be clearly labelled as such, and used Lo show LhaL Lhe ob[ecLlve of Lhe
reform programme ls noL [usL proLecLlng credlLors. 8eform musL be seen as Lhe road Lo falrness, as
Lhere ls no hope among Lhe publlc aL presenL, and Lhls could lead Lo Lhe re[ecLlon of any soclal order.
ubllc auLhorlLles and publlcly owned companles musL also provlde daLa on Lhelr performance (as
was recenLly done wlLh Lhe raLlngs of Lax offlces). 1he resulLlng kls musL be shared wlLh clvll socleLy
lnsLlLuLlons, and a fund should be creaLed by Lhe 1rolka Lo fund small-scale clvll socleLy programmes
LhaL lncrease Lransparency and vlslblllLy. A servlce LhaL Lracks, e.g., bus Lravel Llmes, frequency, or
drlver shlfL performance, would help change percepLlons and aLLlLudes and lncrease engagemenL, ln
addlLlon Lo lmprovlng organlzaLlonal lncenLlves. Slmllarly, Lhe proposed fund should encourage and
reward ouLperformance of parLlcular unlLs wlLhln Lhe publlc admlnlsLraLlon and provlde boLh moral
and maLerlal recognlLlon. Such unlLs could be classes, schools, cllnlcs, hosplLals, deparLmenLs,
agencles, or museums. 1he payoffs should be seen as lnvesLmenLs, agreed ex anLe, and sLrucLured Lo
moLlvaLe boLLom-up change. 1he lnsLlLuLed changes should be used as a besL pracLlce". 1hus small
granLs wlLh flexlble procuremenL mechanlsms can yleld mulLl-dlmenslonal payoffs.

r|vat|zat|ons: reth|nk|ng the structure
1he currenL anLlclpaLed prlvaLlzaLlon revenue, wheLher Lhe orlglnal t30bn or even less, ls unreallsLlc.
lnLernaLlonal comparlsons suggesL LhaL Lhls percenLage of Cu would be unprecedenLed. lor real-
esLaLe asseLs, Lhe currenL uncerLalnLy ln Lerms of Lax envlronmenL and Lhe rlsk of Laxlng properLy
furLher could depress Lhe prlce. Moreover, uk experlence suggesLs LhaL poLenLlal mass selllng ln a
*ConfldenLlal, publlc release 31 CcLober 2011
11

decllnlng markeL can lead Lo a collapse ln Lhe prlce of Lhe asseLs. 1hls could have dangerous slde
effecLs, as Lhe reducLlon ln asseL value would change consumer behavlour and furLher exacerbaLe Lhe
conLracLlon ln Creece.
1he group felL almosL unanlmously LhaL prlvaLlzaLlons should noL be LhoughL of prlmarlly as a source
of revenue, buL more as a means Lo lncrease Lhe compeLlLlveness of Lhe economy. revlous mlxed
experlence wlLh prlvaLlzaLlon (for buyers as much as sellers) needs Lo be Laken lnLo accounL, as does
Lhe currenL envlronmenL. lssues wlLh unlons should be addressed head-on, as Lhey are sLlll casLlng a
long shadow on exlsLlng arrangemenLs and depresslng poLenLlal valuaLlons.
1here was wldespread concern abouL Lhe currenL prlvaLlzaLlon sLrucLure, wlLh an agency sLaffed by
flve execuLlves and llmlLed resources. More lmporLanL, Lhe group felL LhaL Lhe process of seLLlng
aggresslve LargeLs for speclflc daLes when cash would arrlve was slmply unworkable. uelays or a
shorLfall ln recelpLs would lead Lo pressures Lo brldge any fundlng gap wlLh exLreme measures. 1haL
would furLher lncrease Lax uncerLalnLy, whlch ls already prevenLlng lnvesLmenL. So Lhe currenL
sLrucLure has Lhe adverse slde effecL of damaglng Lhe prospecLs for growLh. uncerLalnLy, parLly
lnduced by Lhe programme sLrucLure, could drlve prlvaLlzaLlon lnvesLors away wlLh fear of
unpredlcLable or arblLrary Lax lncreases, for whlch Lhe Creek governmenL already has a bad
repuLaLlon.
We recommend subsLlLuLlng debL flnanclng for Lhe lmmedlaLe push for equlLy recelpLs. rlvaLlzaLlon
asseLs should be Lransferred Lo Lhe prlvaLlzaLlon agency and Lhen be collaLerallzed wlLh debL. 1hen, as
and when sales are made over a longer horlzon (abouL 13 years), Lhe debL ls pald down and reLlred.
1hls sLrucLure has several beneflLs. llrsL, debL can be provlded wlLh clear collaLeral. 1hls means LhaL
Creece can use Lhe markeLs Lo access flnanclng, collaLerallzed by rlng-fenced asseLs and buslnesses,
and use such funds Lo repay lLs debL. Second, lnasmuch as LlLles are cleared up, new collaLeral puL ln,
or zonlng conflrmed, new debL can be ralsed. 1hls provldes an lncenLlve for Lhe Creek governmenL Lo
lncrease Lhe value of Lhe flrms and real esLaLe Lo be prlvaLlzed ln a more measured way. 1hlrd, lL wlll
avold Lhe rlsk of selllng asseLs and companles under duress. lourLh, lL wlll also allow Lhe prlvaLlzaLlon
agency Lo conslder how poLenLlally valuable asseLs (such as former mlllLary lnsLallaLlons) could be
redeveloped and prepared for sale, reallzlng a much hlgher value, and poLenLlally access caplLal (from
Lhe caplLal markeLs) Lo enhance Lhe value of lLs porLfollo and lmprove buslness or real asseLs. As any
poLenLlal fuLure upslde value, exceedlng Lhe value of Lhe debL, wlll accrue Lo Lhe Creek governmenL
(earmarked for debL rellef), Lhere wlll be an lncenLlve Lo lmprove Lhe asseLs under managemenL.
1hls could happen elLher Lhrough a more LradlLlonal sLrucLure (e.g., Lhrough Lhe currenL prlvaLlzaLlon
agency, wlLh approprlaLe resources and accounLablllLy as ln Lhe case of Lhe PlSl recenLly lnsLlLuLed)
or posslbly Lhrough anoLher sLrucLure or vehlcle LhaL comblnes Lu/1rolka and prlvaLe funds. 1o avold
excesslve leverage, a mlnlmum raLlng on publlc debL (e.g., A) can be seL. lncenLlves ln Lerms of Lhe
compensaLlon of Lhe agency could be made conLlngenL on Lhe value of Lhe asseLs sold, compared
wlLh lnLernaLlonal benchmarks, so as Lo clrcumvenL Lhe rlsk of Lhe sale of asseLs or companles ln
depressed prlces. (1he concerns Lhe Creek populaLlon and press have ln Lerms of selllng off"
formerly sLaLe owned asseLs should be Laken serlously and addressed Lhoroughly Lhrough approprlaLe
lncenLlve mechanlsm deslgn and Lransparency.)
*ConfldenLlal, publlc release 31 CcLober 2011
12

1he prlvaLlzaLlon agency, or any subsldlary schemes, should also have Lhe power ooJ tespooslblllty Lo
lmprove Lhe quallLy of Lhe asseLs LhaL lL ls expecLed Lo sell. lL should work wlLh prlvaLe-secLor
speclallsLs Lo help raLlonallze and resLrucLure organlzaLlons, lnsLlLuLe corporaLe-governance changes,
and overall lmprove Lhe value of Lhe companles Lo be sold, Lhus lncreaslng Lhe value reLalned by Lhe
CovernmenL. 1o do so, lL needs Lo be serlously upgraded from a sLaff of a handful of execuLlves Lo an
organlzaLlon wlLh resources, buL also accounLablllLy Lo lmprove lLs porLfollo.
kebu||d|ng the f|nanc|a| serv|ces sector
1he reform programme musL carefully conslder Lhe resLrucLurlng of Lhe flnanclal servlces lndusLry.
1he mosL crlLlcal rlsk ln a halrcuL ls noL Lhe lnablllLy of Creece Lo borrow (or do so aL aLLracLlve raLes),
lL ls Lhe rlsk of collapse ln Lhe flnanclal servlces secLor, whlch may have dlre consequences for Lhe
economy, dramaLlcally lncreaslng conLracLlonary dynamlcs. Clven LhaL Lhe banklng sysLem needs Lo
be supporLed and probably requlres recaplLallzaLlon, our focus here ls on how Lhls wlll Lake place, and
whaL Lhls lmplles for governance (under Lhe LranslLory reglme) and flnanclal supervlslon, whlch needs
Lo be sLrengLhened.
1he pasL hlsLory of pollLlcal lnvolvemenL ln Lhe banklng sysLem ls a parLlcularly Lroubled one ln
Creece. 8anks dlrecLly or lndlrecLly conLrolled by Lhe governmenL ofLen have Lhelr senlor
managemenL replaced followlng naLlonal elecLlons, pollLlcal conslderaLlons and noL economlc merlL
have someLlmes lnfluenced Lhe fundlng of pro[ecLs, and Lhe effecLlveness of regulaLlon by Lhe
relevanL bodles has occaslonally been hlndered by Lhe close relaLlonshlp beLween banks and Lhe
sLaLe. We need Lo proLecL Lhe banks, and socleLy, from such dlsLorLlng forces.
Assumlng a very subsLanLlal halrcuL, how mlghL recaplLallzaLlon work? 1here already ls a flnanclal
sLablllLy fund (Lhe PlSl), whlch has admlLLed lLs flrsL bank, roLon. 1he fund, endowed wlLh t10bn,
has a LoLal pledge of t30bn from Lhe Memorandum of undersLandlng, whlch could be less Lhan whaL
lL needs Lo recaplLallze Creek banks. More Lo Lhe polnL, Lhe PlSl has been seL up as a shorL-Lerm
lnsLlLuLlon for supporL Lo Lhe banks before Lhey are spun off, yeL Lhe currenL macroeconomlc
condlLlons may requlre a Llme horlzon of 3 Lo 3 years (as opposed Lo 2 Lo 3 years) for Lhe flrms Lo be
prlvaLlzed afLer recaplLallzaLlon. Clear crlLerla for exlL" and prlvaLlzaLlon (e.g., prlce per book value)
could be seL ex anLe.
WhaLever soluLlon ls chosen (lncludlng selllng" Lhe naLlonallzed banks Lo Lhe prlvaLlzaLlon agency
afLer Lhey are recaplLallzed and sLablllzed), Lhe governance and agency lssues remaln. ln a
conLracLlonary envlronmenL, when Lhe governmenL can no longer glve handouLs, Lhe LempLaLlon Lo
use Lhe bank's caplLal allocaLlon as a lever of pollLlcal power ls very real
Assumlng Lhe PlSl wlll recaplLallze Lhe banks, we need Lo flnd mechanlsms Lo supporL lL. 1he
Luropean 8anklng AuLhorlLy may need Lo be more acLlvely lnvolved. We are keenly aware of Lhe
aLLracLlveness Lo any governmenL Lo affecL bank governance, and Lhls should be avolded. arLlcular
care musL be Laken Lo sLrengLhen Lhe lndependence of Lhe fund furLher, and conslder wheLher, as
parL of Lhe condlLlonallLles, some lndependenL audlL should be made Lo ensure Lhe lack of pollLlcal
lnLerference - noL only for banks, buL for Lhe fund lLself, whlch wlll lnevlLably be puL under exLreme
pressure. A new Luropean-level lnsLlLuLlon wlLh Lhe mandaLe Lo exerclse corporaLe governance ln
banks (whlch Lhe L8A does noL have) mlghL be helpful ln supporLlng and complemenLlng Lhe PlSl ln
Lhe recaplLallzaLlon process of Creek banks.
*ConfldenLlal, publlc release 31 CcLober 2011
13

A relaLed and fundamenLal concern ls LhaL flnanclal supervlslon should be sLrengLhened ln Creece -
as noLed by a number of revlews, lncludlng Lhe lMl's. Lspeclally glven Lhls fraglle envlronmenL, and
Lhe cerLalnLy of Lhe fluldlLy for Lhe nexL few monLhs, lmmedlaLe acLlon should be Laken Lo bolsLer Lhe
experLlse of boLh Lhe Pellenlc CaplLal MarkeLs Commlsslon (caplLal markeL supervlslon) and Lhe 8ank
of Creece (bank supervlslon) as lL grapples wlLh lLs LoughesL Lask Lo daLe. lnsurance companles,
whose supervlslon was recenLly moved Lo Lhe 8ank of Creece afLer slgnlflcanL fallures by Lhelr former
regulaLor, also requlre aLLenLlon Lo Lhelr performance and accounLablllLy, and so do penslon funds.
LlmlLed buL LargeLed lnvesLmenL ln regulaLory and posslbly Lurnaround experLlse would be very useful
very soon. 1he PCMC, ln parLlcular, should be monlLored ln lLs role Lo lmplemenL Lhe Lu caplLal
markeLs regulaLory framework seL ouL by LSMA.
llnally, lL ls lmporLanL LhaL Lhe delays ln lnvesLlgaLlng flnanclal-fraud cases be drasLlcally reduced, and
currenL cases, lf any, be lnvesLlgaLed prompLly. 1hls ls a furLher rlsk Lo Lhe shorL- and medlum-Lerm
sLablllLy of Lhe secLor. 1he poor sLaLe of Lhe [usLlce sysLem wlLh exLreme delays (leadlng Lo Lhe de
facLo lnablllLy Lo prosecuLe) musL be Lackled as an lssue of prlorlLy. lunds (posslbly from Lhe flnes
levled) musL be used Lo supporL a swlfLer [usLlce sysLem relaLlng, aL a mlnlmum, Lo economlc crlmes,
where Lhe creaLlon of a branch of Lhe [udlclary wlLh experLlse ln whlLe-collar crlme seems emlnenLly
senslble. Lven now, few (lf any) fraud cases assoclaLed wlLh Lhe sLock markeL bubble of 2000 have
been prosecuLed. 1hls noL only leads Lo loss of confldence by lnvesLors ln Lhe ALhens sLock markeL,
buL also Lo wldespread dlsLrusL ln Lhe [udlclal sysLem and Lhe effecLlveness of Lhe sLaLe. 1hese lssues
should be Lackled now, and Lackllng Lhem could help lncrease Lhe buy-ln Lo Lhe reform programme,
wlLh prlorlLy glven Lo cases lnvolvlng well-known execuLlves, pollLlclans, or oLher flgures ln Lhe publlc
eye so as Lo resLore a sense of [usLlce.

Add|t|ona| |ssues |ook|ng ahead
ln Lhese exLremely dangerous clrcumsLances, lL remalns Lruly Lroubllng LhaL Lhere ls no consensus
from Lhe pollLlcal parLles on overhaullng Lhe sLaLe, ln order Lo avold collapse. Should Creece be lefL Lo
lLs own devlces, noL only wlll Lhe Luropean and world economles suffer, buL Creeks wlll be
condemned Lo prolonged economlc mlsery. We hope LhaL pollLlcal forces wlll rlse Lo Lhe occaslon.
ln Lerms of growLh, Lhere ls a subsLanLlal amounL of sLrucLural funds LhaL Creece has noL used, and
Lhese could help [ump-sLarL Lhe sLalled economy. 8uL Lhere ls evldence of Lhe lneffecLlve use of Lhese
funds Lo daLe, and Lhelr adverse slde effecLs. lL mlghL be posslble Lo learn from experlence ln dlrecLlng
lnLernaLlonal ald ln poLenLlally corrupL counLrles, so Lhe funds help sLrengLhen Lhe economy and are
noL channelled Lo consumpLlon.
CLher lmaglnaLlve approaches could be consldered. As Lhe greaLesL shorL-Lerm concern ls Lhe sharp
conLracLlon of Lhe economy and Lhe collapse of buslness cllmaLe, Creece needs Lo supporL new
lnvesLmenLs. Cne ouL of Lhe box" soluLlon could be Lhe esLabllshmenL of an alLernaLlve buslness-
frlendly "Lu [urlsdlcLlon" LhaL lndlvlduals and companles can elecL Lo [oln and operaLe under, posslbly
as a Luropean plloL scheme. 1hls could be responslble for all regulaLory and flnanclal managemenL,
from permlLs Lo Lax and soclal securlLy conLrlbuLlons. 1hose deallng wlLh Lhls sysLem would noL have
Lo lnLerface wlLh Creek servlces, even Lhough Lhey would need Lo ablde by Creek laws. 1he Lu-seLup
auLhorlLles wlll glve Lhe requlred permlLs or exempLlons and wlll hand ouL Lhe proceeds Lhey recelve
*ConfldenLlal, publlc release 31 CcLober 2011
14

Lo Lhe Creek governmenL. AlLhough opLlonal, Lhls sysLem could also help on Lhe flscal fronL by
ellmlnaLlng funds currenLly channelled Lo corrupL offlclals: companles may end up paylng less and Lhe
sLaLe recelvlng more. AlLhough ob[ecLlons on Lhe prlnclple of subsldlarlLy may be ralsed, lL could be
made less lnLruslve and more effecLlve Lhan oLher currenL LreaLy-changlng economlc governance
proposals.
Cverall, a vlable soluLlon Lo Lhe debL problem musL be accompanled by lnsLlLuLlonal and
admlnlsLraLlve reforms so as Lo reduce Lhe deblllLaLlng uncerLalnLy and rlsk of ad hoc LaxaLlon, whlch
ls yleldlng negaLlve reLurns. 1hls needs Lo be accompanled by greaLer pollLlcal consensus and debaLe
on pollcles, as opposed Lo parLy poslLlons. We hope LhaL our recommendaLlons offer some useful
ldeas for Lhe Lask ahead, whlch ls noLhlng less Lhan rebulldlng a naLlon.