by Takis Michas1 ,2

Given the country’s statist tradition, it is no surprise that even Greece’s nominally conservative Prime Minister Kostas Karamanlis has never been a fervent free-market advocate. After five years in power, the government has so far managed only a single full-scale privatization. All public utilities, for example, are still state-run. A recent attempt to privatize telecoms operator Hellenic Telecommunications Organization SA (OTE) resulted in a protectionist backlash.

Finance Minister George Alogoskoufis announced last year that he was scrapping a law stipulating that the state must hold at least 33% of OTE’s shares. “Our goal,” he explained, “is that the government’s stake is reduced to to 5%-8%.” In a first move, Athens brought its stake down to 28% from 38%. This signalled to many investors that the government was really serious about privatization. As a result, investment holding company Marfin Investment Group (MIG) started buying OTE shares, even eying a takeover. Within a year it acquired 18% of the company, making it the second largest shareholder after the government.

But then MIG did something that was unheard of in Greece’s state-controlled corporate culture: It tried to exercise its property rights. It demanded seats on the governing board and openly criticized the policies of the state-appointed CEO, Panagis Vourloumis, a buddy of the prime minister. MIG also asked for more transparency and improved corporate governance, accusing OTE‘s management “of taking crucial decisions about its future without consulting its shareholders.”

This was too much for Mr. Alogoskoufis. He announced in parliament earlier this month that the whole story of OTE’s privatization was a great misunderstanding. “The government,” he said, “is also not discussing any issue of co-management with any institutional investor or any other interested company.” He also introduced legislation capping private investments in “strategically sensitive” companies, such as OTE. Shareholders would need government approval to acquire more than 20% of such firms. This was widely seen as a move to shield OTE from a takeover by MIG.

Moreover, the new law will open the way to “crony capitalism,” former Finance Minister Stephanos Manos told me. The legislation in effect substitutes market-led privatization with state-led privatization. “In a country like Greece, where corruption and clientelism are rampant, this is an invitation to disaster,” Mr. Manos added. It will lead to new opportunities to bribe officials in return for favorable decisions. At the same time, the government’s about-face on OTE’s privatization will scare away investors. They will think twice before risking their capital in a country where the rules of business can so quickly change. The absence of legal certainty is poison for an economy.

The only opposition to the government plans came from a small group of free market activists who appealed to the European Commission, arguing the legislation violates EU rules for the free movement of capital. Word here in Athens, though, is that given the increasingly protectionist sentiment in Europe, the government will have little to fear from Brussels.

The OTE case illustrates that what is called partial privatization really is pseudo-privatization. The companies’ strategy and decision-making remains in the hands of the state while shareholders are reduced to the role of passive spectators. Although globalization has forced the Greek state to open up a little, much of the economy remains in shackles.

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Notes:

1. The Wall Street Journal Europe, 24/12/07 [↩]
2. Mr. Michas is a journalist for the Greek daily Eleftherotypia [↩]