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Greek Rail System’s Debt Adds to Economic Woes
Orestis Panagiotou/ANA, via European Pressphoto Agency
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By LANDON THOMAS Jr.
Published: July 20, 2010
ATHENS — In 2009, bankers for Goldman Sachs and Morgan Stanley pitched the Greek government on a plan to overhaul its money-losing railway system. Among the ideas was to lay off half of the system’s 7,000 workers and have the government take on roughly half of the company’s 8 billion euros in debt.
Enlarge This Image
Thanassis Stavrakis/Associated Press
Hellenic Railways is losing money at the rate of $3.8 million a day.
The suggestion did not fly. It was an election year in Greece, after all, and the country was already struggling to keep up the payments on its debt, which is higher in proportion to economic output than in any other nation in the European Union.
The plan was shelved, soon to be overshadowed by the country’s close brush with bankruptcy.
Losses at Hellenic Railways, however, continue to mount — at the rate of 3 million euros ($3.8 million) a day. Its total debt has increased to $13 billion, or about 5 percent of Greece’s gross domestic product.
Now, as a condition of Greece’s financial rescue, the International Monetary Fund is demanding that a solution be found. The fund and the European Union, which also chipped in to provide the bailout, are requiring that the debt of Hellenic Railways, as well as the off-balance-sheet obligations of other state-owned enterprises, be counted toward Greece’s official debt — which Greece has agreed to do.
Analysts estimate the total to be around $33.6 billion, a sum that would add another 11 percentage points to Greece’s current debt level of about 120 percent of gross domestic product. It would also surely raise questions for many investors about the government’s ability to repay ever-increasing amounts as the overall economy contracts.
Some have argued that Hellenic Railways should shut down the majority of its routes, especially in the mountainous Peloponnese region where trains manned by drivers being paid as much as $130,000 a year frequently run empty.
The government, perhaps optimistically, is advocating the sale of a 49 percent stake to the French, who said this year that they would take a look. But it remains unclear how the French rail network, already burdened with its own high levels of debt, would be able to assume Hellenic’s liabilities and losses.
The debate, a longstanding one in Greece, has taken on new urgency of late. For the better part of a decade, Greece has provided sovereign backing to Hellenic Railways, thus allowing it to borrow billions from accommodating foreigners even though the company’s finances are so skewed that it pays three times as much on interest expenses than it collects in revenue.
The precarious nature of euro zone finances has made it increasingly difficult for state rail companies to raise capital throughout Europe. Standard & Poor’s recently downgraded the debt of the French and Portuguese national rail operators, and earlier this month Moody’s placed the Spanish train operator on review for a possible downgrade.
Until now, Greece has been able to use its rail system as a means to support employment while not adding to its official debt number.
“This was an accounting trick, another good way for the government to hide its debt,” said John C. Mourmouris, a former chief executive of the railway who is now an economics professor here. “But a company with 100 million euros in revenue can no longer borrow 1 billion euros a year.”
In the latest annual figures available, Hellenic Railways reported a loss of more than $1 billion in 2008, on sales of about $253 million. Of course, shaky finances are not uncommon among rail operators in Europe. Many are poor cash generators. Their prices are kept low as a matter of social policy, forcing the companies to become heavy state-backed borrowers to finance upkeep and expansion.
Even so, the Greek railway is in a category by itself. According to an analysis by Mr. Mourmouris, for Hellenic Railways to just break even, it would need to increase passenger traffic by a factor of 10, an outcome that seems unlikely. Greece has a well-developed road network, a relatively short distance separates its main cities and the railway’s shabby reputation makes it an unpopular travel option for most Greeks.
In spite of about $3.2 billion of investment since 1997, outside of the main route between Athens and Thessaloniki, the network seems in many respects patchwork and at times chaotic.
Earlier this month, for example, a trip from Athens to Diakopto, a seaside town on the northern coast of the Peloponnese, took more than four hours. The journey required train passengers to complete a second leg by transferring to an overcrowded bus that was delayed for an hour. The result was a near riot as enraged passengers hurled abuse at overwhelmed train officials.
The same trip by car would take less than two hours.
“It is crazy,” said Nikolaos Kioutsoukis, the union chief for the railway. “It’s not surprising that people prefer to go by car.”
Even he accepts that train travel in Greece is not financially viable on many routes. He blames low prices, misguided investment and political meddling for the railway’s poor condition, and says the government should make new investments to modernize the network. He opposes privatization and says that if jobs and benefits are threatened, the union will strike.
Haris Tsiokas, the general secretary for the Greek Transport Ministry, contends that the government’s plan to close at least 35 loss-making routes and cut 2,500 jobs (1,000 via mandatory retirement, with the rest being moved to other government jobs) will make Hellenic Railways attractive to foreign investors. But he concedes that the pressure is building for the railway, which, for now at least, does not have access to debt markets.
“We are struggling to avert the closure” of the rail system, he said in response to questions sent by e-mail. “We want Greece’s future railway to be competitive with road transport services.”
But reaching such a goal may be impossible, especially when the average salary of a rail employee is over $78,000. Employees benefited from politically inspired pay increases over the last decade. Between 2000 and 2009, the cost of the company’s payroll soared by 50 percent even as overall personnel decreased by 30 percent.
In the eyes of Costis Hatzidakis, the former transportation minister, talk of streamlining, reform and the search for a foreign investor is mere cosmetics when compared with the weight of the rail system’s debts — the bulk of which will mature in 2014.
“When I was minister I said I was not going to privatize” Hellenic Railways, he said, “because I knew I couldn’t find an investor silly enough to invest in a company with so much debt.”
Niki Kitsantonis contributed reporting.
Orestis Panagiotou/ANA, via European Pressphoto Agency
.
By LANDON THOMAS Jr.
Published: July 20, 2010
ATHENS — In 2009, bankers for Goldman Sachs and Morgan Stanley pitched the Greek government on a plan to overhaul its money-losing railway system. Among the ideas was to lay off half of the system’s 7,000 workers and have the government take on roughly half of the company’s 8 billion euros in debt.
Enlarge This Image
Thanassis Stavrakis/Associated Press
Hellenic Railways is losing money at the rate of $3.8 million a day.
The suggestion did not fly. It was an election year in Greece, after all, and the country was already struggling to keep up the payments on its debt, which is higher in proportion to economic output than in any other nation in the European Union.
The plan was shelved, soon to be overshadowed by the country’s close brush with bankruptcy.
Losses at Hellenic Railways, however, continue to mount — at the rate of 3 million euros ($3.8 million) a day. Its total debt has increased to $13 billion, or about 5 percent of Greece’s gross domestic product.
Now, as a condition of Greece’s financial rescue, the International Monetary Fund is demanding that a solution be found. The fund and the European Union, which also chipped in to provide the bailout, are requiring that the debt of Hellenic Railways, as well as the off-balance-sheet obligations of other state-owned enterprises, be counted toward Greece’s official debt — which Greece has agreed to do.
Analysts estimate the total to be around $33.6 billion, a sum that would add another 11 percentage points to Greece’s current debt level of about 120 percent of gross domestic product. It would also surely raise questions for many investors about the government’s ability to repay ever-increasing amounts as the overall economy contracts.
Some have argued that Hellenic Railways should shut down the majority of its routes, especially in the mountainous Peloponnese region where trains manned by drivers being paid as much as $130,000 a year frequently run empty.
The government, perhaps optimistically, is advocating the sale of a 49 percent stake to the French, who said this year that they would take a look. But it remains unclear how the French rail network, already burdened with its own high levels of debt, would be able to assume Hellenic’s liabilities and losses.
The debate, a longstanding one in Greece, has taken on new urgency of late. For the better part of a decade, Greece has provided sovereign backing to Hellenic Railways, thus allowing it to borrow billions from accommodating foreigners even though the company’s finances are so skewed that it pays three times as much on interest expenses than it collects in revenue.
The precarious nature of euro zone finances has made it increasingly difficult for state rail companies to raise capital throughout Europe. Standard & Poor’s recently downgraded the debt of the French and Portuguese national rail operators, and earlier this month Moody’s placed the Spanish train operator on review for a possible downgrade.
Until now, Greece has been able to use its rail system as a means to support employment while not adding to its official debt number.
“This was an accounting trick, another good way for the government to hide its debt,” said John C. Mourmouris, a former chief executive of the railway who is now an economics professor here. “But a company with 100 million euros in revenue can no longer borrow 1 billion euros a year.”
In the latest annual figures available, Hellenic Railways reported a loss of more than $1 billion in 2008, on sales of about $253 million. Of course, shaky finances are not uncommon among rail operators in Europe. Many are poor cash generators. Their prices are kept low as a matter of social policy, forcing the companies to become heavy state-backed borrowers to finance upkeep and expansion.
Even so, the Greek railway is in a category by itself. According to an analysis by Mr. Mourmouris, for Hellenic Railways to just break even, it would need to increase passenger traffic by a factor of 10, an outcome that seems unlikely. Greece has a well-developed road network, a relatively short distance separates its main cities and the railway’s shabby reputation makes it an unpopular travel option for most Greeks.
In spite of about $3.2 billion of investment since 1997, outside of the main route between Athens and Thessaloniki, the network seems in many respects patchwork and at times chaotic.
Earlier this month, for example, a trip from Athens to Diakopto, a seaside town on the northern coast of the Peloponnese, took more than four hours. The journey required train passengers to complete a second leg by transferring to an overcrowded bus that was delayed for an hour. The result was a near riot as enraged passengers hurled abuse at overwhelmed train officials.
The same trip by car would take less than two hours.
“It is crazy,” said Nikolaos Kioutsoukis, the union chief for the railway. “It’s not surprising that people prefer to go by car.”
Even he accepts that train travel in Greece is not financially viable on many routes. He blames low prices, misguided investment and political meddling for the railway’s poor condition, and says the government should make new investments to modernize the network. He opposes privatization and says that if jobs and benefits are threatened, the union will strike.
Haris Tsiokas, the general secretary for the Greek Transport Ministry, contends that the government’s plan to close at least 35 loss-making routes and cut 2,500 jobs (1,000 via mandatory retirement, with the rest being moved to other government jobs) will make Hellenic Railways attractive to foreign investors. But he concedes that the pressure is building for the railway, which, for now at least, does not have access to debt markets.
“We are struggling to avert the closure” of the rail system, he said in response to questions sent by e-mail. “We want Greece’s future railway to be competitive with road transport services.”
But reaching such a goal may be impossible, especially when the average salary of a rail employee is over $78,000. Employees benefited from politically inspired pay increases over the last decade. Between 2000 and 2009, the cost of the company’s payroll soared by 50 percent even as overall personnel decreased by 30 percent.
In the eyes of Costis Hatzidakis, the former transportation minister, talk of streamlining, reform and the search for a foreign investor is mere cosmetics when compared with the weight of the rail system’s debts — the bulk of which will mature in 2014.
“When I was minister I said I was not going to privatize” Hellenic Railways, he said, “because I knew I couldn’t find an investor silly enough to invest in a company with so much debt.”
Niki Kitsantonis contributed reporting.
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