Privatizing Postbank and Power

(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of a broader theme we wish to highlight.)

Outside the Athens headquarters of Greece’s Postbank Thursday afternoon, dozens of employees protested under a banner labeled, “No to the sell-off of Postbank!”

One might think this is simply an example of employees expressing futile angst over the -30% decline in shares of the publicly traded bank. But it actually seems these folks want the firm to remain mostly publicly (read: government) owned. You see, the “sell-off” to which the banner refers is a privatization plan.

All this follows Greek Finance Minister Yannis Stournaras’ statement late Wednesday that Postbank was no longer viable. Nonperforming loans are causing the firm to bleed cash and are further impairing a balance sheet already impacted by the Greek debt write-down earlier this year. Now, troubles in the Greek banking sector are not really surprising at all. The Hellenic Financial Stability Fund (HFSF) stands ready with funds borrowed from the troika to backstop the firm. (Yes, it’s odd to write “Hellenic” and “Financial Stability” in the same sentence these days.) But since Greek government finances put the economy in such a bind to begin with, merely propping up a state-run firm seems an unsustainable arrangement to rely on.

And that’s why privatization seems to have resurfaced—an odd twist in which a government-run bank could soon be bailed out by private banks. Consolidation has picked up in the Greek banking sector, as some better capitalized, stronger firms are seeking to buy up assets distressed by the nation’s woes. The government is currently courting these suitors, though a buyer has yet to step up. All in all, Hellenic Postbank’s two sell-offs Thursday seemingly illustrate the sheer importance greater privatization has for Greece.

Yet Greece isn’t alone in its need for greater private sector involvement. Jumping over Asia Minor to India, it seems the government has come up with a plan to reform the state-owned electricity grid in the wake of the gigantic blackouts that recently left over 600 million Indians in the dark. That event seemingly greatly impacted the popularity of Prime Minister Manmohan Singh’s government—so this seems his effort to address the issue and save some face.

Many experts and economists around the world have suggested a more market-oriented grid is the key. India’s proposed solution, though, is more government—in the form of granting regulators more price controls and the ability to restrict states from drawing excessively from the national grid. Which seems odd when one considers price caps and rationing are largely why the grid blacked out in the first place. Because Indian regulators set artificially low prices, there’s not enough money to expand the grid—and because the grid thus isn’t powerful enough to support all of India’s 1.2 billion people, regulators allot a set amount of electricity to each state. Thus, when some states breached their power limit—with artificially low prices and hundreds of millions of people needing power, why wouldn’t they draw extra—the grid couldn’t cope.

Essentially, officials presume what’s needed is a big federal regulatory crackdown on those uncooperative states. However, even if regulations have more teeth, as long as India continues relying on artificial controls period, future blackouts seem pretty darned likely. A more efficient approach, in our view, would be if India privatized the grid and generation. Then, if demand for power rose, it’s likely prices would too—acting as a self-regulating signal. Higher prices would not only likely dampen demand in the short run, they could signal to private utilities to add more generation to capture the elevated profits.

Greece and India are hugely different economies—with different dynamics, issues, histories, cultures and more. But in our view, governments—regardless of their locale—tend not to allocate capital with nearly the efficiency the private sector does. Not Greece, as exemplified by Postbank in the capital allocation business. And not India, as its power market illuminates (or doesn’t).