Nomura’s chief economist Richard Koo is seeing parallels between Greece and East Germany, shortly after the fall of the Berlin Wall, right now.
In a note sent to clients on Tuesday, Koo attacks Greece’s creditors for negotiating a deal based on “highly unrealistic” assumptions and reaching an agreement that “resolve none of the fundamental problems facing the effectively bankrupt nation of Greece.”
One of Koo’s big problems with the bailout deal is the massive privatisation fund that the EU and the IMF have demanded from Greece. The country must raise €50 billion (£35.3 billion, $US55.1 billion) selling off state-owned assets.
Europe and the IMF are hoping Greece’s big sell-off will be like the Thatcher-era privatisation boom in Britain. But Koo says the creditors have “overestimated to a grotesque degree” how much Greece can raise and predicts the privatisation boom will mirror the fire sale of East Germany in the 1990s.
After the reunification of Germany in 1990 the new government sold off many of the formerly Communist enterprises that were in East Germany. The plan was to raise money to invest in the infrastructure needed for reunification.
But in the rush to get the companies off the government’s books and raise money, this turned into a fire sale of East German assets.
Koo had first-hand experience of all this. Here he is:
At the time I was personally interested in a certain manufacturing concern in the city of Dresden, then part of East Germany. I went so far as to visit the West German liquidator at the company headquarters and ask how much it would take to buy the company. At that time he was very confident the operation would fetch a high price, and the price he gave me was far beyond the reach of someone working for a Japanese company.
But several months after returning to Tokyo, I heard the company had been sold for a tiny fraction of the quoted price.
Since the West German government insisted on selling all assets within six months of bringing them to market, prospective buyers adopted the tactic of engaging in negotiations until the deadline loomed and then stepping away from the table. With just days to complete the sale, administrators were forced to dispose of assets at fire-sale prices.
Koo expects similar tactics in Greece. He concludes that “European authorities appear to have forgotten a key lesson of German reunification, which is that rash privatizations carried out with the goal of raising as much money as possible tend to end in failure.”
He isn’t the only one drawing this conclusion. My colleague Lianna Brinded spelled out recently just how likely a fire sale is, while property company Knight Frank is expecting a fire sale of privately owned Greek islands due to likely increases in tax.
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