Analysis: Baltic experiment has lessons for euro zone

Tue Nov 1, 2011 9:23am EDT
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By Sebastian Tong

LONDON (Reuters) - In their battle to bolster state finances and avoid sovereign defaults, euro zone policymakers may do well to examine the efforts of tiny neighbor Lithuania to reform state-owned enterprises.

The Baltic economy's drive to squeeze higher returns from state assets ranging from office blocks to forestry firms, offer beleaguered European countries a reminder of what UBS has dubbed "the forgotten side of the government balance sheet".

As privatization plans in Europe falter, some say governments should focus on generating greater profits from these assets rather than selling them for paltry returns in debt-cutting fire sales.

"The Pavlovian reaction of politicians is to sell these assets but you can do much more than that. You can rationalize these assets, make them more profitable through better management," said Stephane Deo, chief European economist at UBS.

Deo estimates that euro area governments hold some 2.35 trillion euros ($3.3 trillion) of financial assets and roughly 4 trillion in fixed assets such as buildings and roads.

Governments could do more to "sweat" these assets, he said.

Italy, Portugal and Greece, for instance, raised under 5 percent of total 2009 state revenues from fixed assets though such holdings are worth the equivalent of 30 percent of their individual GDP.

Restructuring state assets would not only boost government coffers but over the longer term, rejuvenate moribund sectors of the economy, ultimately benefiting consumers and taxpayers.   Continued...