US Government Debt Different - Finance Department - University of ...

162Burning the Furniture to Heat the House – The Potential Role of Asset Sales in Funding the Federal Government’s DeficitsOver 100 countries have auctioned off state-owned enterprises(SOEs) since World War II ended. 14 The Federal Republic of Germanyunder Adenauer sold majority stakes in Volkswagen in 1961and in VEBA in 1965. Privatization took deeper root in the early1980s, most famously under Thatcher’s UK government which soldstakes in British Telecom, British Aerospace, and Cable and Wireless.And the fall of communism in Eastern Europe and Russia broughtwaves of SOE sales. 15Asset sales are also playing a role in addressing the current Europeansovereign debt crisis. The troika of the European Union, EuropeanCentral Bank, and International Monetary Fund are requiring assetsales from Greece, Portugal, and Ireland in exchange for bailoutfunds. Italy has pledged to raise €15 billion from real-estate sales by2015.However, states do not part with assets lightly, in particular withland and mineral rights. National pride in ownership can be a largeobstacle, as can security and environmental concerns. There is also adanger that a sovereign will attempt to re-trade an asset physically locatedin its territory. Venezuela and Argentina offer recent examples.Voiding past sales impairs the value of future sales, as investors, oncebitten, will be twice shy. It can also damage other private capitalflows and lead to cross-border political turmoil.Also, in theory, and other things equal, the sale price of an assetshould equal the present value of future income derived from theoperation or exploitation of that asset. If the discount rate is equal toa sovereign’s cost of borrowing and the objective is to raise revenue torepay debt, then the state may be equally well off financing againstthe asset value as it would be in selling it.14 See generally Organisation for Economic Co-Operation and Development, PrivatisingState-Owned Enterprises, An Overview of Policies and Practices in OECDCountries, 2003; Megginson, W. and Netter, J., From State to Market: A Survey ofEmpirical Studies on Privatization, Journal of Economic Literature, Jun. 2001.15 See, e.g., Freeland, C., Sale of the Century: Russia’s Wild Ride from Communismto Capitalism, 2000.