Finnegan's Take

Fears that Greece could default on its debt tops the EU agenda because it puts the balance sheets of a dozen German and French banks in peril. But Greece has already defaulted on its debts to companies.

What is default? EU leaders have been trying to find a way around the fact that Greece cannot meet its debt commitments.

Various ideas have been thrown around – restructuring, reprofiling, ‘soft reprofiling’ – which involve either not paying all the money owed or paying over a longer period. Credit ratings agencies are unambiguous: if you change the terms of a credit agreement, you are in default.

By that definition, Greece – and other EU member states – have been defaulting on debts for years. The difference is that rather than defaulting on government bonds held by large banks, they have delayed payment to companies which supply products to government-funded service providers.

They have unilaterally changed the terms of credit agreements.

This is most stark in the health sector where the government is the biggest payor and has left creditors waiting more than two years for their cash. It has even paid some companies in government bonds which are trading at 50% of their face value (due to fears of default on sovereign debt).

This problem has existed for a couple of years, with some estimating that the outstanding bill owed by Greek public hospitals is 6.5 billion.

The EU has revised its late payments directive (although MEPs decided to go easy on hospitals) to insist on payment within 30 to 60 days – which must have drawn sardonic smiles from companies waiting 600 days for their money.

Impact on the public

Now, some companies have simply stopped supplying medicines to hospitals which show no sign of paying their bills. Companies say the problem has been getting progressively worse and there is little cause to hope it will improve any time soon.

One of the arguments against leaving the euro – and it’s a very good one – is that a new currency would devalue rapidly making imports relatively more expensive. The classic example is that food and medicines would no longer be imported. But Greece is in danger of walking into this situation anyway.

So, patients will no longer have access to medicines, medical devices, or diagnostic equipment. The meltdown has already begun.

For companies, the threat is also real. Big Pharma needs payment for its products so it can pay staff (in Greece and elsewhere) and invest in researching new medicines.

As for ‘small pharma’ and the scores of SMEs making niche medical devices, they are even less able to carry on without cashflow. Small and medium-sized companies have gone to the wall praying for payment from Greek hospitals. More will follow.

Jobs will be lost; the tax take will fall further. The deficit will grow; the debt will mount.

Their options are few. Healthcare is a special case. The biggest buyer is the state. If the government is bust, most of your clients are bust. The auto industry or IT sector has a more diverse client base. They might cut their losses on cars and computers sold (or ‘given’!) to public bodies and focus on their privte sector clients. If you make stents or statins, your options are limited.

North-south divide

Greece is the worst offender when it comes to late payments. But it’s not alone. Spain, Portugal, Italy, Cyprus and others are also chronically slow payers, routinely breaking the terms of contracts entered into by healthcare companies.

By contrast, the diligent northern nations tend to pay more or less on time. If I may don my ‘green jersey’ for a moment, I would point out that Ireland is not amongst the worst offenders. The Irish health service tends to pay within a month or so (depending on whose figures you use).

Culturally, Ireland is more like the UK than Greece or Portugal. It’s pro-enterprise and tends to pay its bills. If Dublin’s previous government had not recklessly guartanteed its banking debt, the Irish would not find themselves at the mercy of the IMF/ECB.

Ireland’s own late payments rules are tougher than those written into the revamped EU late payments directive. And the terms of its ‘Memorandum of Understanding’ with the EU/IMF will require that hospitals pay their bills within 15 days. A tall order, and a likely source of cashflow strain for a battered health service, but at least the target will be taken seriously.

Enough nationalism. The point is that hundreds of small companies have suffered the effects of Greek default already. Yet it is only when Deutsche Bank or Société Générale is at risk that EU leaders pay attention.

Medical companies that sold products to public hospitals are left to hang, while banking giants that bought risky bonds must be saved.

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