Last Friday, 21 October, newswires and twitter timelines went on fire when the troika’s ‘strictly confidential’ analysis of Greece’s debt sustainability surfaced.
The report presents a revised baseline scenario for the sustainability of Greek debt, justifying the reassessment on the grounds that the country is adjusting through recession and wage channels, rather than increases in productivity, slower recovery, lower privatisation proceeds, reduced fiscal adjustment needs and delayed market financing.
The analysis sets the stage from the start, citing that since the fourth review the situation in Greece has taken a turn for the worse.
Since the fourth review, the situation in Greece has taken a turn for the worse, with the economy increasingly adjusting through recession and related wage-price channels, rather than through structural reform-driven increases in productivity. The authorities have also struggled to meet their policy commitments against these headwinds, and due to administrative capacity limitations in the Greek government.
At the same time the troika attempts to justify its program and policies, suggesting that it has worked before, it just does not seem to work for Greece. The argument is debatable but it is not point of focus in this article.
The growth and fiscal policy adjustments assumed under the program individually have precedent in other countries’ experience, but experience to date under the program suggests that Greece will not be able to set a new precedent by realizing at the same time and from very weak initial conditions a large internal devaluation, fiscal adjustment, and privatization program.
Now let’s go back to June, when the 4th review took place, the product of which was the Greek Government’s Mid-Term Development Plan (Mesoprothesmo), which set the ground for the July 21st Agreement – an agreement that, given recent developments, is already obsolete. Below you see the projections of the Mesoprothesmo on Real GDP, Nominal GDP and Consumer Price Index.
The troika assumed a 3.5% decrease in Real GDP for 2011 and growth (!) of 0.8% for 2012 when the Greek National Statistics Agency (ELSTAT) on June 9 announced a 5.5% decrease in GDP for Q1 2011, with final consumption reduced by 6.9% and most importantly Gross Fixed Capital Formation, i.e. investments of businesses in the economy, with the known multiplier effect on national product and income reduced by 19.2% compared to Q1 2010. At the same time ELSTAT on June 16 announced Q1 2011 unemployment figure of 15.9%, compared to 11.7% in Q1 2010.
All the signs were there back in June that the Greek economy was going through an extensive phase of Depression, having recorded 9 consecutive quarters of contraction. Signs that the troika chose to ignore, imposing, in collaboration with the Greek government, more austerity measures, suppressing the demand side with additional reductions in salaries and emergency taxes, with the aim to meet the fiscal targets, targets that never adjusted to the new conditions that were evident to all.
Between June and last Friday the element that changed was the confirmation of the product of this draconian fiscal consolidation, when on the 8th of September ELSTAT announced provisional GDP figures for Q2 2011 with a further 7.3% decrease in non seasonally adjusted figures (2000=100).
In the recent analysis the troika appears to realise the damage and revises projections.
A longer and more severe recession is thus assumed, with output contracting by 5.5% in 2011, and by 3% in 2012. Growth then averages about 1.25% per year in 2013-14, 2.66% in 2015-20 (as a cyclical rebound kicks in, and structural reforms start to pay off); and 1.66% per year in 2021-30 (as the economy reverts to potential growth, which is constrained by demographic trends). All told, real output growth is projected to be cumulatively 7.25% lower through 2020, versus the projections made at the time of the 4th Review.
In the Mesoprothesmo, the troika and Greek government set an ambitious privatisations program that plans to yield EUR50bln by 2015, with a target of EUR5bln for 2011. Under this assumption, the Greek government should realise just under EUR850mln of privatisations revenue each month until the end of 2011 and sell stakes, issue new licences or extend current agreements for no less than 24 entities.
Below the scenarios presented in the Mesoprothesmo to support the benefits of the ambitious privatisation program. It is worth noting that in the best case scenario, with all privatisations goals achieved, in 2020 debt is projected at just over 100% of GDP, whereas in the recent report the revised baseline leads to a debt to GDP ratio of 150%.
Questions were raised from the start on the actual ability to set the right legal framework and proceed with such an unrealistic plan in such short target period. The ability to attract investor interest at home or abroad, for a country that featured every day in the press with headlines of an imminent default, is limited. The concerns were eventually proven accurate.
The Greek government only managed to proceed with the sale of its stake of OTE simply because the option was already available in the agreement with Deutsche Telecom. Questions remain about the possibility of the overall privatisation plan to meet its targets, but time will allow for further discussion on this.
The troika realises the obvious and revises its targets by the amount that the 2011 target falls short, leaving the targets of the remainder of the privatisation program unchanged.
Given the adverse market conditions and technical constraints faced by Greece, a more conservative but still suitably ambitious path is assumed for privatization proceeds for the purpose of the debt sustainability analysis.
The reality is that the situation in Greece did not take a turn for the worse only in the last 4 months. The real issue is that the troika is in denial of accepting the failure of a program that – as we saw earlier – the IMF admitted has implemented in other countries and has more of a homeopathy nature. In an article published 2 weeks ago, respected Greek newspaper, To Vima, quotes a government official ‘off the record’ who admitted that documents from the Turkish, Ukrainian and Pakistani programs formed the basis of the Greek program.
They attempted to resolve a debt crisis by piling up more debt, while at the same time attempting an “internal devaluation” and extensive fiscal consolidation that only put Greece in a recession spiral. The outcome was exactly as predicted and only last Friday the troika seemed to realise.
If the Greek debt was unsustainable when the program was introduced back in May last year, now it is running away, and simply requires what European leaders and the Greek government did not have the courage or political insightfulness to implement when it was needed: a decisive restructuring on face value of all issues in circulation, with voluntary participation of the private sector, exclusion of pension funds, participation of the ECB and official sector support for the duration that Greece needs to set its house in order.