An unsustainable situation
This blog started about a year ago. One of the first posts that I wrote was on the topic of Greece’s debt sustainability after the troika report was leaked ahead of the Brussels summit of October 25th. The Greek situation has not made much progress since as here I am again about to write about Greece’s debt sustainability.
Early on Tuesday morning, the key EU and IMF players announced in a press conference a new set of measures that intend to bring Greece’s debt trajectory under control by 2020.
The main points, a reduction to the interest rates of Greece’s bilateral loans with eurozone countries that were part of the first program, the extension of the maturities of those loans by 15 years, a deferral of the interest payments to EFSF by 10 years, the return of the profits on bonds purchased under the SMP via the national central banks and a re-purchase program of Greece’s privately held new government bonds after the PSI.
A sober assessment of last Tuesday’s outcome needs to happen in consideration of the alternative of not having achieved a deal and the implications of such a failure. The 31.5 billion euros tranche that Greece was supposed to receive last June is to be eventually released, which aside of the fact that it allows the bank recapitalisation process to be completed will also allow the Greek government to at last pay some of the arrears that it owes to all sorts of people and businesses that had the misfortune to have dealings with the Greek state. Another approximately 10 billion euros will be released in three tranches during the first quarter of 2013, assuming Greece’s compliance with the program’s commitments. Failure to have reached an agreement last Tuesday would have just prolonged the uncertainty around Greece’s future and would have an overall detrimental effect on the already deteriorating real economy, which is desperately in need of any liquidity, even if this is drip-fed.
But this is as far as it goes for Greece. By choice, the Greek government stayed away from the debt sustainability negotiations, seeing it as a matter that needed to be agreed between the European Union and the IMF, as Prime Minister Antonis Samaras said on more than one occasion. In this sense, the compromise was suitable for Germany and some satellite countries that were not prepared to discuss a write-down of bilateral loans – and are resisting a direct bank recapitalisation via the ESM – and suits the IMF so it does not appear that the Fund is throwing money into a bottomless pit. In effect, Greece is exactly where it was at the start of the year.
I don’t think it is even worth getting into the details of the debt sustainability. The troika has repeatedly failed to accurately forecast Greece’s growth prospects and there is nothing to suggest that this time will be different. For Greece to reach the target of debt to GDP below 110% in 2022 it means that the country must grow consistently above 4% from 2015 onwards and have a primary surplus of approximately 4.5% of GDP from 2016. The GDP figure of 255 billion euros in 2022 implies that the Greek economy will grow by circa 28% from the 184.4 billion that the Greek budget expects for 2013 and 2022 is seen even 10% higher than Greece’s previous peak in 2008. The figures needed to be massaged in a certain way that would allow a political decision to keep Greece afloat and this is exactly what they do.
The main issue remains, which is the deeply recessionary policies that the troika insists Greece should keep implementing. Even after last Tuesday, there seems to be no intention of changing course. Greece is expected to implement a heavily frontloaded program worth 18 billion euros over the next four years, half of it just in 2013 so the program “gains credibility”. The troika even introduced automatic correction mechanisms to ensure compliance with the fiscal targets, whereas in contrast OECD only yesterday advised that if growth proves lower than expected automatic “stabilisers” should be allowed to operate “even if this means missing the set targets”. The OECD does not see any growth before 2015 and expects unemployment to peak above 27% in 2014, a figure very likely to materialise as early as next year.
In this environment, any discussion on growth is purely philosophical. For as long as the Greek government remains absorbed in muddling through troika reviews and getting the next tranche, Greece will simply remain in the same vicious cycle.
It is high time for someone to introduce into the debate the issue of the sustainability of the Greek society.