Delays to second bailout cause spike in Greek risk

By:
Jeremy Weltman
Published on:

Greece must find a way to secure more aid from its creditors, but is caught in the crossfire between the IMF defending its pleas for debt relief and European policymakers insisting on repayment. The outcome is likely to be messy given the preponderance of elections in Europe this year, and a sense of déjà vu by kicking the can further down the road.

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Medusa stare: Investors avert their eyes away from the Greek crisis for fear
of turning to stone

The country’s risk score had improved after reaching a low in the second quarter of 2015, but has recently turned south again.

Greece’s falling risk score underlines the failure of its creditors to thrash out an agreement in time, with some €6.4 billion-worth of debt repayments to the IMF, EU and private creditors due in July.

Not that Greece was anything other than high-risk to begin with.

The borrower was among the world’s worst default risks, firmly within Euromoney’s tier-five category, nursing a gross debt burden estimated by the European Commission to have grown to 179.7% of GDP at the end of 2016.

The borrower is now languishing in 113th out of 186 countries in Euromoney’s global rankings, slipping one place in Q4 2016, and remaining on a par with some of the worst credit risks in sub-Saharan Africa, which is enough to put off any investor:

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Bad timing

There are differing perceptions of Greece’s debt sustainability, with the IMF urging European creditors to relax their demands for securing a new bailout.

However, the timing is unfortunate.

“The electoral dynamics in the Netherlands, Germany and France, as well as the growing political uncertainty in Italy make the Greek debt negotiations ever more sensitive and less predictable than the previous ones,” says ECR expert Constantin Gurdgiev, a professor at the Middlebury Institute of International Studies (MIIS).

There is a sense of a limit to which European taxpayers are prepared to go to support Greece at a time of weak growth and austerity in Europe, with populism on the rise.

Besides, Germany’s finance minister Wolfgang Schäuble says debt relief would violate the Lisbon Treaty, and the intransigent veteran is never in the mood for compromise.

Vulnerable economy

Meanwhile, the Greek economy is precarious.

Some growth occurred in the second and third quarters of last year, plus the fiscal deficit is now down to 1.1% of GDP, with a primary surplus pursued, leading to a small improvement in the government finances score.

However, GDP contracted by 0.4% in the fourth quarter, causing the year-on-year growth rate to slide to just 0.3%, highlighting how easy it is for Greece to be dragged down again.

Despite encouraging employment growth, the unemployment rate is still a whopping 23%, with household incomes further threatened by the return of inflation measuring 1.2% in January after years of deflation.

Gurdgiev at MIIS also advises caution even if Greece is granted the next tranche of loans.

He says the country will probably be able to roll over its maturing debt in 2018, but not in 2019 when redemptions will rise again to €9.5 billion.

On top of that Gurdgiev has concerns the primary surplus was achieved at the expense of increasing government arrears on payments to contractors.

“Clearing these arrears will mean that even the 2018 debt repayment schedule is not sustainable,” he says.

Greece will likely remain in the eurozone, but already spends more than 6% of GDP on debt servicing, which is clearly unsustainable.

The implication is that the crisis will not be resolved without new structural measures employed and, mention it quietly… some form of debt relief.

Just don’t expect it to be on the agenda this time, which in Gurgiev’s words implies “an extend-and-pretend policy will remain in place”.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.