Country risk expert insight: Hydra-headed debt crisis rears its ugly heads again in Greece

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Chilli Wutte
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In Q4 2016, Greece’s ECR score took another turn for the worse and declined by 0.27 points, dropping to 113th in the country risk rankings. This was a result of lower regulatory environment and overall demographic assessments, but most notably declining debt indicator scores. ECR asks two experts what the wider implications are for the eurozone.

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Philipp Mayer, country risk analyst, Erste


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“As the base case is that Greece will stay in the euro area and there will be an agreement on debt relief after the German Bundestag election, I don’t think that the ‘Greek crisis’ will affect eurozone assets more generally – and there was a first agreement again on Monday to send experts back to Athens.

“However, if Greece would be forced out of the euro – which doesn’t really make sense after all the efforts made on both sides; actually the majority of Greeks still want to keep the euro – it would be a strong signal towards the rest of the periphery and especially Italy.

“Thus I would assume credit spreads for Italy and other peripherals to widen at least in the short run. However, the European Central Bank QE programme would limit any widening.

“Anyway, the political appetite for such a scenario is rather limited after the Brexit.

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“On the other hand, the debt relief which definitely will come sooner or later will send a strong signal once again to the markets, that the euro is a political project and that ‘solutions’ can be found in the last minute despite moral hazard.

“The incentives for the current Greek government are clear: they want to leverage the key European elections in 2017 – debt relief in exchange for calm ahead of elections.

“It is rather certain that, after the race between CDU/CSU and SPD might be closer than thought a few weeks ago, German chancellor Angela Merkel and German finance minister Wolfgang Schäuble have no interest whatsoever in a Greek default in July, just two months ahead of the Bundestag election. Probably Merkel and Schäuble are fine with a Greek debt relief as demanded by the IMF after they have won the election.

“However, they would like to grant the debt relief to a different Greek government and have the implicit hope that Greece’s prime minister Alexis Tsipras will have to call early elections, which then will be won by New Democracy, which is ahead by up to 19 percentage points in polls.

“The rest is a political game which we have seen again and again in recent years.”

Ghinea Iorga, head of policy and strategy, Black Sea Trade and Development Bank

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“After a mild contraction of real GDP by 0.2% in 2015, economic activity gradually picked up as of the second half of 2016. Greece returned to growth, with a real GDP rate of 0.4%, driven by increased investment, although private consumption declined.

“Economic recovery is expected to strengthen in 2017, and accelerate in the next few years, as credit conditions improve.

“The labour market performed better than expected in 2016, with unemployment expected to continue declining also in 2017.

“Deflationary pressures have eased in 2016, mainly due to the increase in indirect taxation. Starting 2017 wages are expected to increase along with economic recovery.

“In the banking sector, non-performing exposures have reached close to 50% of total loans, with non-performing loans in excess of 35% of total loans, although regulatory, institutional and administrative progress has been made with respect to their resolution.

“On the positive side, private sector bank deposits have increased by €5.7 billion in the period from June 2015 to December 2016. The normalization of the financial sector may be accompanied by a gradual but steady relaxation of capital controls and a pick-up in growth of credit to the private sector.

“In 2016, Greece increased general government revenues to almost 50% of GDP, and achieved a primary surplus of about 1% of GDP, more than the 0.5% targeted under the programme agreed with its creditors. The achievement of the primary surplus target, combined with reduced interest expenditure, resulted in the general government fiscal deficit falling to 2.3% of GDP. Still, arrears to the private sector remain high, at over €6 billion.

“The external sector contribution to GDP growth was negative in 2016, with both exports and imports declining substantially. Nevertheless, the current account was balanced, which is a great achievement, in particular considering a negative FDI flow of 1.6% of GDP.

“Since the onset of the crisis, Greece has made significant progress with structural adjustment measures aimed at correcting macroeconomic imbalances and creating conditions for a return to sustainability.

“However, extensive fiscal consolidation and internal devaluation have come at a high cost to the economy and society, reflected in a GDP cumulative contraction of roughly 25%, declining incomes, very high unemployment and increase in the poverty rate.

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“The public debt-to-GDP ratio is anticipated to have increased from 179.4% in 2015 to about 184% in 2016, in spite of the fact that it remained almost constant in absolute terms over the entire period 2010 to 2016. At end-2016, the total foreign debt of the country stood at 245.7% of GDP.

“Nonetheless, the improved fiscal position and positive GDP growth in 2017 and 2018 are expected to put the debt-to-GDP ratio on a declining path.

“In connection with the above assessment, and in order to increase the competitiveness of the economy and ensure a smooth return of Greece to a path of sustainable growth, the Eurogroup endorsed the full set of short-term measures which will be implemented by the European Stability Mechanism.

“Although the Eurogroup agreed with the budget’s primary balance target of 1.75% of GDP for 2017, it insists, however, on the adoption of additional measures to reach a primary balance of 3.5% of GDP for 2018, which should also be maintained for the medium-term.

“On the opinion of some of the participating institutions the Greek debt becomes thus sustainable, as the agreed short-term debt measures are expected to have a significant positive impact and its main creditors stand ready to provide relief in the form of maturity extension and interest-rate saving.

Opposing view

“However, the IMF holds the opposite view, that the Greek debt is unsustainable, and therefore efforts to implement further economic reforms must be complemented by significant debt reduction measures taken by its EU partners, as it views a primary surplus of 3.5% of GDP untenable in the medium-term, and indeed detrimental to growth.

“The longer the disagreement among Greece’s partners and creditors continues, the more it may weaken investor and consumer confidence, and thus damage the economy. Consequently, Greece’s difficulties may increase and risk perceptions deteriorate, as it faces large repayments in July, amounting to more than €6 billion.

“Ironically, although this renewed crisis situation is generated by factors beyond the control of the Greek authorities, it endangers further progress due to the settling in of reform fatigue in the face of the little relief received vis-à-vis what is perceived in Greece as a tactic of moving targets pursued by the partner institutions.

“If continued, this disagreement may even destroy the incipient recovery and plunge the country in political instability.

“However, this time circumstances appear to be more favourable to Greece than in past crisis situations due to the electoral cycle in the EU, uncertainties related to the EU banking-system health, and yet the unclear consequences of Brexit.

“In all likelihood, Greece will receive sooner rather than later the financial support it needs to put the programme back on track. In any event, this new situation is not likely to have a material impact on the eurozone.”

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