Just how broke is Greece?


Nathan Collins, Euromoney Skew
Published on:

On the face of it, Greece is marching towards insolvency but its creditors are likely to stay the course, for now, says Credit Suisse. But the math of macroeconomic adjustment looks ugly.

And now for something different..

In non-eurozone summit news, Credit Suisse has put out a report looking at the post-election situation in Greece and how likely the country is to successfully negotiate concessions on its bailout package. The first problem that Greece is going to face - drum roll - is meeting its reform targets ahead of the next tranche of foreign support, with a looming deadline of August 20th:

“There are a series of fiscal and structural benchmarks that Greece should abide by for the successful disbursement of the next tranche of the loan:
• The banks’ recapitalisation plan has to be in place
• A budget-neutral tax reform package has to be established
• A review to identify €11.5bn (5.5% of GDP) of spending cuts for the 2013-14 period
• Progress with privatisation targets

None of the these reforms is expected to be in place. The finalisation of the banks’ recapitalisation plan was postponed until after the elections and the main banks have been temporarily recapitalised. As for the tax reform, although a discussion had started, the elections halted it. The identification of spending cuts is maybe slightly less urgent (and dependent on the outcome of the renegotiation). Finally, as a result of the political uncertainty privatisations are – once again – behind schedule, despite the progress that had been made in the first months of 2012 (with several projects in the final stages). However, the delays of the past few months and the different views of the coalition parties regarding the privatisation plan are likely to put the 2012 target (€3bn) out of reach.”

This table throws into sharp relief just how reliant Greece is on loans from the IMF and the EU and what happens to Greece's funding shortfall as foreign loans tail off:

However, Credit Suisse is predicting that – even though the reforms are unlikely to be completed on schedule – Greece will receive part of the funds if the government commits to respect at least the fundamental elements of the bailout package. This would probably just cover the government’s basic needs, but would keep it afloat; on which €3.1 billion worth of ECB-held government bonds mature. The analysts are confident that the eurozone as a whole will see the wisdom of deferring debt targets, particularly given Greece's high level of structural reforms - the highest across OECD countries between 2008 and 2011

“First of all, the deterioration of the political and social situation in Greece has been dramatic and EU leaders are likely to want to prevent the further rise of radical parties in Greece. In addition, a successful renegotiation of the programme would reinforce the stability of the government and ease some of the social tensions, at a time when the last thing needed is political uncertainty. Finally, if the Greek government presents a revised programme based on its recommendations, then it can claim “ownership” of the programme, which would improve chances of successful implementation of it.”

The problem is, even if Greece can get past its immediate problems, it is still in dire straits economically-speaking:

"On the growth front things appear to have deteriorated. Following a contraction of 6.8% in 2011, 2012 was expected to have a milder recession (original forecast was 4.5%). Data for Q1 show that GDP contracted by 6.5% yoy, compared to 7.5% the previous quarter. However, since the May elections the situation has deteriorated significantly and the recession in 2012 is likely to end up being as deep as in 2011. The reasons behind this are:

• The banks’ recapitalisation has not yet been completed and deposit outflows have accelerated.
• The government has built up further arrears to suppliers and has not yet repaid almost €7bn of existing ones. Also, it is delaying tax returns and has cut down on the public investment programme.
• Importers are facing trouble importing goods since the last credit insurers announced that they will no longer insure exports to Greece until the political situation is clear, resulting in the need for cash upfront transactions, something that compounds the fact that the banks are not in a position to easily provide liquidity. Also, this has an effect on exporters as a lot of the raw materials they use are imported.
• Tourism revenues – one of the main sources of income for the economy – are expected to fall significantly this summer (industry experts expect a 15-20% fall compared to those in 2011).
• There have been delays in structural reforms (e.g., supporting investment projects) and privatisations. In addition, the uncertainty is preventing investment capital flying in and has also led companies to exit the Greek market."

Although the election has reduced Greek eurozone exit risks in the near-term, the math of macroeconomic adjustment suggests this medium-term risk will show no sign of abating.