The prospects of the Greek economy at the end of the bailout

EPA/PATRICK SEEGER via Naftemporiki

On Aug. 20, Greece is due to exit from its third bailout program. But the country is still saddled with a towering public debt — nearly 180 percent of its  GDP — and Europe’s governments are divided over how much more relief to grant. Creditors are seeking assurances that the country will continue its austerity programme reaching its primary surplus target of 3.5% until 2022 and of  2.5 % until 2060 so it can repay its huge debt that was largely used to rescue European banks.

Bloomberg presents an assessment of the state of the Greek economy in an article published just before Thursday’s Eurogroup meeting:

Between 2008 and 2016, the Greek economy contracted by 28% — the deepest recession in modern history. Lately, though, the economy has been doing better. Output is on course to grow by 1.9 percent this year, according to the European Commission. Investors are becoming more confident, allowing Athens to return to the government-bond market, and the interest rate on the benchmark 10-year bond has fallen to roughly 4.5 percent. Still, Greece’s debts still don’t look sustainable over the longer term, which makes its recovery fragile.

The euro zone and the International Monetary Fund put together three rounds of financial assistance (in 2010, 2012 and 2015), totalling more than 300 billion euros in commitments, though the IMF stopped disbursing cash after the second round and is only offering technical assistance. These programs have all proved insufficient. This is partly because the first two programs underestimated the effect that tax increases and spending cuts would have on Greek economic growth, and partly because successive Greek governments have delayed passing recommended structural reforms that would attract investment, such as cutting red tape. The creditors granted debt relief to make the numbers add up but in the end, it wasn’t enough.

Multiple rounds of belt-tightening have dramatically improved the country’s budget balance, though they also prolonged its recession. In 2009, Athens’s budget deficit stood at 15.8 percent of gross domestic product. Last year, Greece ran a primary surplus (net of interest payments and other one-off payments) of 4.2 percent and an overall surplus of 0.8 percent of national income.

Greece has also made some progress on structural reform. Under pressure from the lenders, it suspended collective wage agreements which had raised labour costs and undermined the economy’s competitiveness, brought wages down and raised taxes.

A recent OECD report called for Greek leaders to continue improving bankruptcy procedures, so failing companies can close less disruptively and do more to speed up the extraordinarily long legal processes which delay investment. The OECD report called for more measures to address higher poverty levels and bad loans at banks.

What went wrong?

“The IMF  clinched an agreement on reducing Greece’s debt on Monday [Nov 26 2012]

After 12 hours of talks at their third meeting in as many weeks, Greece’s international lenders agreed on a package of measures to reduce Greek debt by 40 billion euros, cutting it to 124 percent of gross domestic product by 2020.

In a significant new pledge, ministers committed to taking further steps to lower Greece’s debt to “significantly below 110 percent” in 2022 — the most explicit recognition so far that some write-off of loans may be necessary from 2016, the point when Greece is forecast to reach a primary budget surplus.

“When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt,” German Finance Minister Wolfgang Schaeuble said.

Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment.  Greece will receive up to 43.7 billion euros in stages as it fulfills the conditions. The December installment will comprise 23.8 billion for banks and 10.6 billion in budget assistance. 

German central bank governor Jens Weidmann has suggested that Greece could “earn” a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view”.

Reuters Tue Nov 27, 2012

In June 2017, the euro-zone finance ministers again promised further steps to ensure that Greece’s public debt is sustainable but Eurozone countries do not agree on how far to go. France wants Greece to pay more in good times and less if the economy slows. 

Germany a prefers a stricter system: Relief measures should not be automatic and parliaments should have a say on whether Greece has done enough to deserve further debt relief. An expert group of economists has argued that none of the measures favoured up to now, even if stretched to the limit, would get Greece’s debts on a credible and sustainable downward path.