The Guardian — Greece’s economy will suffer fresh damage from the austerity measures demanded by its creditors and will remain stuck in permanent depression unless it receives substantial debt relief, one of the UK’s leading thinktanks has warned.
The National Institute of Economic and Social Research said the increases in VAT reluctantly accepted by the Syriza-led coalition in Athens in exchange for a new bail out will result in a 1% fall in national output in 2016.
In its quarterly analysis of the state of the global economy, NIESR said that by the time the Greek economy stops contracting in the middle of next year, gross domestic product would be 30% lower than at the start of the crisis in 2010 and 7% lower than when the country joined the single currency in 2001.
The report was published following a second day of heavy selling of bank shares on the Athens stock market. On Monday five shares comprising the banking index – National Bank of Greece, Alpha Bank, Piraeus Bank, Attica Bank and Eurobank – suffered double-digit losses, including three over the 30% limit that triggered an automatic trading suspension. The same group again suffered losses near the 30% level on Tuesday, with trading in Piraeus Bank shares suspended.
However, after falling by a sixth on Monday, the main Greek stock market index had a steadier day as it posted a decline of just over 1%.
Banks have been hit hard by a combination of a poorly performing economy, deposit flight, the rising number of non-performing loans and the capital controls introduced by the Greek government in late June. Shares in banks have lost half their value in the past two days and two thirds of their value since Syriza’s general election victory in January.
The enfeebled state of the banks has added urgency to the talks between Greece and its creditors – the European commission, the European Central Bank, the International Monetary Fund and the EU’s European Stability Mechanism rescue fund – over the terms of a proposed €86bn (£60bn) bailout. More than a quarter of the money, €25bn, is to be used to recapitalise the banks.
Euclid Tsakalotos, the Greek finance minister, said on Tuesday that talks on the privatisation of assets, a key demand by the creditors, had been going well and that a deal was likely by the end of the week. The European commission added that it was “encouraged” by progress so far.
One potential stumbling block to an agreement is the insistence of the IMF that it will not take part in a third bail out unless Greece’s debt is cut by 30%.
The NIESR report said that an even bigger cut of 55% was needed to give Greece a chance of reducing its debt to 120% of GDP by 2020. It warned that continuing to insist on “unrealistic fiscal targets” will ensure that the Greek economy will “remain in depression”. The report said: “According to our modelling, restoring debt sustainability requires a debt write-off equivalent to at least 55% of GDP, higher than the IMF’s estimate of 30%.”
It added that the economy’s descent into deep recession would push up unemployment, which would persist at a level above 20% of the workforce even when the economy started to grow again. Capital shortages and the continued risk that Greece will leave the euro are expected to hit investment, while higher taxes will intensify the squeeze on household incomes.
“The changes to the VAT system will hit already weak consumer spending, shrinking the economy even further this year and next”, said Jack Meaning, a NIESR research fellow.