Is Greece Going to Go Into Debt Again
Is the Greek debt saga finally over?
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- On 22 June, the Eurogroup agreed that Hellenic republic has passed the fourth and final review of its third financial back up bundle
- Every bit a result, Greece volition receive a farther 15 billion euro loan and debt obligations on EFSF loans will exist deferred by x years
- Appropriately, public debt payment difficulties are expected to be express in the short run
- Notwithstanding due to its loftier public debt, Greece stays dependent upon the mercy of Eurozone partners and the markets for a long fourth dimension, amid an improving just still very weak economical surroundings
Is Greece gear up to stand up on its own anxiety?
On 22 June, the Eurogroup agreed that Hellenic republic has passed the quaternary and final review of its tertiary financial support package. As a event, Hellenic republic will receive another tranche of money from Europe and Eurozone partners have also agreed to convalesce the country'due south debt burden. Moreover, the passage of the review implies that Greece volition go out its electric current 3rd financial support package by 20 August of this twelvemonth, as planned.
In this Q&A we volition explain what Greece volition get in render for passing this fourth review, look at the force of Hellenic republic's public finances, share our economic outlook and most importantly, explicate why nosotros think the Greek debt saga has entered a rather quiet stage, just is not yet over.
In brusque, the upshot is that payment difficulties are expected to be express in the brusk run, only due to its loftier public debt Greece stays dependent upon the mercy of Eurozone partners and the markets for a long time.
What does passing the fourth review yield?
In the side by side few weeks Hellenic republic will receive 15 billion euro from Europe: 5.5 billion euro tin be used for upcoming debt obligations, while ix.5 billion euro will flow into an account to build upwards the regime'due south cash buffer. This brings the full cash buffer to 24 billion euro.
On tiptop of the money transfer, Greece and its European creditors have agreed on a debt relief package, in social club to keep gross annual financing needs below 15 percentage of GDP in the upcoming years and below 20 percent in the longer term (effigy one). The well-nigh important elements of the package are that interest payments on 96 billion euro EFSF loans will exist deferred by 10 more years and that the average weighted maturity on those loans volition again exist extended by ten x years. Information technology implies that Hellenic republic volition merely offset repaying these loans from 2033, and the same goes for interest payments on these loans. Appropriately, debt repayments between 2023 and 2033 will be effectually xxx percent less than otherwise would have been the case (figure 2).
Finally, the Eurogroup has too canonical two conditional debt measures. The first mensurate is that about 6 billion euro (3.ii percent of GDP) of profits the Eurosystem has fabricated on Greek debt holdings (related to the SMP and ANFA programmes) volition exist redistributed to Hellenic republic in bi-annual instalments until 2022. The second measure is that the stride-up interest charge per unit margin on a tranche of 11.iii billion euro in the second plan to purchase back more than expensive debt at the fourth dimension, that would have become effective in 2018, will exist waived (savings of about 200 million euro a twelvemonth). To be eligible for these measures Greece needs to implement several reforms adopted and initiated under the current (ESM) support programme and run a primary surplus of 3.5 percent until 2022.
On top of the electric current debt relief measures, the Eurogroup has agreed that more will be done if needed to make sure gross financing needs remain below the 15 and 20 percent targets set. The European institutions will review the state of affairs at the finish of the grace flow (2032) and in case of unexpected adverse growth, involvement rate and/ or primary surplus shocks in the meantime. But but if Hellenic republic has adhered and adheres to European budget rules.
Have Greece's debt problems been put to bed?
For the short to medium term the answer is yes, for the long term the reply is not nonetheless.
Greece's public debt is still stubbornly high at 179 percent of Gross domestic product. Many years of high growth and/ or budget surplus are required to reduce the country's debt load and to make certain the country can actually go it alone. With a potential growth rate below one percent, it is unlikely the country can only grow out of its debt.
On the bright side, Greece has been able to transform its very large (primary) upkeep arrears into a surplus (figure 3). In 2017, the government'due south (main) upkeep balance stood at (4.0) 0.vii percent compared to a deficit of (10) 15 percent in 2009. This clearly limits financing needs going forward. At the same fourth dimension, rollover risks and debt servicing costs are lower than should be expected based on the debt to GDP ratio. As much equally 86 percentage of full public debt is currently held past official institutions, like the IMF, fundamental banks and European financial support facilities (EFSF and ESM) (figure 4). These official institutions have lent Greece money at rather favourable rates and tend to be less fancy-free than private investors. Importantly, well-nigh three quarters of total public debt is in the combined hands of Eurozone governments, the EFSF and the ESM. Hence, Europe'due south (conditional) commitment to keep Greek gross financing needs in check going frontward suggests that rollover risks and interest payments on nigh at least 75 percent of total electric current public debt are probable to remain relatively limited in the future.
Moreover, in the very short term, the liquidity adventure is practically zero. The authorities's cash buffer of around 24 billion euro (xiii.5 percent of GDP) should be sufficient to embrace almost 2 years of financing needs after the end of the programme, based on current growth, revenue and expenditure predictions. Plain, there is a risk that government revenue disappoints and/ or government expenditure overshoots, mayhap due to an unexpected economical setback. In that instance, financing needs would ascent, mayhap shortening the lifespan of the cash buffer.
The cash buffer, Hellenic republic'southward significantly improved (main) budget residue, and the Eurogroup's promise to do more if necessary should besides limit market stress in the next few years[1]. That said, the risk that at some indicate the Greek are ultimately fed upward with the tight financial policy restrictions alongside weak household finances, purchasing power then on, remains nowadays. Appropriately, the chance of new clashes with Europe somewhere farther down the line cannot be neglected. If the risk that the Greek government is going to backtrack increases, market stress could still spur. And Greek government bonds will probable remain vulnerable to pregnant underperformance of the Greek economy and fiscal balances compared to the baseline in the institutions' debt sustainability analysis for Greece. Finally, if uncertainty over the future of the Eurozone were to return, this would of course exercise not much good either. Yet based on recent market movements, it seems that a Eurozone breakup is currently non a peak concern of investors.
In example of renewed market place stress, it depends upon the 'swift' reaction of Europe and the Greek authorities how damaging the renewed market stress would be.
Volition more than debt relief be necessary?
The answer is that more debt relief volition likely be necessary. Europe'due south assumptions on Greece'due south economical and fiscal outlook seem too positive, so more debt relief seems inevitable down the line. The European institutions expect economic growth to boilerplate ii percent until 2022 and 1 percent thereafter until 2060 (figure v), combined with a primary surplus of three.5 percent until 2022 and 2.ii percent thereafter (figure 3). Such a scenario is unprecedented in history.
Source: Macrobond, EC, Imf, Rabobank, Nigem To give an case. Europe's surplus champion is Italia (that's right, Italia). The country has been running a main budget surplus for more than 25 years now (except in 2009 and 2010) of 2 percent on average. But this has come at a toll. To reach this surplus Italy'due south overall tax burden has go very high, while information technology is not compensated with efficient public spending and high quality public services. Average economic growth since 1992 has been 0.vii pct in Italy. And to exist fair, there is not much reason to believe Greece volition fare much meliorate over the longer term. It is even more likely Greece will practice worse, as yous can read beneath.
The event is that regime finances are expected to amend going forward and payment difficulties are expected to be limited in the short run, simply Greece volition continue to depend upon the mercy of Eurozone partners and the markets.
Has the economic surroundings improved?
Compared to the crisis years, the answer is yes. Compared to the pre-crisis years it is debatable.
The Greek economy looks set to grow
Source: Macrobond, Rabobank Betwixt 2009 and 2013 economic growth averaged -5.9 percentage per year. Between 2022 and 2022 average annual growth was close to zero. In 2022 the economy grew again, with 1.4 percent, on the dorsum of a favourable external surroundings and investment growth (both private and public). Furthermore, unemployment has come downwardly from its tiptop of 28 percent to 21 percent (figure 6), bank balance sheets have strengthened, and upper-case letter controls in place since mid-2015 have been loosened over the past years[2]. In the short term, we expect a further pick up of growth (near ii percentage in 2022 and 2019), as investments will likely become a boost from Greece's make clean leave from the programme, while tourism demand will remain stiff. Consumption growth is likely to benefit from employment growth, merely express past further cuts to pensions in 2019.
The long-term potential remains rather weak
In the longer term, growth will probable boring once more and in our view an almanac growth rate of near 1.5 percent until 2030 and 1 percent thereafter, as projected by the European Commission, is withal rather optimistic. For i because fiscal policy will accept to remain restrictive for decades to come, if Greece wants to remain eligible for current and future debt relief agreements and to attach to European upkeep rules. On the bright side, if this is plenty to go along markets at-home, prudent fiscal policy could support (foreign) investment. On the downside, restrictive financial policy to the length of days limits domestic demand, especially if information technology hurts consumption, which accounts for near ii-thirds of total Gross domestic product. With household disposable income notwithstanding nearly 25 percent smaller than pre-crisis (it shrank in 7 out of the final 8 years, figure 7), further cuts to pensions in 2022 and to the revenue enhancement free income threshold in 2020, that outlook does not look too bright.
Other factors informing our relatively pessimistic growth outlook are that Greece'due south population is ageing chop-chop, while productivity growth is very weak. Over the past two decades, labour productivity growth has stagnated and total factor productivity growth has even shrunk. What's more, continued high (youth) unemployment of (43) 20 percentage expectedly is however likewise high to finish the brain drain and feeds hysteresis – around ane million educated young people are said to have left the state in contempo years. And banks are still very weak with not-performing loans of over 40 percent, limiting their ability to stimulate economical growth and withstand another crunch.
Meanwhile, the fundamentals of the Greek economic system remain weak, despite all the reforms that have been adopted, which hurts the country'due south investment outlook and growth potential. Admittedly, the ease of doing business has improved in the past years. Merely doing business organisation remains tough. Within the EU, it is just more difficult in Malta (figure 8). Furthermore, international competitiveness (figure 9) and governance in Greece is now weaker than prior to the crisis (figure 10). Greece ranks last among Eu countries in the Global Competitiveness Index.
Of course we could be surprised positively. It mostly takes a while earlier reforms generate gains and as such the payoff of all the reforms implemented in the past years could exist college than currently seems the example. And potential growth could advance if Greece indeed continues to reform and strengthen its economy, as stated, with technical help provided by the EU. Only for sure there is all the same a very long manner to go to bring wealth back to pre-crisis levels and to seriously lift the country's growth potential to outgrow the massive debt brunt.
Footnotes
[i] The ESM will accept to approve before Greece can utilise of its cash buffer. Every bit such, the cash buffer volition indeed but exist used in case of heightened market stress, and not for current expenditures. Just it is not entirely articulate yet how the interaction between Hellenic republic and the ESM runs. If the requirement of Europe's signature delays the possible use of the cash or comes with conditionality it could limit the cash buffer's potential to stalk market stress.
[2] The limit on cash withdrawals has been raised from 60 to 5000 euro per day. The limit on international transfers by individuals has increased from 0 to 4000 euro every 2 months. For businesses the limit on cash transfers abroad has been increased from 0/ a case-by-case blessing requirement to 40000 euro per client per 24-hour interval.
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Source: https://economics.rabobank.com/publications/2018/july/is-the-greek-debt-saga-finally-over/
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