Endless tragedy of Greek debt

20.06.2018 17:34|Marcin Lipka

“Greece can compare its fate to the myth of Sisyphus. It is practically impossible to roll a boulder up a hill, i.e. to build a macroeconomic strategy that will give sustainable GDP growth and a reduction in debt. Contrary to the familiar myth of Athena, they will never see anything that could give hope to the end of the crisis. The boulder of debt will crush them as soon as they try to move it,” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

On Thursday, the euro area ministers meet in Luxembourg to decide what to do with Greece, which will run out of cash in two months' time from the latest aid plan agreed in 2015. There are several options on the table, including conditional debt relief. However, whatever decisions are taken, neither the Greek economy nor its creditors will sleep peacefully for the forthcoming decades.

Good beginnings of bad...

At first glance, the situation in Greece is not so tragic. This year and next year, GDP growth will amount to about 2% according to the spring forecasts of the European Commission. The budget and current account are balanced and even the primary surplus of the public finance sector (excluding the costs of the debt service) has been achieved at 3.5% GDP, which was the ambitious aim of the creditors and in which many doubted.

Unfortunately, several key indicators do not change the overall picture of Greece, its structural weaknesses and its lack of strong growth prospects. According to the Economic Survey of Greece 2018 (OECD), the level of investments is more than 60% lower than a decade ago and the share of non-performing loans reaches almost 50% (less than 70% for small and medium-sized enterprises - according to the IMF data from 2017).

The inflow of foreign investment in relation to GDP remains much lower than the average in OECD and EU countries. There is still no evidence that confidence in the Greek economy is returning. In the years of crisis, 2010-2015, more than EUR 100 billion of deposits were withdrawn (out of EUR 240 billion) and these funds did not return at all. Why?

Privatisation fiction

It is no secret that the Greek Achilles’ heel is the significant involvement of state capital in most sectors of the economy. For many years, creditors were expected to force the Greek authorities to privatise. However, nothing like that has happened. The sale of inefficiently used assets is going rather badly, which dramatically undermines the credibility of the Hellenic Republic.

In 2011, Greeks promised to privatise 50 billion euros of state assets by 2015. In 2015, when Athens was negotiating its next aid package, no privatisation took place. Instead, as an incentive to creditors, it was once again promised that EUR 50 billion in assets (the same ones, of course) would be sold by 2019.

The final provisions of the agreement with creditors assumed that not EUR 50 billion but EUR 22 billion will be obtained from privatisation by 2020. How much private money have they managed to get from this? Less than 5 billion euros.

Dispute between creditors over debt to GDP: 96% or maybe 275%?

The new aid to Greece was theoretically granted after debt sustainability analysis (DSA). The problem is that, depending on the analysis centre (IMF) or the European Commission (EC), the results are diametrically different.

According to the estimations of the European Commission (Compliance Report ESM Stability Support Programme for Greece) from March this year, the European Commission will present a report on the implementation of the programme. The DSA shows that the debt to GDP ratio will fall from 180 percent in 2030 to 127 percent in 2030 and 96 percent in 2060. In such a scenario it would be possible to service it and Athens would be able to settle their obligations to creditors (i.e. European taxpayers, who owe over EUR 200 billion).

Unfortunately, the EC's forecasts may be based on overly optimistic assumptions (budget surplus and GDP growth rate). The DSA analysis conducted by the IMF suggests that the debt to GDP ratio will increase to 275% after a short period of decline, i.e. by almost 200 percentage points more than in the EC data. In addition, according to the IMF, annual gross borrowing needs (new debt and the need to service the old one) are over 60% GDP. Normally, it should not be more than a few percent. This is one of the reasons why the fund has not made a financial commitment to an assistance programme to Greece. This is probably the main reason why the foreign capital does not want to invest in the Hellenic Republic, and why households and local entrepreneurs prefer to keep assets abroad.

The problem will return

The lack of privatisation, the insufficient number of reforms and the unrealistic economic targets imposed by European creditors will mean that the risks associated with Greece will be doubled. This will be particularly evident when the majority of financing will have to be obtained on market terms and the economic situation will deteriorate.

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