Greece on the brink of the eurozone – again

10.02.2017 12:51|Conotoxia.com

260 billion euro for saving the economy of Greece may go in vain. Athens just returned to the headlines of the financial press. Reasons: insufficient reforms size, deadlines to repay the loans getting closer and disagreement between the creditors. The Greek catastrophe lies in the background – comments Marcin Lipka, Cinkciarz.pl senior analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

In mid-2015 the world saw what the true financial crisis of a country really looks like. Thousands of people protesting in the streets, no ability to make money transfers, lines in front of the ATMs, limits to the daily withdrawals at only couple dozen euro per day and a paralysis of the international economic activities related to the control of the capital flow.

After many weeks of negotiation and a real threat of Greece leaving the eurozone, the creditors and the debtors agreed on a third help pack in amount of 86 billion euro (according to the International Monetary Fund a total destined to help Greece from the beginning of the country’s crisis is 260 billion).

It probably is no surprise that a year and a half later Greece is again in the spotlight. What’s even more interesting, there’s not only more disagreements between Athens and its lenders, but also among the creditors themselves.

A crushing report

The main reason for Greece making the headlines again is a February report by the International Monetary Fund (IMF). It presents the difficult situation the country found itself in, even though it received the enormous financial help. According to the base case scenario, which assumed introducing the reforms, the debt of Greece in 2060 reaches 275 percent of the gross domestic product, and the gross annual debt needs (a necessity to ensure the financing for the new debt and the debt that is maturing in the given year) will reach 60 percent GDP. This is approximately six times more that the current annual debt needs of Poland related to the GDP.

The IMF also points out that half of the debts given by the banking sector are bad (overdue at least 90 days). The report also informs of the huge tax frauds. Nearly a half of the income of the self-employed people (doctors, accountants, engineers, lawyers) is not on record and thus their salaries are not subject to taxation.

Also the retirement fund generates enormous costs as the reduction of the pension mainly affected the newly retired. For those who received the benefit earlier, the average and last pension ratio is 80 percent, while the average for the eurozone is below 50 percent.

The ambitious privatization plan, which was to finance the Greece’s debts towards the creditors, can be called fictitious. In 2015 it was established that Greece will sell 50 billion euro worth of real estate. According to the IMF, however, up until now the selling contracts have been signed for only 1.5 billion euro. The Fund estimates that until 2018 this amount should grow to 5 billion.

Also the IMF remarks on the statistical data presented by Greece are interesting. Between 2001 and 2014 the average annual growth of GDP was revised by 0.6 percentage point downwards compared to the initial data. The average revision in the eurozone was from 0.2 percentage point up. The revision of the initial deficit in the public finance sector (before the cost of the debt) between 2001 and 2015 was as big as by 2.4 percent of GDP annually, whereas in the eurozone it was 0.3 percent.

A fundamental debtors’ dispute

So far only the countries from the eurozone and the International Monetary Fund took part in helping Greece. The Fund did not, however, participate in the third part of the program financing Greece, after it decided that the debt is unstable, meaning it is unpayable without the reduction of the capital part.

On the other hand, the countries from the common currency area think that the debt is stable as long as the assumptions regarding the economic forecasts and the initial deficit will be maintained. However, these are the disproportions in assumptions that cause huge differences in the final perception of the financial possibilities of Greece.

The European institutions assume that the debt of Greece will gradually go down from the current 180 percent GDP to 120 percent GDP in 2030 and about 100 percent between 2040 and 2060. As the IMF emphasized, this causes the difference in the projections of the Fund and the countries of the eurozone being over 170 percent GDP.

Where does this difference come from? It is most of all a result of the enormous dissonance in an initial surplus of the public finance according to the Fund and the European institutions. The Eurogroup estimates that until 2030 the surplus will reach the level of 3.2-3.5 percent, and the IMF assumes this number to be 1.5 percent GDP annually. Last year, which is assessed as a good one, it was only 0.9 percent, what shows how big a risk of a mistake is for the very optimistic European estimates, and also for those less optimistic by the Fund.

The Eurogroup also foresees that the nominal GDP growth (including inflation) in Greece will be at the level of 3.3 percent annually up until 2060, meaning this number will be 0.5 percentage point more that the IMF economist estimate. The European institutions also think that before 2030 15 billion euro will flow in from the privatization, but – as the Fund emphasized – they did not count include the cost of banks recapitalization in their base case scenario.

Unavoidable catastrophe

“We cannot carry out the debt reduction for a member of the eurozone, it is forbidden by the Lisbon Treaty” – said Wolfgang Schaeuble, Germany’s Minister of Finance in ARD TV channel (according to the news from Bloomberg, February 8). On the other hand, Germany wants the Fund to join the current program financing Greece, suggesting that otherwise they will not finance Athens anymore, what increases the risk of Greece leaving the eurozone.

The Fund, on the other hand, doesn’t see the possibility of keeping high initial surplus of the Greek public financial sector by the coming decades without the reduction of the capital part of the debt. Theoretically there’s always a possibility of further lowering the interest part of the debt, even though – as the IMF emphasized – if the initial deficit remained close to the current levels, then the annual financing cost from the EFSF program (European Financial Stability Fund) and ESM (European Stability Mechanism) would have to be reduced to the level of 0.25 percent in 30 years perspective.

In the coming months it can be anticipated that the European debtors will decide on lowering the interest of the debt and Greece might announce additional reforms. Currently a larger crisis would be inconvenient for the eurozone, especially in the perspective of the upcoming elections and the necessity of repaying the debt of over 6 billion euro in the summer by Greece.

However, as soon as the election period is over in the key countries of the eurozone, the Greece topic will probably return in the coming quarters. Then, however, the next overview of the Greece’s financial situation will show an increasing necessity of the reduction of the debt’s capital part.This will be the moment when the risk of Greece leaving the eurozone will dramatically increase and this will be not stopped by any promises of the reforms.


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