Greece: the agreement will not create the necessary impulse to boost growth

This is an addendum to my yesterday’s post on Greece.
What do we have to keep in mind after the agreement (see the press release here)
This agreement is the end of the financial rescue program that started 8 years ago
Greece will receive €15bn and the total amount of the rescue program is €96bn.
Therefore the cash reserves is now at €24.1bn which is perceived as sufficient for the next 22 months. In other words, Greece will not have to go on the market before 22 months.
In order to ensure debt sustainability, Greece will have to respect a constraint on its budget: a primary public surplus at 3.5% of GDP until 2022 and 2.2% on average from 2023 to 2060.
Its gross financial needs (public deficit + funds required to roll over debt that matures in the course of the year) has to be 15% in the medium term and 20% thereafter.
Repayment of the EFSF debt has been postponed by 10 years to 2033 and maturities have been extended.
Therefore, debt repayment will be limited until 2030.
The profit done from the ECB portfolio (SMP) will be reversed to the Greek budget (€1bn)

In other words, Greece will receive new cash, will postpone its debt repayment but will have to follow strict rules on primary public finance balance. We can imagine lower long term interest rates.
That’s pretty fine but the question that remains is the source of impulse after 10 years of recession. Greece will not be able to use a Keynesian type fiscal policy due to constraints on its public finance. So even if institutions converge to a more efficient framework, the question is on the possibility to change the growth trend. It could have been efficient in a “normal” economy not in one that has suffered a 10 year recession.
Greece doesn’t have strong fundamentals that will allow to recover endogenously. This is not the last episode for Greece.

One thought on “Greece: the agreement will not create the necessary impulse to boost growth

  1. Pingback: La Grèce après l’accord | Le Blog de Philippe Waechter

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