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.
Eurozone governments have brokered a long-awaited debt relief deal for Greece, pushing back repayment deadlines on almost €100bn of bailout loans as the country prepares to exit its era of financial rescue programmes.
After years of recession, the Greek economy is back to growth as the first graph shows. But the 2017 figure is very low while the rest of the Eurozone was in a strong expansion. Despite this improvement, the GDP level remains, at the end of 2017, 25% below the 2007 peak. The adjustment, almost 10 years of recession, that has been imposed by the troika (IMF, European Commission, ECB) was extremely strong, persistent and brutal. It has broken the capacity of the Greek economy to recover endogenously.
An historical comparison shows that the duration of the Greek depression has been longer than that witnessed by the US during the great depression in the 30’s. Ten years after the start of the US depression the US economy was back to its pre-crisis level. After 10 years, the Greek economy is still 25% below this peak. That makes the difference and show how deep and strong was the adjustment. Continue reading
This simple graph from the Wall Street Journal is just a measure of the constraints that have been imposed to Greece since the beginning of their adjustment. The US depression is just small potatoes compared to Greece.
How many years will be needed for the Greek people to come back to their pre-crisis level? At a 2% growth rate per year it would take about 15 years. In other words, the time for adjustment is around 25 years. This is a generation. Continue reading
The Greek crisis, with its uncertainties related to the place of Greece within Europe and with the constraints associated to the banking sector shutdown since the beginning of July, has provoked a deep drop in economic activity.
The Markit survey for July shows a synthetic index at 30.2 for the manufacturing sector. An index below 50 implies a reduction in economic activity. The index is at its lowest level ever, much lower than during the 2008/2009 recession. That’s what we see on the graph below. The impact on the GDP profile will be dramatic in the third quarter. Continue reading
The political equilibrium in the Eurozone is still fragile regarding the deal with Greece.
Interesting paper on this issue
After the deal at the Euro-Summit, there are still questions that puzzle me.
The first is the question related to growth. At which moment in the future can we imagine a growth take off in Greece? There are some minor measures on competition (shops open on Sunday and liberalization for pharmacy ownership and bakeries) and on the labor market. They can improve the situation but will not create a boost that will be able to change the global picture.
Last Thursday, Alexis Tsipras mentioned that the target for primary surplus was 3.5% of GDP in 2018 versus less than 1% this year. This means that an extra saving of 2.5% will be needed in the 3 year to come. It will come from higher VAT rate and lower pensions. This will lead to lower internal demand and then to a poor GDP performance.
In 2014, austerity was a bit lighter and we saw the beginning of a rebound in activity and in jobs at the end of the year. The phenomenon was the same than in the UK and in Spain since 2013: less austerity implies stronger growth momentum.
Since the beginning of the year the situation was messy with the arrival of Syriza at the government but we cannot expect a rapid improvement after the measures Greece will have to take.
In other words, after a deep drop in GDP during the last five years, we do not expect a rapid recovery. Probably, recession will remain the main word to describe the Greek outlook.
The retirement reform that is expected to be presented at the end of October will have the same effect. With the large drop in GDP, the reform will scale down contributions and pensions to the lower level of activity. This will also penalize growth.
Two questions are associated with this issue Continue reading