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Greece

 

The country is still far from having overcome its backbreaking economic problems. In fact, disappointing those who had hoped that it may at long last be headed for sustained growth, real GDP declined by 0.4% in the final three months of last year, after a 0.9% gain in the third quarter. Unemployment remains painfully high at 23% of the labor force, a state of affairs made worse in its impact on the people by the fact that roughly three in four of the jobless have been out of work for more than a year and are, therefore, receiving no benefits. Brussels seems to believe that the economy will bounce back strongly this year to advance by 2.7%, following a meager gain of 0.3% in all of 2016. Chances are, this will turn out to have been too rosy an expectation. The latest round of debt talks has been hobbled by disagreements on a number of important points between the government in Athens, the EU creditors, and the IMF, and it would be surprising if the resulting uncertainties would not leave their mark on the nation’s performance.

Greece is still burdened with an unbearable debt load of EUR 323 billion, after Japan’s the most punishing ratio of IOUs to gross domestic product in the world. Almost half of all bank loans are non-performing and preciously little credit is being extended these days to small companies, which form the backbone of the economy. So it is little wonder that investment is extremely weak, obstructed, as it additionally is, by regulation and tax codes that are inimical to business and unreliable, to boot. This is not the kind of economy that can easily digest measures to ensure that the country runs a primary fiscal surplus (before accounting for debt interest payments) of 3.5% of GDP, as the EU creditors want it to. The Hard-Left Syriza government of Prime Minister Alexis Tsipras has no illusions about the struggle it would face trying to get such a belt-tightening through parliament. Thousands of farmers have already taken to the streets in Athens to protest the prospect of more austerity, and labor unions are whipping up their members as well.

An alternative for Syriza would be to call elections, but the party knows it would probably lose them. The International Monetary Fund also believes that the fiscal surplus demanded by the EU creditors is something that will be self-defeating by stalling the already stuttering economic recovery. What the IMF wants to see is a considerably lower fiscal surplus target, but with Eurozone countries making up the difference by offering substantial debt relief. This, however, is anathema to EU leaders, who have already granted Athens three bailouts and think that the loans involved at one point become so concessionary that they really are grants. With elections pending in Holland, France and Germany, leaders in these countries are extremely hesitant to give their voters the appearance that they are letting Greece off the hook. So there are profound disagreements between the three camps concerned. Under the IMF’s rules, it cannot participate in bailout number four unless it has reason to believe it will leave a debt load that is decreasing and easily financed. The EU creditors want IMF participation in the next bailout, not only because they want the Fund to come on board as a lender but also because they do not trust the Commission to oversee the Greeks. The Germans and the Dutch have indicated that they will not approve further disbursements without the Fund. And Tsipras, of course, has severe political resistance at home to consider.

Fortunately, Greece has enough cash to make it to next July without more aid. I also firmly believe that the commitment European partners have to Greece is strong enough to make the necessary compromises possible. The Greek government has already pledged to tighten the austerity regimen by bringing in pension cuts and broadening the tax base after its current program ends in 2018. It has also promised more reforms of the labor market, admittedly hoping that it can sweeten the bitter pill for the people with a bunch of tax cuts. Between them, the European Financial Stability Facility and the European Stability Mechanism have disbursed EUR 174 billion to Athens, surely not in the expectation that the Hellenic nation will be allowed to go belly-up and this money will never be paid back. Certainly, Brussels does not want to see Athens leave the Eurozone, and it appears that now a majority of Greeks have come around to the view that losing the euro would be a disaster. All this leads me to believe that the necessary compromises will be forged and a new agreement will be reached before the July deadline. On the other hand, there is no indication that Greece’s debt problems will be resolved for good, meaning that bailout talks, off and on, will keep making headlines against the backdrop of crisis meetings of EU Finance Ministers and attendant jitters in the financial markets. So, it is comforting to know that Greece is one country the Eurozone could lose without fatal damage being done to the common currency.

Global Perspectives by Dr. Hans Belcsak