Greek private companies and households are feeling the pinch of the credit crunch as local banks have essentially turned off the spigots of credit, contributing to the economic downturn. However, the public sector, which brought the country to its knees, continues to receive preferential treatment, giving a new meaning to the concept of crowding out at a time when stabilizing the national economy should be a priority.
Most analysts thought the successful completion of the PSI (Private Sector Initiative) would have resulted in a significant reduction in the country risk and positively affect market sentiment.
Unfortunately, this has not been the case so far, even though the target for debt relief via PSI, a precondition in Greece?s second bailout package, was met since bonds and state guaranteed securities with a nominal value of 199 billion euros, exceeding 96 percent of designated debt, underwent a haircut. The behavior of the Athens bourse, the spreads on the new Greek bonds and actual investor bids in public real estate assets confirm this.
Some believe the PSI effect has not been as positive as expected because of uncertainty surrounding the outcome of national elections on May 6. Although political uncertainty has not helped at all, it remains to be seen whether this has been the main factor, or doubts about the sustainability of Greek public debt post-PSI.
Analysts had also bet a lot on the recapitalization of the so-called viable Greek banks to boost confidence and facilitate the flow of credit to the economy and in particular to the public sector. After all, some 48.5 billion euros from the second bailout funds have been set aside for this purpose.
However, things are not evolving the way one expected. After moving back the date for announcing the 2011 results so that they would have more time to ready the bank recapitalization plan, the authorities kicked the can down the road once again, leaving key parameters of the plan to the new government while putting in place an interim safety capital net.
So, it does not come as a surprise that many, including us, doubt that the banks will complete the necessary capital share increases by September as initially planned. This means it will take even longer for banks to start playing their intermediary role, most importantly, providing credit to the private sector, and therefore rendering the stabilization of the Greek economy more difficult.
This is bad news for the Greek economy, although officials are working on other plans to mitigate the impact of the credit crunch. These include leveraging EU funds and have the European Investment Bank (EIB) provide or guarantee loans to small and mid-sized Greek companies via the local banks.
Also, the second financing package also foresees the gradual repayment of debt owed to the private sector by the state. This works in the same direction since most of these companies have borrowed from local banks by pledging state payables as collateral.
To be fair, Greece has not so far experienced the kind of deleveraging seen in other countries which have gone through a sovereign or banking crisis in the past -- considering the magnitude of the economic downturn. The economy nosedived cumulatively by about 9 percent in real terms in 2010 and 2011.
But the trend is showing signs of deterioration and is worrisome. A breakdown of net financing flows to the private sector and the general government, which includes the central government as well as utilities, local governments and others, is also revealing.
According to the central bank?s figures, net financing to the private sector was down 8.1 billion euros in 2011 after having been nearly flat the year before, compared to a rise in credit to the general government of 1.8 billion and 17.8 billion euros respectively in 2011 and 2010. Net financing includes both loans and corporate securities held by banks.
In other words, the local banks cut their exposure to the private sector in the last two years by providing less in fresh loans than maturities, but continued to extend loans to the entities of the general government.
Given the scarcity of credit and liquidity, this means the public sector absorbed funds that could, under other conditions, be directed to the private sector and put to more useful use. Of course, the demand for credit from firms and households is not strong because of the current economic situation, the grim prospects ahead and higher interest rates on fresh loans. However, many firms are reportedly complaining of inadequate financing for their working capital needs and some projects such as photovoltaic parks.
In economics, an expansionary fiscal policy in the form of excessive government spending causes interest rates to rise, therefore displacing private investments. This is known as the crowding out effect. In Greece, this displacement of private investment spending has taken other forms.
So far, we knew the state had essentially declared a moratorium on debt payments to the private sector, contributing to the financial strangulation of a number of companies. We also knew banks had been forced to charge higher spreads on fresh loans to take into account the country?s heightened credit risk and cut back or/and eliminate credit lines to private firms.
However, we had paid little attention to the informal credit rationing by banks, favoring the beast of the Greek economy. Needless to say, this has to stop so that the crowding out of the private sector, not just private investment, is contained and the economy takes a breath. [Kathimerini English Edition]