Thursday October 23, 2014 Search
Weather | Athens
24o C
14o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Time not on Greece’s side as debt decisions needed fast

 Few cases in EU where fiscal consolidation led to a sizable reduction in amount owed over long term

By Dimitris Kontogiannis

Moody’s Investors Service may have surprised the markets with a multi-notch cut of Greece’s credit rating but the downgrade itself was hardly surprising.

The move underlines the increasing risk of a restructuring event and the country cannot hide from it. At some point, the government and other political forces will have to make up their minds and face the challenge head-on.

In the history of the European Union, there are a few cases where successful fiscal consolidation policies led to a sizable reduction in the public debt-to-GDP ratio over a long period of time.

The cases of Ireland and Belgium stand out. Ireland managed to slash its budget deficit by 20 percentage points of gross domestic product between 1978 and 1989, averaging a fiscal tightening of about 2.0 percent per annum over the 11-year period.

By 1989, its primary budget surplus adjusted for the ups and downs of the economy reached 4.4 percent of GDP and averaged 3.5 percent of GDP over the next five years.

It is reminded that a primary surplus results when revenues exceed expenditures excluding interest payments on public debt. A large primary surplus is important in bringing down a high public debt-to-GDP ratio along with nominal GDP growth surpassing the average interest rate paid for servicing the debt.

Belgium, a highly indebted country, managed to produce a large-scale fiscal adjustment over a long period of time to cut its debt from 141 percent of GDP in 1993 to below 100 percent in 2007.

Even Greece has a sizable fiscal consolidation to show. It managed to slash its budget deficit by 12 percentage points between 1989 and 1995, producing a cyclically adjusted primary surplus of about 5.0 percent of GDP at the end of the period and averaging over 4.0 percent by 2000.

In contrast, the country had a cyclically adjusted primary deficit of about 10 percent of GDP in 2009.

Before drawing any conclusions, one has to remember that Ireland, Greece and Belgium to a large extent had their own currency during the period of fiscal consolidation.

Moreover, the external economic environment was largely favorable as world trade picked up and Belgium benefited from the introduction of the euro and its low interest rates as of 2000.

Lastly, all fiscal adjustments lasted for many years and not just three as Greece’s economic program approved by the International Monetary Fund and the European Union entails.

Coming back to the present and Greece, one cannot but notice the economy entering its third consecutive year of recession with visible signs of deterioration as the fiscal tightening bites.

Fiscal tightening may be necessary for an economy to move toward a large primary surplus.

However, if it is significant and is applied to an already weak economy in a relatively short period of time with the private sector deleveraging, the GDP is bound to decline more than expected unless strong exports make up for the anemic domestic demand.

But Greece’s external sector is relatively small to offset such a drop in domestic demand and therefore nominal GDP growth remains subdued lagging the state’s average cost of funding.

This creates the so-called snowball effect compounding the public debt problem. This is more so for countries like Greece which have a high public debt to start with.

It is clear that only a reduction in the stock of public debt via privatizations and asset sales via pro-growth policies can turn things around. However, Greece has lost precious time in doing the necessary homework to prepare the ground for privatizations of state-controlled enterprises and selling public property.

Instead, it has focused most of its efforts on the strict implementation of the fiscal side of the economic program which the markets are unwilling to buy since it has helped dig the economy into a deeper recession.

It is ironic that Moody’s and the other credit rating agencies downgrade Greece by claiming that it has not done enough on the revenue side when tax revenues rose by 6.0 percent in 2010 despite an annual drop of 4.5 percent in the real GDP.

However, this is normal since their benchmark is the economic program approved by the IMF and the EU.

Few understand that the problem lies with the benchmark itself, that is, the unrealistic high targets on tax revenues for an economy mired in a multi-year recession and having a different structure than others in the EU with a high number of professionals and small firms.

Still, Greece cannot wait to hear the same song of downgrades from other rating agencies.

The government and other political forces will have to determine whether the country can serve its huge public debt and assume the economic, social and political cost or this cannot be the case.

If they decide the latter is the case then they will have to decide whether it is best to reduce the debt to sustainable levels, that is, between 80 and 100 percent of GDP, from its peak after consulting our eurozone partners and the IMF.

In our view, time is not on Greece’s side and therefore the sooner the better, assuming they decide sizable debt reduction is necessary and desirable.

ekathimerini.com , Monday March 7, 2011 (23:27)  
Athens weighs its LNG and CNG options
Greece ranks among global leaders in tourism growth
Global oil price drop sends local fuel prices back to 2010 levels
Buy big house, become a citizen
Cyprus seeks EU response over Turkey´s EEZ violation
Cyprus is to raise the issue of Turkey’s violation of its exclusive economic zone (EEZ) at Thursday’s European Council meeting after Turkish Prime Minister Ahmet Davutoglu raised the specter...
Thirteen indicted for inmate torture
Thirteen correctional officers and their former warden will stand trial in Serres, northern Greece, over the death of Albanian inmate Ilie Kareli on March 27 at Nigrita Prison. Kareli was tr...
Inside News
SOCCER
Roberto´s heroics make Kasami´s goal count
Pajtim Kasami’s goal and Roberto’s heroics in goal saw Olympiakos claim one of the biggest wins in its history on Wednesday downing Italian champion Juventus 1-0 to boost its chances of reac...
SOCCER
Third-division Iroditos punished heavily after fan death
Greek third division team Irodotos has been docked 15 points and ordered to play 10 matches behind closed doors following the death of an Ethnikos Piraeus supporter, the Hellenic Football Fe...
Inside Sports
COMMENTARY
Careful what you wish for
Everyone is in a rush to become prime minister in this country, as if they have not learned a single thing from its political history. While still in opposition, PASOK’s George Papandreou ma...
EDITORIAL
Taking care of our key industry
It’s time to face facts: Tourism is the country’s heavy industry. The sector’s considerable contribution has served as a stabilizing factor for the local economy, essentially placing the cou...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Roberto´s heroics make Kasami´s goal count
2. Athens weighs its LNG and CNG options
3. Greece ranks among global leaders in tourism growth
4. Global oil price drop sends local fuel prices back to 2010 levels
5. Buy big house, become a citizen
6. Cyprus seeks EU response over Turkey´s EEZ violation
more news
Today
This Week
1. At least 11 banks to fail European stress tests, three in Greece, report says
2. Cyprus to block Turkey's EU talks after EEZ violation
3. EU’s Juncker wins Commission-team approval with investment vow
4. Juncker’s EU commission team set for parliamentary green light
5. Taprantzis resigns from privatization agency TAIPED
6. Fallen tree, smashup cause traffic jams in Athens
Today
This Week
1. Istanbul skyscraper casts shadow over Greece's banking ambitions
2. Coalition shooting itself in the foot
3. Greece’s closed society is central to its current malaise
4. Greece must stick to reforms, says Schaeuble
5. The past, present and future of the Greek debt crisis
6. Samaras’s crumbling Greek exit lacks backing from economists
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.