By Dimitris Kontogiannis
A number of macroeconomic figures point to output stabilization ahead at the same time the Greek economy rebalances, posting both a primary budget surplus and a current account surplus. However, the huge public debt overhang will continue to undermine growth prospects unless it is tackled effectively. Official sector debt relief (OSI) in the form of extending the maturities of official loans to 50 years and cutting the interest rate charged on the EU bilateral loans is a step in the right direction. However, it is uncertain whether this type of OSI will convince financial markets and others that the debt overhang issue has been resolved.
The Greek economy is expected to post a current account surplus up to 1 percent of GDP, or 1.8 billion euros, and a primary budget surplus up to 1.6 billion euros, or 0.9 percent of GDP, for 2013. Government officials are finding it hard to conceal their enthusiasm about the so-called twin surpluses but know very well these numbers mean little to the average citizen who has lost his job or seen his disposable income cut sharply. It is even worse for disenchanted citizens when they hear the government is planning to distribute a good deal of 70 percent of the actual primary surplus to vested interest groups like military personnel, judges and university professors to honor court decisions.
Policymakers understand it is economic growth that is going to make the difference in people’s lives. The deceleration of the GDP contraction recorded in the third quarter of 2013 is a positive sign. However, encouraging new data point to a 3 percent year-on-year rebound in the volume of retail sales (without fuel) last November for the first time since April 2010 and the rise of the PMI indicator above 50, a threshold separating growth from contraction in industrial activity, in January for the first time since August 2009. Some pundits warn the Greek PMI figure should be treated with caution, but the retail sales figure is more reliable, largely reflecting efforts to reform commerce, such as Sunday opening for stores, by low-key Deputy Development Minister Athanasios Skordas.
Finance Minister Yannis Stournaras has repeatedly predicted the economy will grow by 0.5 to 0.7 percent in 2014 and the country’s creditors appear to agree, although others, including the OECD, forecast a decline. A lot depends on the outcome of the elections for local offices and the European Parliament in May. The coalition government would like the Eurogroup to come up with a decision on OSI in early May, after Eurostat verifies last year’s primary surplus in April, to boost its election chances. This would also give Athens the opportunity to tap capital markets immediately thereafter on better terms and tell people the disengagement process from the unpopular memorandum (MoU) with the creditors has begun. This is crucial for the government since the anti-MoU parties are currently doing well in the opinion polls, with the leftist SYRIZA party leading and the extreme-right Golden Dawn party riding the anti-systemic popular sentiment.
A recent story by Bloomberg on OSI debt relief in the form of a 20-year maturity extension on bilateral loans (GLF) provided to Greece by EU countries and the EFSF/ESM mechanisms and a 50-basis point interest rate reduction on the EU bilateral loans has returned this old scenario to the limelight.
It is noted Greece received about 53 billion euros in bilateral loans from EU countries in 2010-11. It is also expected to get a total of 144.6 billion euros from the EFSF from 2012 onward. It may further include any new loan from the ESM to fill the 2014-16 financing gap. It should also be taken into account that the EU bilateral loans are amortizing in an almost straight line from 2020 to 2041 and the first repayment on EFSF loans will take place in 2023. The EFSF debt has an average weighted maturity of 30 years.
But Nomura economist Dimitris Drakopoulos estimates this type of OSI, that is, the 20-year extension of loans to 50 years, will have a very small impact on the sustainability of the Greek debt in the next decade or so. In other words, it will barely affect the debt-to-GDP ratio of 124 percent in 2020. However, it will start having a material impact beyond that date, reducing Greece’s refinancing needs by roughly 4 billion euros per year in 2020-30 and lower the debt-to-GDP ratio by an estimated 2.5 percentage points in 2030.
Moreover, the interest rate cut of 50 basis points – one percentage point is equal to 100 basis points – will only affect the EU bilateral loans of 53 billion euros. Greece is currently charged an interest rate equal to three-month Euribor plus 50 basis points for these loans. Drakopoulos points out this half-a-point rate cut has already being incorporated in the DSA (Debt Sustainability Analysis) as of November 2012, reducing Greek debt by about 1 percent of GDP in 2020. In other words, it has no effect on current DSA.
All in all, the debt relief in the form of a 20-year maturity extension on bilateral and EFSF/ESM loans combined with a half-a-percentage point reduction in the interest rate charged on bilateral loans appears to have a very limited impact on the sustainability of Greek debt till early next decade. Whether market participants, consumers and businessmen think this type of OSI resolves Greece’s debt overhang remains to be seen. Nevertheless, it is a step in the right direction and a gesture of good will to pro-reform political forces which the EU should not disappoint by delaying the announcement until after the May elections.