By Dimitris Kontogiannis
Buoyed by improved market sentiment and the execution of the 2012 budget, Greek and foreign officials hope the country may be able to return to the markets next year or in early 2015, in time to fill a financing gap of up to 9.5 billion euros during 2015-16, according to the International Monetary Fund. However, these hopes may be dashed if they cannot get the Greek economy back on the path to growth.
Charles Dallara, the managing director of Washington-based bank lobby group the Institute of International Finance (IIF), said last week Greece could return to the markets as soon as late 2014 or early 2015. He was speaking on the sidelines of the World Economic Forum in Davos.
He is not alone. A few government officials in Athens have privately been expressing the opinion that the country may be able to borrow from international capital markets at some point next year or in 2015 at the latest.
They are pinning their hopes on a bigger-than-expected general government primary surplus, a further reduction in the likelihood of a Greek exit from the euro, positive market sentiment for risky assets internationally and perhaps more debt relief initiatives by the European Union to render the public debt sustainable.
Readers are reminded that the country’s debt-to-GDP ratio is projected at 128 percent in 2020 after the interventions decided by the Eurogroup last November. The EU is committed to taking further action to bring the debt ratio down to 124 percent if Greece sticks to the economic adjustment program.
A good deal of the de-escalation of the debt ratio relies on the assumption revenues will be broadly equal to primary expenditures, which exclude interest expenses, in 2013 but exceed them to produce a primary surplus of 1.5 percent of GDP in 2014. The primary surplus is seen rising to 3 percent of GDP in 2015 and 4.5 percent in 2016, which generally speaking is the steady state target for the de-escalation of the debt ratio to 124 percent in 2020.
Finance Ministry and other government officials, encouraged by preliminary data showing the 2012 budget attained the revised targets or even did better, feel confident the primary budget outcome will be better than envisaged this year. They think the country has taken more front-loading measures such as spending cuts and tax hikes than needed to bring the primary budget balance to zero even after factoring in a bigger than the predicted 4.2-4.5 percent contraction of the GDP in 2013.
Some estimate the primary budget may show a surplus as high as 1 percent of GDP or 1.8 billion euro in 2013. If true, this will enable them to use 70 percent of it for purposes other than paying interest and principal on the public debt, boosting economic sentiment.
The emphasis on producing a primary surplus rests on the assumption it could both help suppress the debt ratio and slowly rejuvenate demand for Greek bonds at a time when there is a growing appetite for high yielders – Portugal’s successful sale of five-year bonds recently being a case in point.
On the other hand, Greece will have to produce consistent data, showing a primary surplus has been attained for a number of quarters, but it is too early to predict whether investor appetite will continue to be strong during that period. Moreover, it is hard to see how traditional fixed-income investors who have suffered huge losses during the Greek sovereign debt restructuring – known as PSI – will return, even if markets have a short memory.
Some officials hope Greece could also capitalize on a boost to market sentiment by the EU adopting more debt relief measures, namely a drastic reduction of the interest rate charged on European Financial Stability Facility (EFSF) loans. This in turn assumes the coalition government will be able to deliver on its promises to creditors and implement the adjustment program.
All these hopes are not groundless. However, they do not focus enough on how to get the Greek economy growing again unless, of course, one assumes the latter will be the result of the improved fiscal outcome and market psychology. This is key to the success of the economic adjustment program and the country’s return to the international capital markets in the next couple of years.
With the fiscal austerity program firmly in place and limited credit available to the private sector ahead, the prospects are not bright, to say the least. This is without counting the possible impact of a bigger-than-estimated fiscal multiplier on economic activity and an external environment for Greek exports which is projected to be worse than last year.
Of course, an economy cannot shrink for ever and there is always a bottom to any recession.
The output gap, which is the difference between the actual GDP and the potential GDP, is seen widening to minus 10 percent of potential output in 2013 from minus 7.3 percent last year, according to the latest IMF review.
Others estimate the output gap at minus 13 percent of potential GDP this year. The fact the actual GDP is below the level of output the economy could achieve at full capacity means many resources are being underemployed. The latter cannot be taken lightly because it may have serious political and social repercussions down the road.
In this regard, Greece’s return to the markets in 2014 or early 2015 will be mainly determined by the battle between the negative forces of fiscal retrenchment and the credit crunch on one hand and the natural tendency for this large output gap to close on the other. As long as the focus is not on how to get the economy growing but on fiddling with the debt ratio, Greece’s return to the markets is likely to be burdened by delays.