ECONOMY

Falling prices may pose risks to Greece’s bailout, says OECD

Falling prices could pose a new threat to Greece’s bailout, the OECD warned on Wednesday, highlighting risks faced by the indebted nation as it rejoined MSCI’s emerging market index after a 12-year gap.

Greek prices might fall 12 percent more than assumed by the country’s international lenders by 2020, hurting economic growth and resulting in a higher than expected debt-to-GDP ratio, the Organisation for Economic Co-operation and Development said.

The Paris-based think tank’s new economic survey of Greece was unveiled as Greek stocks re-entered MSCI’s emerging markets index .MIWO00000PUS on Wednesday after more than a decade in the developed market category. That helped push the Athens stock exchange .ATG to a 33-month high.

The OECD predicted Greece’s debt would not fall below 160 percent of GDP before 2020, almost 35 percentage points above the level forecast for that date by its EU/IMF lenders in July.

“About two thirds of this difference reflects the assumed larger deflation,” the OECD said. “Deflation pressure may be stronger and last longer than expected.”

Greece is in its sixth year of a recession that has been exacerbated by the austerity measures attached to its multi-billion euro bailouts, and prices moved into deflationary territory for the first time in over four decades this year.

“If negative inflation risks materialize, assistance from Greece’s euro area partners may need to be considered,” the OECD said.

Falling prices have not been unwelcome in Greece and are seen as a way to make companies more competitive abroad and protect consumers whose incomes have been sharply squeezed.

Milk, for example, costs more in Greek shops than anywhere else in the European Union. “Fresh pasteurized milk in Greece is up to 34 percent more expensive than the European average. We will not tolerate this any longer,” Development Minister Costis Hatzidakis told a joint news conference on Wednesday with OECD Secretary-General Jose Angel Gurria.

The OECD is the only major international organisation forecasting a seventh consecutive year of recession for Greece in 2014, when it sees the economy shrinking by 0.4 percent.

Athens and its lenders expect GDP growth of 0.6 percent next year. The slump has shaved about a quarter off economic output.

Risks to real growth are “still on the downside” even if the country fully implements all the reforms imposed by its lenders, the OECD said.

After nearly going bankrupt last year, Greece has seen its fortunes revive in 2013 as fears of a euro zone exit ease and it makes progress in getting its finances back on track.

Tourism has surged and foreign investment has started trickling in, boosted by the news that Greece would be downgraded to emerging market status by stock index MSCI.

Greece’s downgrade will leave it with a 0.4 percent share of the MSCI emerging index .MSCIEF – similar to other central European markets – and nearly 4 percent of MSCI’s Emerging Europe index .MIEE00000PUS.

In a boost for Greece, veteran emerging market investor Mark Mobius said last month he is looking at investing in Greek private equity in tourism, retail and infrastructure.

“It’s an interesting market,” said Charlie Gushee, managing director at Auerbach Grayson.

“You have a country that’s come through a depression, albeit with a 20 pct reduction of GDP, and much more committed backing to the future of Greece coming from their European partners. So there will be a gradual recovery of the investment case.”

[Reuters]