Greece submerges as crisis fallout worse than emerging markets

The Greek economy risks being more a submerging market than an emerging market.

As another round of aid talks between the Mediterranean nation and its creditors ends without a deal, its economy is faring even worse than a string of developing countries which suffered traumas in the last two decades. That leaves Commerzbank AG declaring the country is in little position to pare its debt and that default or a restructuring may loom.

“Just as with emerging markets in the past there is a point in time where you need to move on to the next stage rather than being paralyzed,” Simon Quijano-Evans, head of emerging market research at Commerzbank in London, said in a telephone interview. “In Greece, we need to think of next steps and be innovative.”

To illustrate Greece’s pain, he published a report this month comparing how the economic fallout from its five-year-old crisis compared with the bouts of turmoil suffered in the last two decades by Turkey, Argentina, Latvia and Thailand. The result illustrates why Commerzbank sees a 50 percent chance of Greece ultimately leaving the euro area.

While Athens has imposed the tightest fiscal squeeze of the five and pushed its budget balance excluding interest payments into surplus from a deficit of about 10 percent of gross domestic product in 2009, Turkey and Argentina were doing better at the same stage.

Mounting Debt

Even worse, debt of around 175 percent of GDP is bigger than the 110 percent at the outset and surpasses those of all the other crisis-hit economies five years on. Turkey managed to cut its debt to 35 percent from 100 percent without defaulting.

The amount of lost output is also bigger in Greece than the other economies, all of which had begun to recover by now, and its 25 percent unemployment is higher. The International Monetary Fund estimates the Greek economy will be 20 percent smaller this year than in 2009.

To Quijano-Evans, such data reflect how Greece’s economy failed to improve with assistance and austerity. It also demonstrates the challenge of trying to revive an economy without a currency of its own.

“Under normal circumstances, if a country adjusts its fiscal backdrop in a meaningful way and allows its exchange rate to float freely, one eventually sees that passing through into a stronger economic picture, coupled with a drop in debt/GDP,” said Quijano-Evans.

Absent a return of a devalued drachma, Greece needs a bigger budget buffer as well as meaningful acceleration in economic growth and inflation if its debts are to be made sustainable, he said. Unfortunately, the economy is back in recession, consumer prices fell an annual 1.8 percent last month and politicians are at loggerheads with the international community.

“Comparing Greece’s experience so far with that of EM crisis countries shows very simply that the country’s already stressed economy and electorate are unable to cope with more pain,” said the Commerzbank economist.


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