Berenberg: Greece has reason for hope, and concern


A recent analysis by Germany’s Berenberg Bank iargues that after the Eurogroup’s debt relief decision last month, Greece is ready for a fresh start with decent economic recovery potential. However, it also warns of several challenges that may stifle growth and need to be addressed by the government, such as high public and private debt, a large stock of nonperforming loans, high tax rates, weak educational performance and emigration.

The report by analyst Carsten Hesse, the Hamburg-based lender’s European economist, identifies six reasons for optimism that Greece will manage without new loans from its official lenders and attract money exclusively from private sources. These are that Athens has implemented pro-growth reforms, rebalanced its large fiscal and current account deficits, improved its competitiveness, turned around its labor market, brought down its bond yields and secured more EU funds to support investments.

It adds that there is decent growth potential if Greece stays on track: “Ireland, Portugal and Spain enjoyed healthy economic expansions soon after the end of their bailouts. If Greece continues its reform efforts to raise its supply potential and makes its tax rates more competitive, it could turn into a growth leader in the eurozone. We expect GDP to increase by 2 percent in 2018, 2.2 percent in 2019 and 2.4 percent in 2020.”

But, “the margin for error is small,” the report warns. “Greece was already on the path to recovery in 2014. However, a conflict between the SYRIZA government under the then-finance minister Yanis Varoufakis and Greece’s official lenders undid much of the progress and set back the eventual rebound by some three years. To avoid a painful repeat performance, Greece needs to stay on the reform track.”

The country also faces a number of serious challenges ahead. “The Greek economy suffers from a weak banking sector due to very high proportion of nonperforming loans and a high loan/deposit ratio. While credit growth is gradually rising across the eurozone and shows signs of improvement in the erstwhile crisis countries, credit continues to contract in Greece. In the first quarter of 2018, private credit declined by 7 percent year-on-year,” the report says.

Berenberg found that while business confidence has “improved significantly from the trough caused by the Tsipras/Varoufakis government in early 2015… it still lags behind the other Mediterranean countries, indicating Greece might struggle to achieve the same growth rates as them.”

Crucially, Greece’s tax system is seen to constrain trend growth. “Over the past eight years, Greece has raised the personal and corporate income tax rates (CIT) as well as value-added tax (twice) and property taxes. The corporate income tax rate increased from 20 percent in 2012 to 29 percent in 2015, one of the highest in the EU. Additionally, the solidarity levy – charged on top of the income tax rate – has been increased, raising the top tax rate to 55 percent, also among the EU’s highest. The tax hikes deepened the recession and the high tax burden makes a dynamic recovery more difficult. To raise trend growth, a cut in corporate income taxes would make sense,” Berenberg said.

The report also recommends that ”while a VAT cut would raise consumption over the short term, a cut in corporate taxes would boost trend growth also over the long term. Greece will likely generate a rising cash surplus over the next few years which can be distributed. It would be beneficial for the country to use some of that money to finance tax cuts instead of increasing social spending.”

There is also a lack of improvement in education and a serious brain drain problem, the analyst warned.

“The OECD Program for International Student Assessment scores 15-year-old students’ performance in mathematics, reading and science among 72 countries every three years. Greece ranked 44th in 2015, but dropped in the table across all major categories. The distance to the OECD average widened further except in mathematics. Greece should reform its education system to boost the performance of its students,” the report recommended.

It further notes that “since 2011, over 650,000 Greeks or 6 percent of the population left the country. Worryingly, it is mostly young workers in the 18-35 year range who have emigrated. The number of 30-year olds in the country fell from 170,000 in 2011 to only 121,000 in 2017, a decline of 28 percent.”

“If Greece manages a strong and sustained recovery, these workers may return,” it adds.

The Berenberg report notes that since its post-Lehman trough in Q1 2013, Greece’s GDP has only increased by 3 percent. “This is the worst post-Lehman recovery of all eurozone economies This is partly due to the fact that the major problem in Greece (excessive public debt) was different to the other euro-crisis countries – which mainly suffered from turmoil in their banking sectors. After a nearly decade of pain, Greece finally seems ready to move on.”

It acknowledges that the European Union wants Greece to become a success story: “Greece now has a good chance to follow the footsteps of the other successful ex-bailout countries. Additional efforts to tackle its low productivity, expensive pension system, large public sector and weak banking sector would add to Greece’s chances of success.”

Its outlook identifies a light at the end of the tunnel  for the country: “The left-wing SYRIZA government is on a reform track, but early elections cannot be ruled out as the government majority of Prime Minister Alexis Tsipras has shrunk to two seats in the 300-member Parliament. But this does not need to be a bad thing: according to all opinion polls, the even more reform-orientated center-right New Democracy party would win in such a scenario.”