ECONOMY

Coming quarters will determine outcome of clash between optimists and pessimists

It is a clash of estimates and perhaps, in some cases, a clash of wills. The camps of optimists and pessimists differ over the future of the Greek economy as the country heads into its own winter of discontent with rising unemployment and suppressed incomes but some good numbers to show on cutting its budget deficit. It may seem academic at this point since Greece is just entering the six month of a three-year program signed with the European Commission, the European Central Bank and the International Monetary Fund in May but the implications over whether the optimists or pessimists are right are vast for the average Greek citizen. On the one hand, the optimists like to believe Greece will be able to slash its budget deficit next year to more than half what it was in 2009, return to growth in 2012 or even the second half of 2011 and put the public debt-to-GDP ratio on a downward path from 2014 onward. Although they reject any suggestion of restructuring the country’s public debt, they are unofficially preparing for it, working on the likely extension of the average maturity of the loans given to Greece by the eurozone and the IMF. The Greek government, the IMF, the European Commission, the ECB, officials from other countries, some major European banks holding Greek government bonds in their portfolios and some other banks which may hope to be awarded projects from the state simply buy the optimists’ story. On the other hand, the pessimists see the economy slipping into a deeper recession and returning to low to moderate growth rates no earlier than 2013-14 and being burdened by a higher debt-to-GDP ratio than in 2009-10. The country may have lowered its budget deficit-to-GDP ratio by then but the key primary budget balance will be either in deficit or a small surplus, making debt dynamics unsustainable, they predict. The pessimists believe an outright default or a restructuring of the public debt, involving a haircut of 30 to 50 percent in the nominal value of Greek government bonds, as being inevitable. Among the pessimists, one finds US banks and others with limited knowledge of the Greek economy and investment funds which are likely to have taken bets against local bonds and stocks. One also finds some Greek company executives who think it will take a long time for the country to get rid of excesses going back decades and the mismanagement of the current crisis by the government. There is no doubt that the performance of the economy will determine which camp is right or wrong. The government seems committed to the policies outlined in the memorandum and the EC, ECB and IMF seem determined to provide financing and help the country as much as possible provided it mostly sticks to the fiscal and reform policies outlined in the program. This may show up in meeting or even beating the budget deficit reduction targets and help Greece partly regain the confidence of some market participants. However, it will be very difficult to meet the fiscal budget goals if the economy remains in the doldrums in the quarters ahead. At this point, one might say there is a clear risk it may do so, judging from the descriptions of the situation in the real economy given by businessmen, bankers and others. If the optimists are right and the implementation of the economic policy program goes smoothly, the living standards of the average Greek citizen will return to the 2008 level in 2014-15. At that point, the public debt-to-GDP ratio will be higher than in 2008 and likely similar to the debt ratio in 2010-11 but the budget deficit will be smaller than 3.0 percent of GDP. In other words, the average Greek will have sacrificed four to five years of his life, hoping the economy will be based on stronger foundations to be on a sustainable upward path in the years ahead. This is not a short period of time, especially for those 45 to 55 who would have liked to put some savings on the side for retirement. With the economy squeezed and fewer jobs available, these people may have to draw down their lifetime savings and retire with the basic pension of 360 euros per month plus any additional supplement. It may be better for younger generations provided the structural reforms and fiscal discipline lead to a better allocation of resources, jacking up the potential GDP growth rate and providing sustainable high growth rates. However, this cannot be taken for granted. Things will get much worse if the pessimists turn out to be right. Depending on who is more downbeat, the drop in the standard of living could fall to where it was in the 1990s or the 80s or even to where it was in the late 70s. Some local pessimists even envisage many citizens leaving Athens and other major cities to go back to their villages where living costs are lower and taking over jobs done now by immigrants. Undoubtedly, it is too early to make a call on which side is right although one could hope the pessimists are dead wrong in their forecasts. It all comes down to the performance of the economy where the signs are getting worse and worse week by week and of course the question on whether Greece could have avoided going to the EU and IMF for financing despite its high debt-to-GDP ratio and large 2009 budget deficit as other eurozone countries did.