Prospects remain poor as recession pinches businesses, households harder

No one doubts 2011 will be another tough year for Greece, most likely tougher than 2010. However, experts disagree whether it will mark the last year of recession in the current chain and the slow start of a recovery or will turn out to be another disappointing economic year in a vicious cycle. Although Greece can count on the 110-billion-euro loan from eurozone states and the International Monetary Fund for its borrowing needs till April 2013 and therefore does not have to access wholesale bond markets, it does not mean it is sheltered from developments in the eurozone. At this point, the environment in the so-called peripheral eurozone states is not benign at all as Portugal appears set to be the third country to seek financial aid and the markets seem to be ready to test Spain. It is true that it may better for Greece to have company, since it has not been singled out and may be able to sell its bonds more easily in the future because it could claim that the sovereign debt crisis was more of a general phenomenon than country-specific. However, the market turmoil has not helped bring down yield bond spreads for Greece and the other peripheral countries and, along with warnings of downgrades by the credit rating agencies, has made it more difficult for local banks to boost their liquidity. It is no coincidence that bankers and businessmen alike agree that providing liquidity to the economy and the private sector in particular is paramount to the return of economic activity to some kind of normalcy. With the state depending on the 110-billion-euro loan to fund wages and pensions in the public sector and pay back Greece’s creditors and banks depending on cheap ECB funding, the prospects do not look promising. The problem will be compounded by the expected loss of deposits as the recession bites even more, with corporations withdrawing cash to pay down their debt or other obligations and households smoothing out their consumption pattern. A drop of total deposits for households and companies to the tune of 10 to 20 billion euros will not come as a surprise to many bankers and it is an amount considered manageable. They count on state guarantees and funding from the European Central Bank to make up the difference. However, this does not do much to convince those who say the Greek economy needs an injection of liquidity along with a boost in consumer and business confidence to outweigh the negative impact stemming from fiscal austerity measures and the likely drop in disposable incomes in the private sector. The Greek government has voiced its desire to return to the bond markets at some point in the new year. This could have provided a boost in confidence and perhaps gradually opened the markets to Greek banks and local firms, helping improve liquidity. However, this is not likely next year unless the overhang of debt restructuring is somehow resolved. The state could also help to boost liquidity in the private sector by paying its creditors on time and refunding taxes promptly instead of blackmailing private companies with «haircuts» to pay the rest of the money owed on time. This is something that can be done and could help somewhat, but it does not change the general picture. Unfortunately, the prospects for credit to the economy do not look promising in 2011. Optimists hope that the return of market tranquillity to the eurozone’s periphery, the much hoped-for pickup in exports and especially tourism could help the Greek economy turn a corner in the new year. While these factors will be helpful in improving some aggregate figures and will aid some sectors, they don’t look strong enough to put the economy back on an upward trajectory. Net exports – exports minus imports – provide an example. Although exports have picked up a bit, most of the improvement has come from a sharp drop in imports. This has helped offset part of the drop in consumption spending and therefore helps gross domestic product but has done little to boost domestic production since the latter is not a substitute for imports. What we imply is that even if we do see a stabilization in GDP growth data in the second part of 2011, this may not be supported by a rise in incomes or more jobs. People will understand this later on, after an initial euphoria brought about by reports in the local media, and this may bring about more disappointment. One can think about it as the Greek version of a US jobless recovery. Also, one can’t rule out the prospect of early general elections by April, which would complicate the economic situation even more. To keep things simple, we have not factored in such a development. However, if early elections are held, the odds will be against stabilization and recovery in the second half of 2011. In all, the prospects for the Greek economy look poor in the first half of the year, when households and corporations will feel the pinch of the recession more intensely without much help from external factors. The second half of 2011 is a puzzle, but the prospects for liquidity to the economy are not promising, increasing the chances of an improvement in the figures without any apparent improvements in living standards.

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