ANALYSIS

Greek austerity saga set to continue

greek-austerity-saga-set-to-continue

Delays in the implementation of all milestones linked to the disbursement of funds earmarked for the bank recapitalization have cast a shadow over the efforts of Greek banks to attract private capital. Government officials are hopeful a solution will be found on the pending issues, most importantly foreclosures, but others urge caution. Although finding a solution is better than not, the delay has highlighted the risks and affected the banks’ drive to raise funds despite some positive news on the economic front.

It is still early for a verdict but Greece could beat official forecasts, calling for a small primary deficit in 2015, and end up with a balance or even a small surplus at the general government level, assuming recent trends in revenues persist, in our view. This estimate is based on most recent data on the state budget balance, a subset of the general government, from January through October and figures at the broader government level in the first nine months of the year. It does not take into account the full clearance of state arrears to the private sector.

In addition, the economy continues to show resilience, with gross domestic product contracting 0.5 percent quarter-on-quarter and 0.4 percent year-on-year, much less than expected by economists, from July through September, according to preliminary estimates by the Hellenic Statistical Authority. And this despite the imposition of capital controls and heightened political uncertainty. Although some of the negative effects of the capital controls will manifest themselves in the coming months, the overall impact is not as great as initially feared.

Assuming raw data confirm these estimates, it is almost certain economic activity will shrink by less than 2.3 percent projected in the third bailout. It may even end up around 1 percent or less this year, paving the way for a better outcome than the official prediction for a 1.3 percent recession in 2016. In this regard, unemployment may stabilize at current high levels rather than rise much further next year. The government predicts the jobless rate, which stood at 24.6 percent in 2014, will rise to 25.4 percent this year and 25.8 percent on average in 2016.

Of course Greece’s austerity saga will go on. The country will have to take additional fiscal measures, amounting to about 6.4 billion euros during 2015-16, according to the third bailout agreement. Measures worth around 2 billion euros should be taken in 2015 and an additional 4.35 billion next year. Eurobank estimates the projected measures will reduce economic activity by 5.7 billion euros or 3.5 percentage points of GDP.

Readers are reminded the country has implemented tax increases and spending cuts in excess of 30 percent of GDP, or more than 60 billion euros, from 2010 through 2014. The fiscal austerity can fully explain the loss of output during the same period. The nominal GDP decreased by about 58 billion euros. The country’s GDP stood at about 179 billion euros in 2014.

However, it looks as if the recessionary effects of fiscal austerity in 2015-16 could be contained. This is especially so if tourism continues to be buoyant, the absorption of EU structural funds picks up, privatizations speed up and the banking sector is recapitalized and returns to normal.

It is important that Greek banks are recapitalized, although this is a necessary but not a sufficient condition for lending growth in the coming years as we have repeatedly pointed out in the past. Disagreements between the government and the lenders on some key milestones, such as foreclosures, have made things more difficult for banks to attract private money.

It is noted that the European Central Bank identified a capital shortfall of 14.4 billion euros for the four systemic banks, which aim to cover more than 9 billion euros privately. They would like to raise more than 6 billion euros from the markets and some 3.5 billion from the voluntary swap of their securities held by third parties with common equity. The rest, about 5 billion euros, will come from the Hellenic Financial Stability Fund.

Top bankers have reportedly conveyed the message to the government that it is important to conclude the negotiations as soon as possible. Although some ministers have publicly expressed the opinion that this will indeed be the case, sources close to the negotiations advise caution. Of course an agreement is better than none, but we are concerned that some damage has already been done because of the delay. First of all, the delay has made foreign investors who were concerned about the risks but were willing to dip a toe in Greece more hesitant to commit funds in the bank recap. Second, the local banks, which are eager to avoid or limit the use of state funds in the recap, have contacted Greek firms and wealthy individuals to chip in. In some cases, loans were made available according to sources.

Therefore, it is important that efforts are made by all sides to reach an agreement on pending issues so that the recapitalization of the Greek banks is successful and completed before the end of 2015. It is also better to have state funds or foreign money cover some bank capital needs rather than repeat past mistakes by mobilizing domestic deposits and loans to do so. The markets cannot be fooled and the economy will not show resilience for ever if some things do not change.

[Kathimerini English Edition