The saga of the negotiations over the first review of the country’s third bailout program will most likely come to an end on Tuesday when the Eurogroup of eurozone finance ministers meets, even if there is no final deal on debt relief. The government hopes the event will herald the start of economic recovery and a gradual return to growth, but others see the economic slump continuing, possibly even into 2017. It’s not an easy call.
The Eurogroup is likely to approve the disbursement to Greece of an amount ranging between 9 and 11 billion euros, according to press reports. This, if confirmed, will help the country meet its financing needs by year-end and clear some of the state arrears to the private sector. Analysts estimate Greece’s debt repayments at more than 5 billion euros from the start of 2016 to end-July. About 2.8 billion is due to the European Central Bank and the International Monetary Fund in July and about 300 million to the IMF in early June.
As far as state arrears are concerned, they came to 6.7 billion euros at end-March. It is noted that late tax refunds accounted for 1.1 billion euros of the state arrears while the rest comprised overdue obligations of social security organizations, state hospitals and local government. It is estimated that state arrears may surpass the 7 billion mark by end-May.
The steep rise in overdue state obligations from around 3 billion at end-2014 to about 4.64 billion at the end of last year, or 5.4 billion if overdue tax refunds are included, keeps cash budget expenditure down. This policy has helped the state honor IMF and bond holdout redemptions and pay interest on outstanding debt with no cash disbursements from the European Stability Mechanism (ESM) since the beginning of 2016. Of course the state has also relied on domestic borrowing from general government entities to meet debt payments, but building up arrears has played an important role.
This policy has been widely criticized for aggravating liquidity conditions and consequently hurting the real economy. However, it is the main option available to the administration to satisfy state financing needs when negotiations over the program review drag on for a long time. In the usual ritual, the government caves in at the end and the ruling majority in Parliament votes in favor of whatever the creditors demand, because the country’s negotiating position has weakened and the state starts encountering financing stress. The government thinks a reduction in arrears will improve liquidity and sentiment and partly offset the recessionary effects of the newly legislated pension reforms and austerity measures, mainly tax hikes, totaling 5.4 billion euros. This package of measures comes on top of last year’s austerity measures, estimated by the opposition at 3 billion euros. The odds do not look good based on recent history.
The tax-loaded austerity of the first program in 2010 hurt the economy more than projected and failed to meet the fiscal targets, while the second program, which relied more on spending cuts, did better on both accounts. The EU lenders have accepted the leftist government’s agenda of raising taxes in order to attain the fiscal goals. However, in a more encouraging sign, the creditors have effectively lowered the annual primary surplus targets by accepting that no supplementary austerity measures will be applied if the deviation from the target is up to 0.25 percent of GDP.
The primary surplus targets are set at 0.5 percent of GDP in 2016, 1.75 percent in 2017 and 3.5 percent in 2018. Most analysts agree the 2016 target will be easily met while it will be more challenging but still easier to produce a surplus of 1.5 percent of GDP instead of 1.75 percent in 2017, which will be confirmed in April 2018. With the specter of a bigger fiscal gap receding, the economy’s projected recovery should not face any new headwinds from that source. This also materially enhances the chances of political stability extending into the second half of 2018.
The government is further counting on having a number of investment projects up and running, such as the TAP pipeline, the regional airports, the development of the site of Athens’s former international airport at Elliniko, the continuation of the Eldorado Gold mining investment in Halkidiki and others. It is also betting on a more active role by banks on improving profitability and liquidity as the ECB accepts Greek collateral in refinancing operations, buys their EFSF bonds and even Greek bonds at some point in the future. It is also counting on the fast decline of bond yields to allow companies to borrow on global markets again and Greece to return to the sovereign debt market in 2017.
However, there are others who see things differently. The pessimists think the austerity package is too heavy and will likely keep the economy in recession in 2016 and in 2017 or alternatively post weak growth next year. They point to the lack of competence of several ministers as well as the lack of a new pipeline of investment projects. They admit that an extension of the stock and bond rallies is possible but they will be capped because economic reality will reign. They also think the banks will not be able to function properly due to the large stock of bad loans and even see the need for a new recapitalization down the road.
Undoubtedly, the likely completion of the review is good news for the economy but comes at a high fiscal price. The resilience of the Greek economy to the new dose of austerity will determine to a large extent whether the government or the pessimists are right. For the time being, we’ll have to keep our fingers crossed.
[Kathimerini English Edition]