There are two dangers lurking in the global trend of rising interest rates: One is that it will halt the post-Covid economic recovery (this worries European Central Bank head Christine Lagarde, as recovery in the eurozone is still weak), and another that it will cause great damage to heavily indebted countries, companies and individuals. Greece could be affected by both.
There is also a third, more specific risk, for our country: its creditworthiness which, after three bailouts, remains in the “junk” category. If this does not change, if the rating does not rise by two notches to investment level, the cost of servicing our debt will increase many times over. This is a great danger – which many have been aware of over the previous 10 years – that could cast a heavy shadow on Greece. These are not just theories and not just distant scenarios. One of the first to feel the risk of an uncontrollable rise in borrowing costs is a strategic link in the economy – the banks.
In the next four years, by 2026, it is estimated that banks will have to raise 14 billion euros from the markets to continue meeting their minimum requirements for own funds and eligible liabilities (MRELs). In the face of rising interest rates, this alone would be enough to challenge some imaginative profitability scenarios that are circulating.
The situation seems more complicated if some invisible consequences of the Hercules bad loan reduction scheme are taken into account. In order to meet the plan’s requirements, the banks “burned” capital. Thus, their capital adequacy fell significantly compared to the European average and, at the end of 2022, when the period of supervision ends, we will see whether or not new capital increases are required.
Neither the banks, nor the big companies, the state, nor employees will be unaffected by the increase in the cost of borrowing. Reaching investment grade is urgent. The alarm should have been sounded. Yet the opposite is happening.
Fiscal policy seems to be moving in line with the extended pre-election phase. So, instead of exercising fair fiscal management, the ENFIA property tax (in a sense, one of the fairest taxes) has been drastically reduced for everyone – both for those who own small properties and for those who own a lot of real estate – at a cost of 350 million euros for the state coffers, instead of the 70 million euros written in the 2022 budget.
And instead of exercising prudent fiscal management, the government has decided to give away 6 of the 8.3 billion euros that was initially distributed as repayable advances during the pandemic to support businesses, while the possibility of even greater generosity is being considered – cutting or writing off the remaining 3 billion euros altogether.
In short, government decisions that serve political patronage send messages to foreign and domestic observers that undermine the key national goal. To the outside world, they tell them to be skeptical when looking at Greece’s creditworthiness, because it is a country that, despite owing 200% of its GDP – over 350 billion euros – doesn’t hesitate to take advantage of relaxing European rules to borrow even more for pre-election handouts.
In Greece, the message is that they can relax, because there is money, and above all, there is a government that is manages the crisis by handing out cash – not like the others, in the past, who imposed taxes. And if today there is a strong belief that, supposedly, if it wants, the government could handle the tsunami of price hikes at no cost to us, it would be unfair not to recognize the government’s contribution to this belief.