‘There has to be some forgiveness,’ says Schroders economist on Greek debt

Greece’s chances of negotiating a debt relief deal with the eurozone next year or in 2016 will be better than they have been until now, according to Schroders economist Azad Zangana, who thinks that this is the only sustainable solution for the country’s economy.

However, before any agreement is in place Greece will have to continue with its reforms. Ensuring that these actions are carried out is one of the reasons that the country’s lenders want the government to be bound to further conditionality.

Given the latest figures, which point to growth, what are your expectations for the Greek economy?

It’s hard to have much expectation because we really haven’t had much data out of Greece for a very long time. This is the first time I have seen quarterly data from Greece since the statistics office [ELSTAT] stopped it quite a few years ago so we were very reliant on the annual data, which of course gives you a bit of a picture but is not detailed enough to see the momentum. Now of course we have the data, and this suggests the Greek economy is starting to grow and at quite a nice speed as well.

Of course this comes after years of contraction. The Greek economy probably contracted by about 30 percent from peak to trough so it’s natural to see a rebound at some stage. Now I do think that Greece will continue to grow from here but I hope that at the same time the government continues with structural reforms to raise the growth rate further.

Political developments in Greece over the next few months are expected to be crucial. Do you think the country’s European partners will ultimately agree to end the memorandum and to launch the 11-billion-euro precautionary credit line?

Clearly the European Union and the European Commission do not trust Greeks to implement reforms, which is why they want to make sure that Greece continues to be reliant on funding from the European Union. They don’t want Greece to relax and fall back on reforms. The credit line would be important, clearly, although it’s not sufficient to ensure that Greek public finances remain stable.

Are you referring to the sustainability of Greek debt?

At some stage there needs to be a serious negotiation between the official creditors and Greece on what they plan to do for the long term. If they continue to just roll over the debt at a near zero interest rate it doesn’t really allow Greece to take on any more debt going forward. They would never be able to run a deficit even, say, if they went back into recession. It’s not a sustainable, long-term solution in my mind. There has to be some debt forgiveness at some point and it needs to be done at the official institutions level because I think private creditors have had more than enough pain.

When do you think such a negotiation could take place?

Next year is certainly a possibility, or the year after even. Maybe after the next election in Greece could be a possibility. They way I looked at it in the past was it has to be the right time for both sides. When we looked at it 18 months, two years ago, Europe was still in crisis and other countries were being dragged in. That was clearly the wrong time for Europe to allow more debt forgiveness for Greece because if they did it and when they do it I would expect quite a serious backlash from creditor countries. The German population, the Dutch and even the French would be very angry at money being lost to Greece through debt forgiveness. This would have put further bailouts in jeopardy. Now, if next year there is only a very limited chance of any of the other countries getting into trouble, then that may be the right time to do it.

Can the Greek economy maintain fiscal stability when conditions in Europe itself are unstable?

It is a bad time for Greece to talk about debt forgiveness at this point in time. But if you fast-forward a year, maybe two years, I do expect eurozone growth to pick up next year and that will create a better environment to have a discussion on this. I also don’t believe that Europe will allow it until they are satisfied with the progress made in structural reforms in Greece. My concern is really that if Europe as a whole goes into a significant recession, say in two years’ time, hypothetically, will Greece be allowed to start running a deficit to help the economy? This is what you expect from fiscal policy. Fiscal policy is meant to be counter-cyclical. In the good years you run tight policy and grow your budget in order to run either a balanced budget or a surplus and in bad years you allow it to go back into deficit and that’s what supports the economy. If you have what’s happened in the last two years, which is tightening at the same time as going into recession, then clearly you have a much deeper recession as a result, which is negative all round.

Can Greece expect any leniency from Brussels?

If you think back to 2011, there was a significant delay in the time countries had before they had to then start tightening their deficits. They were given up to 2014 to hit their targets – a three-year period is quite significant. If you also go back to 2009, there was a suspension of the excessive deficit procedure all round because they accepted that countries were going to break through the 3 percent Maastricht limit. There has to be policing and oversight over the behavior of euro countries and their fiscal balances. We’ve seen the consequences of what happens when there isn’t that. But fiscal policy needs to be flexible at times and it has to allow for stimulus when it’s required.

How does the outside world see the prospect of early elections in Greece and an opposition SYRIZA win?

The outside world still sees SYRIZA as a major risk for not only Greece but the eurozone. They don’t acknowledge the improvements in the messages they’ve made, such as the promise to stay in the eurozone, for example. They’re still seen as a risk to the stability of Greece. They might continue to promote themselves as a mainstream party and that might work, but for now I think the markets would react very negatively to a SYRIZA victory.