Where now for Greece?

The country has achieved one of the most dramatic transformations in public finances seen in modern times—but it is not out of the woods yet

January 11, 2018
Greek Prime Minister Alexis Tsipras. Photo: Marios Lolos/Xinhua News Agency/PA Images
Greek Prime Minister Alexis Tsipras. Photo: Marios Lolos/Xinhua News Agency/PA Images

Greece seems to no longer be making the headlines it did just a couple of years ago. That was when the country was going through huge political and economic upheaval.

Mired in a debt crisis, it had elected the radical left wing Syriza government which was then forced to accept tough conditions for an EU bailout, the third since 2010, or face default—or even a forced exit from the euro. Then followed a period of further austerity with capital controls and tax increases which hit the Greek people hard. There were cuts in the minimum wage, public sector salaries and pensions, with further impacts on spending and consumer and business confidence. The whole ordeal had disastrous human costs.

So why this period of relative calm—at least as far as Greece's visibility in the news is concerned? Importantly, the fear of “Grexit,” which dominated movements in the foreign exchange and bond markets at its height, has been replaced by fear of Brexit. This has made the rest of the EU determined to ensure the remaining 27 stay together. Being more lenient to Greece is therefore now seen essential—as is recognising the substantial and broadly right wing reforms that Syriza, under its surprisingly effective leader Alexis Tsipras, has managed to achieve.

Through a series of public sector cuts and tax increases and finally, albeit reluctantly, engaging in a long overdue privatisation programme, Greece has achieved one of the most dramatic transformations in public finances seen in modern times. A deficit of 15 per cent of GDP in 2009 was turned into a surplus of 0.7 per cent in 2016. Last year saw a primary surplus, if you exclude debt servicing of some 1.75 per cent—which is an achievement in itself. Though Greece now faces an even tougher task of increasing this to 3.5 per cent for 2018 under pressure from its creditors, Tsipras has so far repeatedly tightened the screw with relatively little opposition, something that a right wing government without support from the unions would never have been able to do.

The cost of course has been enormous—and the country is not out of the woods yet. GDP is still some 25 per cent below what it was in 2009. House prices have collapsed and wealth has been wiped out for many. Public debt of some €300bn is equivalent to 188 per cent of GDP. The banks still have a non-performing loan ratio of just under 50 per cent and are now being forced by the European Central Bank to sell bad debts at a huge discount. Many individuals are beginning to very publicly lose their homes, which are being auctioned online after years of non-payment of interest on their mortgages.

“A deficit of 15 per cent of GDP in 2009 was turned into a surplus of 0.7 per cent in 2016”
But some confidence is returning. Greece has gone through some successful reviews of its progress during the current bailout period and is due to exit its bailout conditions in August this year. Tourist receipts are booming, providing a much needed boost to incomes particularly in the islands. The fall in unemployment has been the fastest in the EU over the past year—admittedly from 23.2 per cent to 20.5 per cent in late 2017. And even youth unemployment is down from 54 per cent at its height to some 39.5 per cent by autumn last year—though some of that must be due to the massive exodus of the young to other European countries in search for work over the last few years. Growth was some 1.8 per cent last year and is forecast at 2.4 per cent for 2018.

The country went back to borrowing relatively cheaply from the markets again last autumn for the first time in two years and is likely to do so again soon, with a further seven year bond issue expected next month and likely two further forays into the market through the course of 2018. The banks have also tapped the markets again. And the hope is that Greece can soon be allowed to be part of the ECB's quantitative easing programme, that will reduce the rates it has to pay for its external debt. As it is ten year bonds have gone down to below 4 per cent and six month bond yields are now yielding just 1.65 per cent. Two years ago ten year bond yields were above 20 per cent.

What can shatter this? Disarray in Europe, and a lack of strategy on Greece, would be disastrous. As would the absence of any visible evidence of a lift in the austerity programme which the Greeks have endured for so long. Early elections would also be destabilising. The right wing and main opposition New Democracy party has become more popular and could well win an election if it were called—but one suspects it would rather stay aside while the big issues are being tackled by Tsipras's ruling coalition.

But what Greece needs more than anything else is a commitment from its fellow EU members to finding a long term solution to its huge debt overhang—in the shape of longer maturities and interest rate restructuring and also possible “haircuts,” in finance-speak. However painful for the creditors.

Greece remains an overly bureaucratic, frustrating place to do business. But it is just possible that given the current political pressures within the EU, from Brexit to the disaffection of the former eastern European countries and the increasing recognition of the special needs of the south, Greece could strike it lucky in 2018.