Greece: the never ending story

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CaixaBank Research | On August 20, Greece will finalise its third financial assistance programme since 2010.

At last, the Greek economy seems to be in a much more solid position. Greece once again saw positive growth rates in 2017 and it’s expected to maintain a growth rate of around 2% over the next two years. It is also significant that the primary fiscal balance has remained close to 4.0% of GDP since 2016, one of the highest levels in the EU.

In spite of this, the financial sustainability of Greece’s public sector remains in doubt. Specifically, Greek public debt is at very high levels, close to 180% of GDP. And, although the IMF and the European Commission predicts the debt could embark on a gradual downward path to end up below 150% of GDP in 2030, this forecast is based on assumptions difficult to materialise.

This situation would certainly be unsustainable if it were not for the fact that most of the debt is long-term. That allows for financial needs to be contained over the next few years. In particular, nearly 70% of Greek debt –equivalent to 128% of the country’s GDP – is made up of very long-term loans, granted by “official” creditors at interest rates which are much lower than market rates. At the same time, debt in the hands of private investors, which represents around 15% of the total (and 28.7% of GDP), has a relatively broad average maturity of 12 years.

That said, within 10 years, even in a scenario in which Greece maintains solid economic growth and a prudent fiscal policy, financial needs will increase quickly and will reach over 20% of GDP, the threshold for a high-risk zone in the IMF’s view. Whatsmore, the cost of refinancing the debt will increase significantly, given that it’s expected market rates will be very much higher than those on “official” loans.

Being aware of this, the Eurozone countries have taken on a commitment to implementing debt relief measures, like a new extension on the average maturity of the loans and a deferral on repayment periods. According to the IMF, however, the readjustment needs to be very substantial to ensure the financial needs will remain below the sustainability threshold. In this context, the Eurogroup is studying the design of a mechanism which automatically links debt repayments to the performance of the Greek economy. In other words, if Greece grows less than expected, the average maturity date could be extended or the payment of the principal and interests could be delayed.

This mechanism would certainly contribute to reducing the risk of refinancing as it would cut the amount of debt up for renewal in years with a less favourable outlook. Nevertheless, there could be some relaxation of the incentives for continuing to implement reforms and maintaining healthy public accounts. As is already being noted, it would be essential for this process to be accompanied by instruments which continue to allow for the monitoring of the economic and fiscal policy implemented in Greece. This ensures that Greece will go on being a source for debate in the coming years, although it is not part of a financial assistance programme.