Press reports have suggested that the International Monetary Fund has become unhappy with the Greek government’s austerity measures, since it felt not enough was being done to maintain fiscal solvency. Anyhow the latest tranche of money has been credited to the Greek government and life goes on, although Greece’s international creditors are watching the budget numbers month by month.
The following note recognises that the Greek government is not far from achieving a ‘primary budget balance’ (i.e., non-interest public expenditure is only slightly above tax revenues). In that sense, much has been done to restore the creditworthiness of the Greek state. However, the cost has been calamitous, with falls of about a quarter in real terms in both national output and government expenditure. Even worse, it is not clear that the big austerity drive so far will be sufficient. Two points have to be emphasized. First, output has fallen so heavily from the peak (i.e., in 2007), and is still falling at such a rate, that a budget surplus would be needed to stop the debt/to/GDP ratio from rising further. There is no sign of that. Despite the defaults to private sector creditors, IMF data show the debt-to-GDP ratio now at about 175%. Second, the drop in output has of course a large cyclical element and, sooner or later, a cyclical recovery must surely happen. However, a deeper problem is now emerging, that international investors are shunning Greece and the trend level of output may be going down. To halt the rise in the debt-to-GDP ratio, Greece therefore needs an overall budget surplus over a series of years and not just a primary surplus in an emergency period Again, there is no prospect of that in any relevant planning horizon.
Sustainability of Greece’s public finances still in doubt
Preliminary figures for the first half of 2013 from the Greek Ministry of Finance indicate that the programme of tax rises and spending cuts have failed to restore the country to fiscal surplus. However, a big move towards fiscal solvency has been made. Indeed, once interest payments are excluded from expenditure, Greece has gone far to eliminate the deficit on the so-called the so-called ‘primary balance’. The primary deficit in the first half of 2013 was just €0.98b., compared with €2.35b. in the first half of 2012. The release of a further €6.8b. tranche of aid from the ‘troika’ was agreed earlier this week, following threats from the International Monetary Fund to suspend further payments on account of the slippage in public sector reforms. (The troika is the group of international bodies [the IMF, the European Commission and the European Central Bank] acting more or less in unison to ensure that financially- distressed Eurozone countries can honour their international debts.)
The release of the money must have come as a relief to the Greek public sector. However, the aid will be staggered over a three-month period and will be conditional on further austerity measures, including more public sector job cuts. Job retrenchment in response to international pressure has become particularly sensitive. The Democratic Left party quit the governing coalition in May, to register a protest against the sudden shutdown of the state broadcasting company ERT which had been forced by the troika’s demands. With the government’s majority in the Greek Parliament reduced to single figures by the Democratic Left’s departure, the vote on Wednesday 17th July to implement the latest austerity package will probably pass by the narrowest of margins.
The graph above illustrates the scale of the problem faced by the Greek government. In the first half of 2013 it more than satisfied the fiscal targets agreed with the troika, but was still unable to balance the books. State budget expenditure was no less than €3b. below target. Although income was €0.8b.below target, the end result of a deficit of some €5b. was in fact below the half-yearly budget deficit target of €7.2b. agreed with the troika. All the same, the government’s debt continues to grow.
The situation would be worse were it not for the significantly lower interest payments compared with 2012. In the first half of last year, these payments totalled €9.2b., whereas the corresponding figure for 2013 is €3.5b. If interest payments are excluded, the scale of government spending cuts becomes apparent. In the three-year period between 2009 and 2012, spending fell by 18.7% in absolute terms. Factor in the effects of inflation, which was over 5% for much of the second half of 2010, and this amounts to a cut in real terms of approximately one quarter.
But only 99 civil servants were sacked in the nine months to March 2013. The dismissal of 2,650 ERT employees was meant to propitiate the troika, which wanted 2,000 public sector layoffs by the end of June 2013. The 2,000 target was seen as part of a larger programme of cutbacks which would lead to an overall reduction of 15,000 in the state workforce by the end of 2014. Public sector broadcasting resumed on 10th July, although few ERT employees have been reinstated.
Asset sales have been another element in the attempt to balance the Greek state’s books. The troika insists that Greece must raise €2.6b. this year and €11b. in total, but privatisation is progressing slowly. Latest troika estimates are that Greece will struggle to reach 50% of the €11b. target following the withdrawal of an offer from Russia’s Gazprom to buy DEPA, one of Greece’s state-owned gas companies.
Uncertainties remain about debt roll-overs in 2013 and 2014
Meanwhile, Eurozone finance ministers are increasingly concerned about a possible shortfall of €4b. when the current Greek bailout programme is wound up next year. These claims, which are denied by Athens, suggest that some Eurozone central banks are refusing to roll over Greek government bonds. Their argument is that this would constitute direct financial support for the Greek government, which is forbidden under ECB rules arising from the 1992 Maastricht Treaty. The sums involved are substantial, €3.7b. of debt in 2013-2014 and €1.9b. in 2015-2016.
The IMF’s latest projections for Greece appear implausibly optimistic, stating that public debt will peak this year at 176% of GDP, and that the country will return to growth in 2014, with net government debt will falling both in absolute terms and as a percentage of GDP. Indeed, GDP is projected to rise by 0.6%, thus helping the country to record a budget surplus of 0.4%. Given that in April 2011, the IMF predicted GDP growth of 1.1% for 2012 whereas GDP in fact contracted by 6.3%, it is hard to take the IMF’s projections seriously, especially in the light of its admission in May that it had ‘misjudged’ the severity of the downturn that would result from imposing such severe cuts..
Where will economic growth come from? Obviously, not from the public sector, which is being cut at the behest of Greece’s creditors. But the private sector has its problems too. The Hellenic Confederation of Professionals, Craftsmen and Merchants, Greece’s small business federation, estimated in March of this year that some 55,000 businesses may close in the coming months. For any businesses wishing to borrow to finance growth, there may be serious obstacles in obtaining credit. Greek banks are likely to be seeking to boost their capital reserves to counter what could be quite substantial losses from loans at risk of default. The growth in non-performing loans has been quite dramatic, rising from 24.2% to 29.0% of all credit in the three months to March 2013, and totalling €66b. in all.
Greek unemployment levels are still rising, although the 0.8% increase from 26.1% at the start of the year to 26.9% at the end of April is less pronounced than the increase of almost 5% recorded in 2012. With the main tourist season now under way, seasonal work may act as a further brake on rising unemployment for a while, although this did not slow the growth in unemployment during the summer of last year. Given that a recent survey found that over 60% of Greeks expect a further deterioration in their personal finances, it is hardly surprising that there is little appetite for taking on additional debt. Private sector credit contracted by 3.7% in the 12 months to May 2013, according to the Bank of Greece. On top of all these factors, Greece entered a period of price deflation in March, which further adds to the difficulties of stabilizing the debt/GDP ratio.
If Greece had left the Euro in 2010 before the worst of its crisis, it would have gone through a painful default and devaluation. But by now it would probably be exporting its way back to growth with a more competitive drachma. However, support for the euro’s retention was then solid among both politicians and the electorate. Euro membership was widely considered proof that Greece had turned its back on military dictatorship and was now a fully-fledged member of the club of Western democracies. Opinions have changed since the end of 2012. According to an opinion poll published in the Kathimerimi newspaper, only 55% of the Greek electorate now have a positive opinion of the euro. With Greece now in its sixth year of recession, and with a seventh looking likely, it may well be that the country’s beleaguered electorate may eventually well decide that “Grexit” is their only hope of recovery.