Opinion

Hugo Dixon

Greece will probably pull through

By Hugo Dixon
April 22, 2013

Greece is not yet out of the woods. But there is a credible path that could lead the country back into the sunlight. That’s the main conclusion of a week I have just spent in the country.

Although the economy will have a terrible 2013, next year should be better. But the outlook is fragile: political crisis could yet rear its ugly head, tax evasion is rife and there’s the risk of external shocks.

Look first at the good news. Antonis Samaras’ coalition government has held together surprisingly well since it came to power last June following a period of political chaos, despite pushing through extremely unpopular measures. Samaras’ centre-right New Democracy party is neck and neck in the opinion polls with the radical left Syriza, the main opposition party. Samaras hasn’t suffered the plunging support of Spain’s Mariano Rajoy or France’s Francois Hollande.

Largely as a result of Samaras’ effective government, the troika – the European Commission, the International Monetary Fund and the European Central Bank – last week gave Greece a thumbs-up in its latest progress report. More bailout funds, which so far total around 200 billion euros, will be disbursed.

Last year’s trauma, when it looked like Greece might quit the euro, and the ongoing austerity will cause the economy to shrink by another 5 percent or so this year, taking the cumulative decline to around 25 percent. Unemployment will probably rise to about 30 percent.

These are grim figures. But Athens now seems on course to achieve “primary balance” this year. In other words, it won’t have a budget deficit before interest payments. That means it probably won’t have to implement another round of austerity next year, so the economy won’t be struggling against that headwind.

Meanwhile, up to 50 billion euros of bailout cash is being used to recapitalise viable banks and shut down non-viable ones. The money is meant to fill a hole left by the steep losses on their government debt holdings and the avalanche of bad private-sector loans. It is tragic that this operation wasn’t completed at the start of the crisis, as the zombie banking system has exacerbated the slump. Still, better late than never.

The banks’ dependence on expensive emergency liquidity assistance (ELA) from the Greek central bank has also been slashed. It is now 22 billion euros, down from a peak of around 120 billion euros. Banks’ funding costs have fallen, theoretically allowing them to pass the benefit to clients.

Another 8.2 billion euros of bailout cash is being used to pay the government’s bills. Again, it is terrible this wasn’t done earlier. Athens’ failure to pay its bills has crushed many businesses. But again, if the money is disbursed rapidly, the private sector will get a breather.

The drive to improve competitiveness, mainly through much lower wage costs, is finally bearing fruit too. This is most visible in tourism, which accounts for 17 percent of GDP. Revenues are expected to jump 9 to 10 percent this year, according to the industry.

If Athens can hold the course, there’s also a good chance that the euro zone will agree to further lighten its debt load, which amounts to about 160 percent of GDP, by cutting the interest rate and lengthening the maturities of official loans. This was explicitly mentioned in the latest troika report. Debt relief would allow Athens to avoid further fiscal tightening.

However, the outlook isn’t all rosy. For a start, the political situation remains fragile. Even if the coalition hangs together, elections will probably be called by early 2015 at the latest. This is because Greece needs to choose a new president then and the constitution specifies that if a super-majority of MPs can’t agree on a candidate – which seems likely – a general election has to be called.

Many observers think Samaras could be tempted to call an even earlier election, especially if he thinks he can win. But such a gamble could backfire. Meanwhile, a Syriza-led government could lead to renewed friction with the troika and a decline in business confidence.

Samaras should also not be complacent about the country’s finances. While Athens is hitting its deficit targets, this is because spending is below target. Revenues are also below target, a consequence of the continued failure to crack down adequately on tax evasion. Doing so is vital, not least so that taxes on honest citizens don’t have to be raised further.

More generally, Samaras doesn’t seem to be doing enough to combat oligopolistic practices – perhaps because his party is closely associated with some of the country’s oligarchs. The troika should make clear that freeing up markets is essential for Greece’s competitiveness and progress on this front will be a key factor in determining whether to provide further debt relief.

Finally, there is the risk of external shocks. Athens has so far largely dodged the bullet from Cyprus, after Cypriot banks’ branches in Greece were ring-fenced from the deposit haircuts in Nicosia. Even so, trade with Cyprus will plummet and the confidence of Greek depositors has been somewhat shaken.

The real danger would be if the Cyprus crisis deteriorates to such an extent that Nicosia quit the euro. Contagion to Greece would then be harder to avoid.

That said, the outlook for Greece looks far better than it has for years. The country will probably make it.

Comments
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You’ve got to be kidding! You’re predicting more than a year in advance while Greece is still in a deep pit. A year from now, the Cyprus debacle will be a vague memory (except to Cypriots), but Greece will still be in deep economic straits.

Haven’t you learned? We’ve had more than five years of pundits constantly claiming that recovery is right around the corner. Now, most of them are saying they haven’t a clue what can be done to turn around the bad European economy for at least another couple of years.

Meanwhile, all the BRICs, once the darlings of booming economies, are all stumbling.

Posted by ptiffany | Report as abusive
 

Greece will probably pull through | Hugo Dixon.

This is how these pieces work. If Dixon is correct, then he can claim to be the first to call the Greek recovery. If Greece continues its descent into depression, then everybody will have forgotten about this article in a few months anyway. Mainstream media types are rarely called to account for poor predictions with the consequence being that they make a lot of them.

In this article, Dixon combines his free trip to Greece with a few anecdotes meant to show how Greece is improving. Unfortunately for the Greeks, the economic data shows the exact opposite of those nice little stories about the brave Prime Minister holding the country together and tales meant to foreshadow Greece’s coming economic rebound.

Let’s cut away the hype and see what remains.

Samaras hasn’t suffered the plunging support of Spain’s Mariano Rajoy or France’s Francois Hollande. This statement is not true. Samaras was elected with over one-third support of Greek electorate. His current support is less than 19%, which places New Democracy in a statistical tie with opposition Syriza.

But Athens now seems on course to achieve “primary balance” this year…That means it probably won’t have to implement another round of austerity next year, so the economy won’t be struggling against that headwind. Maybe Dixon is right, but maybe this will just be the third straight year that Greek promises of attaining a primary balance are pushed back . Moreover, budget cuts and tax increases don’t go away after they are implemented. The economy will still be held down by a confiscatory tax scheme for the near future.

Meanwhile, up to 50 billion euros of bailout cash is being used to recapitalise viable banks and shut down non-viable ones. You can give the banks all the money you want. The economy is weak, so the demand for loans remains low. Banks are not lending in the periphery and will not as long as they can invest their capital in the ECB supported sovereign bond market.

The banks’ dependence on expensive emergency liquidity assistance (ELA) from the Greek central bank has also been slashed. It is now 22 billion euros, down from a peak of around 120 billion euros. The implication here is that Greek banks are healthier because they require less ELA, but this reasoning is incorrect. When Greece was dithering on its bailout and the troika was withholding funds, the country was in danger of running out of money. In order to prop Greece up until the troika paid the bailout, the ECB was lending the Greek central bank money who loaned it to the Greek banks to buy Greek T-bills to finance the government. Since the bailout tranche was released to the Greece, the banks no longer require as much ELA.

The drive to improve competitiveness, mainly through much lower wage costs, is finally bearing fruit too. It’s nice that Greek tourism may have a good year, but where in this chart do you see lower wage costs bearing fruit?

Greek GDP Performance

The Greek economy continues to contract, and there is no end in sight to the depression. Lower wage costs are still not low enough to make the unproductive Greek worker a bargain.

If Athens can hold the course, there’s also a good chance that the euro zone will agree to further lighten its debt load, which amounts to about 160 percent of GDP, by cutting the interest rate and lengthening the maturities of official loans. If you read the sentence, you will notice that the Greek debt load is not being lightened but merely restructured. Instead of the next two generations of Greeks struggling under this debt, the load will be shared with more of the unborn. Lightening the debt means forgiving principal, and this will never happen as anti-bailout sentiment rises across the northern tier.

The outlook for Greece looks far better than it has for years. The country will probably make it. What does “probably make it” mean? This is a vague prediction. As long as the country avoids a fascist coup, you could probably argue that Greece has made it.

However, if we mean that Greece will not default on its debt mountain and return to sufficient growth to cut its unemployment rate below ten percent, then poor Greece will probably not make it.

Once you cut away the hype, little remains.

dareconomics.com

Posted by dareconomics | Report as abusive
 

Samaras has max 15 months or so until looming elections effectively stop government activity. While fiscal consolidation has progressed, structural reforms are going nowhere. As usual privatization targets are proving to be too ambitious. Corruption continuous to be endemic. And recently the trade balance started deteriorating again. without another sizable haircut it is highly unlikely that Greece “will make it”. Society is also changing: Fascist-like behavior is becoming acceptable, a sense of victimization and conspiracy theories are prevalent. Populism is increasingly spread, even by “mainstream” media. Even with significantly lower labor costs who, apart from rent seekers in oligopolistic markets with implicit or explicit guarantees, invests in this climate?

Posted by Indus88 | Report as abusive
 

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