Navigator Consulting Group has completed a detailed analysis of Greek macroecomic developments. Summary follows here: view the detailed slides here.
The Greek economy continues to shrink under the weight of the existing austerity programme which has resulted in high unemployment (24.4% in June 2012), declining public and private consumption, and higher taxes in the middle of an economic depression.
Central government expenditure is close to a primary surplus, i.e. a surplus in regular operations before counting interest costs and debt repayment. This is an impressive achievement given the depth of the recession and surging unemployment.
Despite these achievements, it is doubtful whether the Greek reform programme can be sustained. Greek interest costs have not been substantially reduced by the EUR 100 bln Private Sector Initiative (PSI) “haircut”. Instead of EUR 100 bln, the actual write-down by private banks is equivalent to EUR 40 bln, which is less than three years of interest costs.
As a result, Greece’s main problem remains high interest, which place the sustainability of its public finances in doubt. By end-2012, a combination of shrinking GDP and high debt interest will see the debt:GDP ratio return to 160%. Some 25% of central government budget expenditure will be oriented to debt service.
In order to escape a debt trap, Greece needs to:
- Implement a proper debt restructuring, including a partial Official Sector Involvement (OSI). In contrast to the previous restructuring, it is recommended that politicians stand aside and allow a debt restructuring to take place under normal market conditions. This has not been achieved in the German-led restructuring. Alternatively, the EUR 60 billion allocated in the first PSI to bank recapitalisation should be funded by the EFSF and not count as government debt, as is the case with Spain’s EUR 100 billion bank bailout.
- Accelerate the privatisation and wider investment promotion programme, while allocating part of the income to open-market debt by-backs. Greek debt is trading at an average 28% discount, but far greater discounts are possible via negotiations. Unfortunately, this is impossible according to the terms of the second bailout, which allocates all privatisation income to Troika debt repayments.
Ultimately, the record of “Troika” (IMF, ECB and Eurozone government) involvement in the bailout have been disastrous. Their involvement has been characterised by a theoretical approach to debt restructuring which bears little resemblance to equivalent market-led approaches. Three issues in particular have placed the sustainability of this effort in doubt:
- Both bail-out programmes have totally miscalculated the cost of interest and debt service.
- Rather than implementing a standard restructuring using a mix of principal write-downs, longer maturities and interest rate moratoriums, the Troika reimbursed private creditors with 100% of debt value (at a time when the creditors themselves were discounting Greek debt by 25-40%). This was a straight gift towards the banking system. It is no coincidence that French and German banks owned the majority of Greek debt in 2010.
- As a condition for the first bailout, France and Germany insisted that Greece commit to a EUR 10 billion arms sale comprising Dassault fighters, Fremm frigates, Leapard tanks and Germany submarines, at a time when the government could ill-afford to do so. This aspect of the bailout is a visible argument that European “solidarity” in the Greek reform programme is misplaced, and that fundamental commercial interests apply.
Any future countries seeking a European bailout, or seeking to join the European currency, should beware of the major failings of the Eurozone to address a relatively simple public debt crisis which could have been solved through standard market practise, but instead has been little more than a colossal failure which continues to undermine both the Eurozone as well as healthier economies.
The repeated policy failures and the inability of the Eurozone to deal with the Greek debt crisis is nothing less than a warning against pooling national sovereignty within the Eurozone. It fully confirms the United Kingdom's stance of remaining separate yet equal within the European Union.
Despite this dire situation, we believe that Greece will remain in the Eurozone. The political costs, risks and uncertainties of a "Grexit" are too high, and would have irreversible consequences for other Eurozone economies. Moreover, there is no legal means for a Grexit, and the costs of keeping Greece in are relatively low, judging from the primary and general deficit numbers.