As the year comes to a close, I feel that it is healthy
to revisit the posts written so far and to assess how events have tracked our
expectations and predictions. This is
the first installment of the series.
It has been our view that Greece would not be able
to fulfill its commitments to the rest of EU and that the adjustments it needed
to make were so great that it should and would leave the eurozone, at least
temporarily, if not this year at least next.
We have also felt that the single most effective tool at its disposal to
correct excessive debt loads was privatization of public assets, which it has
refused to implement: of some €300 billion in privatizable public assets[1],
only €50 billion were earmarked for sale, and to-date, cash proceeds to the
Greek government have been €1.8 billion only.
So far, Greece remains in the eurozone despite
having spectacularly failed meeting its targets and carrying unsustainable debt
loads. Last March, the Greek government
agreed to a series of targets with the Troika (European Commission, ECB, IMF),
such as bringing its debt-to-GDP ratio down to 120% by 2020; despite a severe
“haircut” imposed on private creditors, that ratio stood at 150% by mid-year
and was budgeted to rise to 189% by 2014.
Such huge “miss” was due to both a collapsing economy and rising
debts. The budget deficit target will be
missed as well. Further adjustments
include more cuts in public sector salaries, pensions and other social
transfers, and of course, better tax collection.
Faced with unattainable goals, the Troika decided to
fudge, increasing the 2020 debt-to-GDP goal to 124%, reducing interest rates on
loans to Greece, returning realized profits on previous ECB financial aid operations
and requesting Greece to buy back debt[2] (at
a discount) before disbursing the next aid package.
This next disbursement of €34.4 billion is not
assured yet. It is also huge as it
represents 17% of Greek GDP[3]. It is worth noting that Germany has become
increasingly skeptical of the viability of the Greek rescue, and not without
reason: Greece keeps missing its targets, its debts remain very high and the
above mentioned budget cuts are likely to stoke further political instability
and push an ever larger share of the economy underground, reducing tax revenues
and distorting further the economy.
Having forced private creditors to take a €106
billion loss without putting its debt on a realistic recovery path, Greece will
ask the same from its public creditors next.
Despite the IMF insistence, the eurozone has so far adamantly refused,
although chancellor Merkel recently acknowledged the inevitable, sort of. Large scale privatizations continue to appear
out of the question.
The problem is that, while another round of debt haircuts
appears necessary, it is not sufficient to get Greece back on track.
Nowhere in Europe has the pain been greater than in
Greece: Nominal GDP dropped 7.6% from €232.9
billion in 2008 to an estimated €215.1 billion in 2011. It is expected to drop close to 7% this year. Labor costs have been greatly reduced and
external accounts have adjusted considerably, although in large part because of
low internal demand: the trade deficit[4] for
the first nine months of 2012 was €10.1 billion compared to €18.6 billion in
2009 and €32.7 billion in 2008.
For the period 2009-2012, the Greek GDP will have
fallen as much as that of Chile did in the early 1980s, yet the comparison
stops there. Chile carried out profound
structural economic reforms during its depression years while Greece hasn’t. Unless Greece invests massively to become
more productive and to shift its output towards greater value added products, unless
it shrinks its public sector, unless it designs a tax system that is efficient without
being confiscatory, the above adjustments will prove to have been cyclical
rather than structural. So far, the
situation is grim: for example, total investment as a percentage of GDP has
gone from 23.7% in 2008 to 14.5% in 2011 and is likely to drop further this
year.
At this stage, the odds of Greece remaining in the
eurozone are slim although less dismal than they were last March. To remain, it is necessary that Greece get a
large debt reduction, but it is not sufficient.
Besides reforms it also needs the European Union, which absorbs over 62%
of its exports, to recover too.
So far, it seems to me that Greece’s condition has
gone from desperate to critical; perhaps there is room for further improvement. The eurozone countries are starting to
acknowledge that they can’t fully collect their loans to Greece. They have yet to decide which avenue is best
for them: granting a large haircut as the final boost to a recovering country and
fellow eurozone member, or cutting their losses to a country exiting the
eurozone.
I remain in the camp of the skeptics.
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