Greece finally rid the shackles of its eight-year bailout programme last Monday, in what has been hailed by many as a milestone. But it will have a profound impact on the economy in the medium term.
While most countries were affected, and many bailed out, in the wake of the 2008 financial crisis, Greece was one of the worst hit. Its subsequent trio of rescue packages totalled almost £300 billion, allowing Greece to service its debts through a difficult period.
European politicians hailed the landmark, suggesting Greece is now out of the woods. Mario Centeno, chair of the European Stability Mechanism, claimed “Greece’s economy is growing again, there is a budget and trade surplus and unemployment is falling steadily”.
However, its survival has come at a big cost, both to the country and its population. The strict conditions imposed by its creditors – the European Union, European Central Bank and International Monetary Fund – plunged the country into deep, long-term austerity measures.
True, GDP increased 1.7% in 2017 and is set to grow at 2% in 2018; the unemployment rate has fallen below 20% for the first time since 2011; and its external position is much improved. However, “Greek economic conditions are still dismal”, according to Silvia Dall’Angelo, senior economist at Hermes.
The economy is around 25% smaller, and unemployment still more than double, pre-crisis levels, she notes. The current account may have shrunk significantly, but that mainly reflects “anaemic domestic demand and a boost to competitiveness from weak domestic prices and wages”.
Some are more constructive. Maarten Jan Bakkum, senior emerging market strategist at NN Investment Partners, says there’s scope for growth to continue improving. Consumer demand is also picking up – reflecting a modest improvement in consumer confidence – as is export growth despite fixed investment growth remaining lacklustre.
“You would expect, after the sharp declines in Greek wages, that improved Greek competitiveness leads to better export performance,” continues Bakkum. “The end of the bailout programme is important in this context as it helps bring back confidence in Greece, both for consumers and businesses.”
Despite an improving picture, Miles Eakers, chief market analyst at currency experts Centtrip, says Greece is a long way from seeing robust economic growth like Spain and Portugal. “Greece is still a bit of a mess, and is going to continue to be so for the foreseeable future, until they really start to rebuild and restructure.”
Higher Interest Rates Could Pose Problems
And the problems that existed in the Greek economy eight years ago are still prevalent, according to Christopher Peel, chief investment officer at Tavistock Investments. Back then it had a huge debt pile – and it will still need to pay off the rescue packages, meaning it still has a huge debt pile.
Now is hardly an opportune time to have a mountain of debt. While many countries have been able to pay down outstanding payments at historically low interest rates thanks to loose fiscal policies, many parts of the world are now in tightening mode.
The US is well into rate rising mode, the UK has raised interest rates and European rates will start to rise in the near future, with quantitative easing set to end in 2019.
“The real pickle that Greece is going to be facing is the fact that they’re going to be coming back to the market and borrowing at higher rates,” says Eakers.
Peel adds that it won’t take much of an increase in interest rates by the ECB for Greece’s debt crisis to kick off again. “It makes sense for Greece to be happy about the fact they’ve come out of the bail out programme,” he says.
“But, in reality, they’re just on life-support and it’s not going to take much of an economic downtrend in Europe for them to be back with the same problems again.”
As a result of its debt, Greece will have to try to generate higher tax revenues to meet those interest repayments. But that will be a challenge, says Peel, as “there’s been a brain drain out of Greece into other parts of Europe and the rest of the world, so the engine for those tax euros is nowhere near as large as it has to be”.
Greece needs investors to return to its markets and, now it has escaped the grip of the troika, it can once again tap into financial markets when it needs financing. But Eakers points out that those investors will be demanding more incentives to convince them to come back.
That’s especially true when you look at the example of Argentina, adds Peel. The South American country managed to sell a 100-year bond at $1.05 just over a year ago. Fast forward 12 months, and the coupon is now down to around 75 cents.
“Investors will come back, but they’ll also punish very quickly,” adds Peel. “Greece just doesn’t have a strong or balanced enough economy or tax-collection mechanism to ensure that they’re always going to be able to service the existing amount of debt, never mind any sort of issuance.”
Eakers is slightly more positive, noting that it might not reward those looking for a “quick buck”, but “over the next 10 years or so it will probably do well”.
