Friday, 28 September 2012

Greek debt revisited

Over the last days, new publication concerning the state of Greek debt have been published by the rating agencies. Specifically, both Moody's and Fitch expect this year's recession to reach 7%, next year's about 3% and 2014's will be practically zero. Public debt is expected to reach 180% in 2014 as well, with unemployment rates soaring to 22.8% by the end of the year. Alas, it seems like troubles will never end for this country!

In addition, a German magazine, stating anonymous source within the Eurozone, has stated that another Greek haircut is being considered. (for details, click here). According to the same source, at the same time, the IMF proposes a plan which promotes debt restructuring for the public lenders, which hold about 2/3 of the now €330 billion Greek debt. So, by simple math, if debt is 164.9% of GDP now, Greek GDP has to be around €200 billion. This would mean that if the new plan proposes restructuring the debt until it reaches about 120% of current GDP, no less than €90 billion euros will disappear into thin air!

Need I ask which of the now ailing governments would be willing to take such losses? Obviously none. Very few nations in the EU have the resources to handle this. Even more, extending the Greek debt by 2 years will have an additional €20 billion cost for Greece's lenders. 

Some of the regular readers (hmm I may be flattering myself!) of this blog may recall, I have already proposed that the Greek austerity and reforms program should be extended by 1 year and not by 2. Why is that? Simply because a two-year horizon would allow the Greeks to be more lax, than a 1-year one. While benefits of an extension are obvious, the truth is that over-extending the austerity program is bound to some incentive problems. Although I believe that Samaras is the best politician the Greeks have had for many years, his popularity has started to fall, given the perpetuation of the Troika talks concerning the €11.9 billion austerity measures, as well as the measures themselves.

Thus, what other alternative is there? What the IMF proposes, although a nice idea, would be difficult to implement especially given the current circumstances. What needs to be done is shift focus from austerity to growth. The reason why the Greek debt is growing as a percentage of GDP is because the latter is diminishing at a fast pace. Debt can be haircutted a million times and still not be sustainable if GDP keeps becoming lesser and lesser. The solution lies not in reducing the debt, but in increasing the GDP.

The European Investment Bank has recently agreed to facilitate Greece with a package of €750 million over the next few months, aiming at energy, transport, education and SME's. This money should be distributed to Greece as soon as possible and put to good use. This kind of stimulus package should be able to promote some growth in the country's economy during this and the following year. In addition, measures promoting growth should exist on the 2013 fiscal budget; measures which would actually promote growth not merely social benefits and other transfers. 

Once focus is shifted from austerity to growth and GDP moves from decreasing to increasing, more austerity meausres should be promoted to keep costs down. In the opposite case, 1 or even 2 extra haircuts may be needed in the not-so-distant future.

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