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07 Mar 2014

Greece: graduating from Troika

Murat Ulgen

by Murat Ulgen

HSBC Chief Economist, Central and Eastern Europe and sub-Saharan Africa

Greece: graduating from Troika  (Getty Images/Adrian Assaive)

The expectation for Greece is a protracted and gradual improvement

After six years of depression, the Greek economy is recovering. Deflation troughed at 2.9 per cent last November but by January 2014 the annual fall in consumer prices had halved and the purchasing managers’ index for manufacturing was showing growth for the first month since August 2009.

Although GDP fell a further 3.7 per cent in 2013 the Troika of the European Central Bank, International Monetary Fund (IMF) and European Commission is forecasting 0.6 per cent growth for this year and 2.9 per cent for 2015. Given our cautious eurozone outlook and discomfort on deflation, we stick to our more conservative forecasts of 0.2 per cent and 2.2 per cent for this year and next, but that is still growth.

Unemployment keeps climbing and reached an all-time high of 28 per cent last year with youth unemployment at a disturbing 61.4 per cent

On a less encouraging note, unemployment keeps climbing and reached an all-time high of 28 per cent last year with youth unemployment at a disturbing 61.4 per cent. While jobs are usually considered as a lagging indicator, such an excessive level of unemployment will likely slow the pace of recovery.

The consensus expectation for Greece is a protracted and gradual improvement. The Troika sees falling prices as an inevitable component of the internal adjustment that will not only make Greece more competitive but also lessen the deep fall in wages, supporting income earners at the margin.

But any recovery must be supported by exports. They grew in 2013, helped by a strong tourist season and a well-timed reduction in Value Added Tax for restaurant and catering services between August and December.

The painful austerity and the deep retrenchment in public-sector spending, while adding to Greece’s economic malaise, has resulted in a sharp improvement in its national finances. A budget deficit of 7.9 per cent of GDP in 2009 was last year turned into the first surplus in a decade. However, the IMF is sceptical about the sustainability of the surplus, pointing to front-loaded taxation, an increase in EU structural funds, and under-executed current spending.

The IMF also believes structural reforms are not complete and privatisation efforts are lagging. An Organisation for Economic Co-operation and Development study pointed to distortions in the economy that are holding back competition.

Conclusion of the Troika’s fifth review of Greece’s finances should enable the release of funds to help cover the country’s immediate hefty debt redemptions but the Troika is still trying to quantify the remaining funding gap from now to 2016 and the measures needed to close it. Greek officials estimate the gap to be around EUR9 billion to EUR10 billion, nearly 5 per cent of GDP.

The coalition government is opposing further austerity, however, and does not even see the need for a third Troika programme because of an expected economic turnaround. They see the recovery as evidence that Greece can exit the Troika programme and return to the markets. Officials are emboldened by Ireland and Portugal’s successful return to bond markets and the recent persistent easing of periphery-country finance costs. The government is eager to come back to the international markets in the second half of this year.

This research was first published on 18 February 2014.