Published by MNI Euro Insight
It looks like it’s all being sorted: Eurozone
parliaments have grudgingly agreed to a third Greek bailout allowing the
eurozone’s bailout fund ESM to lend 86 billion euro over three years to Greece,
while early elections should consolidate the more moderate part of Syriza in
power. Hereunder I take a closer look at
the assumptions underlying the third bailout, explaining why Greece’s debt
situation is unlikely to be “sustainable”.
Given
that trust in the European Commission is limited at best, the more “hawkish”
Eurozone countries are keen to have the – presumably more “hawkish” - IMF
involved, despite the fact that the latter leaves no occasion unused to tell
Eurozone countries to take losses on their lending to Greece, something it doesn’t
even want to contemplate with regards to its own lending to Greece.
A key condition
for the IMF to be involved and lend some more cash to Greece is that Greek debt
is “sustainable”. It already agreed
with Eurozone countries to basically ignore that the country’s debt is heading
to reach 200% to GDP in 2016. Instead it will look at whether the percentage of
GDP which Greece devotes to “debt service” exceeds 15%, having agreed that
above this point debt service would be unsustainable. Eurogroup Chairman Jeroen
Dijsselbloem has stated that even according to the most pessimistic Eurozone
predictions for future Greek growth, Greece’s debt service still
wouldn’t exceed 12% and would thus be “sustainable”, at least “in the 2020‐2030 period” . The only thing is that according to him
“the remaining difference is that the IMF’s worst-case scenario is more
pessimistic than ours.” With Open Europe, we expect that the IMF may
be convinced by extending maturities – from just over 30 years now to
around 50 years – combined with an extended grace period in which Greece doesn’t
have to pay back debt yet – up from ten years now to between 20 and 30 years.
The interest rate Greece now pays is lower
even than the one carried by Portugal, Italy, Ireland and Spain and can hardly
be cut much lower.
This
tinkering to keep the IMF on board may perhaps make sure that given the
assumptions of Eurozone countries, Greek “debt service” costs remain under 15%
of Greek GDP also after 2030. Still it’s of course questionable whether it’s
possible to predict GDP growth figures so far ahead. Even more questionable,
and the fundamental problem here, are the assumptions.
The
Eurozone estimates in its “debt
sustainability analysis” that in the most pessimistic scenario, Greece’s
economy would shrink 0.75% this year, would remain at 0% growth in 2016 and at
1.25% in 2017 and 3% in 2018%. Also the IMF doesn’t seem much more keen to
predict negative growth data any more than Soviet bureaucrats were. As recently
as April, months after the Syriza-victory had produced a deep stand-off with
Greece’s creditors, it predicted
that Greece would be the fasted growing country in Europe, although in July it said
that the crisis would take “a heavier toll” than previously expected on
economic activity in Greece. This all reminds of how its predictions
of Greek GDP growth, really since the crisis erupted, consistently turned
out to be false.
On the
other hand, estimates by private institutions put Greek growth for this year and
the next few years at a much more negative level than the eurozone’s “most
pessimistic” estimate, with for example Standard & Poor's predicting
at the end of July that Greece’s GDP would shrink 3% in 2015. In April, S&P
thought
Greek GDP would be shrinking 1.5% in 2015 whereas the IMF still predicted
growth of 2.5% for Greece this year. If this gap can be of any guidance of the
incompetence of public sector institutions, the growth predictions may turn out
to be false once again and the annual “debt service” may easily surpass 15% of
Greece’s shrunken GDP.
There are
more factors indicating Greek growth may not take up: there are lots of reports
of Greek companies relocating or considering to do so. Some 60.000 have requested
moving their headquarters to Bulgaria, while ship owners may move at least part of
their operations to Cyprus due to increased taxation. Not exactly a factor
which may boost Greek growth.
Currently, the EU Commission estimates that the Greek
“fiscal gap” amounts to 1.25% of GDP, or around 3 billion euro. It looks like
the idea is to largely finance this by tax hikes. The “memorandum of understanding” - the instruction list imposed by creditors – requires
that the unpopular real estate tax ENFIA, to be paid at the end
of October, “should raise €2.65 billion revenues in 2015”. Spending cuts this
year look minimal, although defense spending will still be cut
by 100 million euro before the 1st of January. Other tax hikes
include
an increase of the corporate tax rate from 26 to
29%, increasing sales tax on processed food and restaurants to 23%, abolishing VAT discounts for
Greek islands, extra luxury taxes on big cars, boats and swimming pools, a new
tax on television advertisements, “tonnage
taxes” which will hit the shipping industry, higher income taxes on – lightly
taxed – farmers, higher taxes on insurance premiums and a higher “solidarity
tax” for all income brackets. To be fair, the next few years will witness more
spending cuts, like 400 million euro in military spending next year, but it’s puzzling how anyone can believe
releasing an avalanche of tax hikes on an economy already suffering from
capital controls will do anything to boost growth.
Furthermore, one doesn’t
need to have paranormal abilities to be able to predict that tax hikes will
also lead to a greater informal economy, thereby further shrinking Greece’s
official GDP which is supposed to carry the annual debt service cost of which
EU institutions think it’s sustainable and won’t exceed 12% even in the most
pessimistic scenario.
Then
there is the question mark how much Greek privatisation efforts may raise. It’s
widely assumed these will fail to bring in the 50 billion euro which creditors are
expecting. During the previous “programme”, EU institutions
estimated that selling off Greece’s state owned real estate may
raise “anything above some €20bn”, but this
failed spectacularly. In 2011, Greece’s creditors wanted Greece to raise 50
billion euros as well by selling state assets. Since then, however, Greece only
managed to raise 3.2 billion euros: 94 percent
below the target. The failure to do so was due to obstruction by
powerful and privileged trade unions and because it was hard to value certain
assets, like Greece’s islands, while there was little
demand for things like sport infrastructure or government
airplanes.
Still, privatisation is a great idea. It can work in Greece,
as proven
by the privatisation of Piraeus Container Terminal’s strong performance since
it was taken over by China’s COSCO Pacific. Still one should do it in order to
make the economy more competitive and not in order to raise a lot of money.
It’s unfortunate that the Greek government will use
some of the proceeds from privatisation to recapitalize some of the country’s
zombie banks. Essentially, more than
half of the capital of Greek banks are claims on the shaky
Greek state, which itself owns stakes in Greek banks. It would be better to
first unwind these zombie banks, whereby shareholders and bondholders suffer
losses, and then restructure and completely privatise them.
I haven’t mentioned the “structural
reforms to enhance competitiveness and growth”, which are
laudable, but unlikely to lead to a quick turnaround in growth, given how
deep-rooted Greece’s structural challenges are. The fate of the unstable Greek
bank system and its debt service burden are hanging like the Damocles over
everything else. Angela Merkel had the opportunity to test a different
recipe on 12 July, but she chose to kick the can down the
road. One last time?