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Victoria Mindova

"The markets expect a greater reduction of the Greek debt than the currently renegotiated 50%. Perhaps they rather tend to expect 70%. We will see in the coming weeks how this process will end", said exclusively for GRReporter the senior investment strategist of Merrill Lynch, Johannes Jooste at the presentation of the annual report on the development of world economy. He said that creditors and equity markets realize that Greece will not get away only with financial savings and structural reforms. Therefore, writing off a part of the debt is inevitable. The question is how much are the creditors willing to sacrifice. The financier said that the size of the cuts of the Greek debt is a difficult problem, but he left open the possibility for the reduction to be greater than officially announced so far.

Merrill Lynch expects that the Greek foreign debt will reach 120% of the GDP even without a nominal reduction of the value of Greek government bonds held by private creditors (PSI). This contradicts the information provided by the Greek government, which argues that through the PSI programme only, it will be possible to bring the debt back to the levels it was in 2009 before the outburst of the Greek crisis. If the predictions of Merrill Lynch are correct this would mean that either the Greek government has underestimated the effect of the PSI on the mastering of the debt crisis, or it does not intend to make any drastic reforms and will rely mainly on the remission of a part of the foreign debt to get rid of the accumulated burden.

So far the evaluation of the bank remains that the 50-percent reduction of the debt and the implementation of the reforms set out in the first Memorandum of financial assistance as well as the rehabilitation programme may have a better result than expected. With this combination, the Greek foreign debt may even reach 90% of the GDP. Jooste underlines that these figures can not be provided with accuracy, because it is still not known how much the Greek GDP will be reduced over the coming years. "The financial savings are important, however it will not work out without some economic growth at a certain point", the financier was explicit.

The bank warned that the sharp reduction of the foreign debt may have a positive effect in the short term, but in the long run it will increase the cost of credit and the distrust of the markets in the country. This will significantly limit the opportunity to stimulate growth and will outline the way for a long and lasting stagnation. Experts see the way out of the Greek crisis somewhere in the golden mean – a reduction of a part of the debt and financial savings, without which the country will not get away.

The investment bank determined that the uncontrolled bankruptcy of a Member State and the continuation of the "political paralysis" of the old continent, which was noticed in 2011 are among the main risks in the eurozone. This can be costly, both for the eurozone and for the global economy in general. Financiers suggest that the European Central Bank reconsider its position and undertake the role of the ultimate guarantor on the market of government bonds in the area, to put new means in circulation and to reduce interest rates by 0.5%. This would stimulate positive economic growth over the next year, which in Europe is expected to be rather weak.

The report notes that key European countries have much more optimistic forecasts for economic development in 2012, compared with the expectations of Merrill Lynch. While Germany is planning a growth of around 2%, the bank believes that it will be negative and will be somewhere around -0.5%. The forecast for France and Italy is also similar. While they have planned positive, although lower, results the bank expects a negative economic growth, less than -1%. For Greece the recession this year will reach 1.8% of the GDP, while over last year it was 5.3%.

The world economy in 2012 is at a critical point, but financiers believe that the worst can be avoided if political forces in the U.S. and Europe are activated. Indebtedness of the advanced economies will create serious obstacles for economic development this year. For the United States an increase of 1.9% is expected, which may increase if the government stimulate the construction sector and real estate market. This year presidential election will be held in the U.S. and the positive results on the local economy will have their influence on the election results. China has undertaken a change of course and has adopted a new priority, which is boosting domestic consumption.

"In 2012 we will see China's economy grow by about 8.6%, which is less than last year's growth of 9.2%". The other two strong players on the world market are Russia and India respectively having economic growth of 4% and 7.5%. These are the three countries which exporters should be interested in and should seek a market for their goods. The bank reported that in 2012, the price of gold is expected to continue to increase and they have advised investors to avoid the government bond market. They also recommended investments in shares of large corporations in sectors such as manufacturing and new technologies based in the U.S. and the UK.