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What does Greece lose and what does it win from the extension of the Memorandum

19 August 2012 / 17:08:10  GRReporter
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The extension of the fiscal adjustment programme by two years is of vital importance for the Greek economy – only this way the opportunities for growth from 2014 onwards are effectively increased in order to enable the economy to emerge from the severe recession for the first time in six years.

According to finance ministry data, the recession this year will reach 7.3 per cent and the urgent need for it to be controlled will be the main argument in the difficult negotiations to extend the programme for fiscal adjustment. Based on calculations with which the Greek side will sit at the negotiating table, if the partners do not approve Greece’s request for extension, the recession will vary from 2.5% to 4.5% and will only reach 0% as late as by 2014.

Otherwise, if the packet with severe austerity measures amounting to 11.5 billion euro is allocated to four years, if the extension is approved, the economy will breathe much faster. In this case, Treasury data show a recession of about 1.5 per cent in 2013, and a growth reaching 2% in 2014.

Based on the same data, the deficit reduction will be more gradual. With the extension of the Memorandum, the deficit will step back up to 6% of GDP in 2013 to 5% in 2014 and to about 3.5% in 2015 and will finally end up at less than 3% in 2016. In the more severe scenario (without the extension of the Memorandum) a significant reduction of the deficit of around 4.7% will have to be expected as well as its stepping back to below 3% from 2014 onwards.

"With stronger growth prospects the viability of the Greek debt is also actually improved", says the ministry. Moreover, the deeper the recession, the more difficult it becomes to achieve the fiscal targets. This year in the first half the GDP shrank by 6.35 per cent, while economic analysts predict that in the current quarter the rate of decline could reach a record level of 9% and it is almost certain that the year will end with a GDP contraction of around of 7.3%.

Given these data, it is impossible that this year the deficit will step back to 7.3% of GDP and the best estimates are that it will be around just over 8% of GDP. Thus the procedure for reducing it to below 3% of GDP, which is the ultimate goal of the country, will be more difficult. As it becomes clear, the Greek economy remains for the fourth consecutive year in a vicious circle of a deep recession and a high deficit.

The main feature of this vicious cycle is the constant adoption of additional fiscal measures to reduce the deficit, which however automatically lead to a bigger recession and inevitably to maintaining the levels of deficit. Significantly, since the fourth quarter of 2008, when the GDP started shrinking, the cumulative decline in economic activity reached 17.4%.

Extension and later a new "trimming" of debt?

It is openly reckoned that a new "cut" of the Greek debt will be necessary to fill the funding gap that will appear in the event that Greece receives an extension of the Memorandum in order to reduce its deficit.

Recently, rumours of plans, according to which Europeans are unofficially preparing for a new "trimming", have become more numerous, initially of bonds held by the European Central Bank, probably, however, also of the Greek debt, kept by European governments. The aim will be a new debt reduction by 70-100 billion.

It seems that the International Monetary Fund is exercising strong pressure for such a development. Many analysts are worried what will accompany such a decision, referring to the imposing of unprecedented harsh conditions of the country, perhaps even exiting the eurozone.

In any case the U.S. financial giant Goldman Sachs believes that Greece will cope with the money provided in this support package, at least until the end of 2014, even if it fails completely in the process of privatization and the creation of primary surpluses. At the same time it believes that if the European Central Bank agreed to convert the bonds that it holds now into bonds with longer maturity, Greece will be backed financially in 2015 as well. Then a new 38 billion euro will be needed for the country to continue until 2016.

Meanwhile, in its latest report the second-largest Swiss bank Credit Suisse said that Greece's exit from the eurozone is not likely to happen in the short term, however, reservations are expressed in terms of prospects for the next 6-12 months. The report stresses that the time has come for the European Central Bank to act with the restructuring of the Greek government bonds it holds. At the same time, the report criticized German politicians who talk about Grexit (Greece’s exit from the eurozone), stating "we are hoping that they are doing it by political considerations, and this is not their actual belief."

Credit Suisse believes that the spread of the crisis in the eurozone and the possible exit of Greece would be difficult to limit by today’s existing tools. The Bank, however, is quick to warn that within the next 6-12 months the vulnerable position of Greece would still be viable and outstanding issues must be dealt with. At the same time the report of the Bank emphasized that the allocation of additional aid to the country will be very difficult politically, and added that the forthcoming report of the supervisory Troika for the viability of the Greek debt will be critical.

Tags: Memorandum extension supervisory Troika economic crisis
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