Signs of stabilisation in Greece are being noted by Deutsche Bank's chief economist for the Eurozone Mark Wall, characterising as realistic the return to markets in 2014 in an exclusive interview to naftemporiki.gr. However, he talks about limited impact of interventions on the competitiveness of Greek economy, noting slow progress in structural reforms and limited access to credit.
Which are the appropriate next steps concerning the public debt sustainability a) of Greece and b) of the Eurozone (could the introduction of tools of common management of the European dept be helpful?)
a) Anticipation is building in the market. The primary surplus is a precondition for some form of debt relief from the EU. The good news is the Greek economy is showing signs of starting to stabilise. Not unrelated to this, the fiscal performance is improving. Together, these take some pressure off the EU to do something radical, which would always have been politically complex to deliver. But these facts improve the likelihood that 'OSI lite' -- maturity extensions and margin compressions on the official sector loans -- has a meaningful impact on market perceptions of Greek debt sustainability. Greece and the Troika will no longer be fighting against the financial tide.
b) Europe's crisis-fighting efforts have rotated over the last couple of years from fiscal controls to banking union as the main ice-breaker for a more integrated euro zone. One should not underestimate the relevance of banking union to securing the return of cross-border funding throughout the euro zone's bank-based financial system. But nor should one underestimate the challenge of implementing banking union, as the ongoing debates over direct recapitalisation and the Single Resolution Mechanism demonstrate. Ultimately, banking union and fiscal union are inseparable -- common deposit insurance would, for example, necessarily entail a fiscal backstop. It is possible that the euro area experiments with common T-bill issuance to at least explore the technical aspects of common issuance, but without stronger fiscal counterbalances core countries will remain reticent about going further. Treaty change would be necessary and the political will to do this has not reached a consensus yet.
Can the primary surplus, which according to the Finance Ministry of Greece amounts to 835 million in January 2014 (for 2013 is expected to surpass even the most ambitious goals), determine the next steps in the settlement of the Greek question, concerning the debt as well as the intensity of the measures that will accompany a possible new loan from the EFSF to the Greek public?
Reaching a primary budget surplus is significant. It reduces the likelihood of a third programme and more EFSF loans being necessary. It is also a precondition for debt relief. The data must be confirmed by Eurostat and the modified primary balance data used by the Troika may have to wait for the HFSF annual report in August, but Eurogroup President Dijsselbloem has indicated willingness to discuss the outlook for debt in August. This supports market optimism.
The Greek government now borrows from the European support mechanism with average long-term interest rate close to 3% and hardly finances its needs, while facing funding gaps. Within this context, how realistic is the return of the Greek public sector to the markets in 2014? Interests above what level would send Greece back into severe recession?
A return to the sovereign debt market by Greece is not unrealistic. Markets are less fearful about tail-risk than they were, raising risk appetite in general. Other euro area peripherals have had successful visits to the markets this year. Global financial liquidity remains high, driving a search for yield. The primary surplus and promise of debt relief helps Greek fundamentals. The market is intelligent enough to hold the simple debt sustainability analysis at arms length. The fixation on public debt targets like 120% of GDP in 2020 is changing. Extending the maturity of the official sector debt will improve the attractiveness of Greece to private buyers of debt. A successful return to the market by the sovereign ought to make it easier for banks and corporates to follow suit. Private sector access to funding would improve, bolstering growth prospects. This can help compensate for a higher funding cost for the government.
In 2010, Greece adopted a program of internal devaluation, according to analysts' estimations of around 20-25%, aimed to recover competitiveness. How competitive is the Greek economy today? Meantime, the value of currencies of emerging markets, which are competitors of southern Europe, such as Turkey, has fallen dramatically. How does this development affect the competitiveness of Greece which uses Euro for its transactions? Broadly, could at this stage a devaluation of the common European currency help? Additionally, political stability is a key factor to attracting investment. How close of how far is Greece from fulfilling this requirement?
The statistics say that relative to its euro zone peers, Greece's competitiveness on the basis of manufacturing labour costs has improved dramatically over the last few years. The economy is beginning to show signs of stabilising, but one might have expected the scale of improvement in competitiveness to have had a more positive impact. Slow progress on structural reforms, for example on the non-wage costs of doing business, could be a factor. Another is likely to be the restricted access to credit. With another round of bank recapitalisation taking place and the ECB AQR still to come this year a clearly improved flow of credit might be a 2015 story at the earliest. With the dollar set to appreciate and euro exchange rate fall over the next year and with clarification of political leadership more likely by next year if the Presidential election triggers a parliamentary election, 2015 could become a positive turning point for Greece.
Vassilis Kostoulas
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