Shadows loom over government’s ‘clean exit’ scenario

Greece’s bailout exit has been eliciting condescending and bitter commentary on the country’s beaches and in its near-deserted cities, as few Greeks believes their lives are going to improve or that the country’s prospects will be akin to those of other bailed-out eurozone states. Greece’s “return to normalcy” and “clean exit,” much touted by the government, appear to be happening somewhere else.

The exit scenario being described by analysts is not much cheerier and these are some of its key characteristics:

1. Tapping the international markets will not be easy. “How can you celebrate the exit when the markets are closed?” a banking source comments, referring to the high cost of borrowing, which scuppered the Greek government’s plans for two new bond issues before the end of the memorandum. Despite decisions on the debt, meanwhile, the Italian and Turkish crises have confirmed that Greece is still very vulnerable to shocks.

2. The fiscal adjustment will continue. Greece has agreed to reduce pensions further from January 1, 2019, and the tax-free threshold from January 1, 2020, and to present primary surpluses of 3.5 percent of GDP through 2022 and then of 2.2 percent of GDP. The government is trying to stop the pension cuts, but it is not at all certain that this would be viewed favorably by the markets.

3. Greece will remain under close supervision by Greece’s creditors, including the International Monetary Fund, and any fiscal derailment will result in the suspension of debt-lightening measures, as well as sending the wrong signal to the markets.

4. The “bounce-back” theory failed to transpire and even though the Greek economy is emerging from the longest recession in its history, the growth rate is below expectations at around 2 percent this year. Further fiscal adjustment also bodes ill. Greece, meanwhile, missed out on the European rebound and on the European Central Bank’s quantitative easing measures, and is now faced with a volatile international environment and hikes in interest rates.

5. Greece’s banks continue to labor under a huge pile of nonperforming loans, which stand at 42 percent of total loans when they are just 1-5 percent in other European countries. This burden makes them unable to bankroll growth.

6. Structural changes are half-baked: To name just a couple, the overhaul of the public sector is pending and tax evasion is still rampant.

Analysts acknowledge that significant progress has been made in the past eight years on the fiscal front, with the deficit of 15.4 percent of GDP in 2009 being turned into a surplus of 0.8 percent of GDP in 2017 (and a primary surplus of 4.2 percent of GDP in the same year). They also point to the reduction in the current account deficit from 15 percent of GDP in 2008 to 0.8 percent in 2017.

They add, however, that achieving this fiscal balance came at a significant cost in terms of income (GDP contracted by 25 percent) and unemployment, and was based largely on overtaxation, which put an incredible burden on households and undermined Greece’s growth prospects.

Given that growth is now the main issue at hand – also according to the rating agencies – economists are urging tax reductions. Yet more important perhaps, especially as regards beleaguered direct foreign investments, is building a climate of trust. That said, memories of the debacles of the privatization of Elliniko in southern Athens and of the gold mine in Skouries, northern Greece, are still fresh. Even worse, looming elections threaten a complete return to all the bad habits of the past.