Greece: Country exits third bailout program
After nearly a decade of tough negotiations and reliance on creditors, Greece exited its third bailout program on 21 August, standing on its own two feet for the first time in eight years. The smooth ending of the program bodes well for helping restore confidence in the economy, and near-term debt-related risks are minimal. A final disbursement of EUR 15 billion from the European Stability Mechanism was released at the start of August and the country has a solid cash buffer, large enough to cover its financing for around 22 months. Moreover, the June debt relief agreement notably lessened debt repayments due in the next decade and the country will be kept on a tight leash by creditors, with quarterly reviews and some debt-relief measures conditional on continued progress on economic reforms and hitting ambitious fiscal targets.
While the economy appears set for smooth sailing in the coming years, doubts remain over the long-term sustainability of the country’s debt load. The country has accumulated a debt pile of EUR 289 billion, which will take decades to pay off, and its ability to do so will be conditional on the government continuing to run ambitious primary surpluses. While there are incentives in the debt-relief agreement for the government to hit fiscal targets, an austerity-weary population could interfere with the government continuing to pursue tough economic reforms. In addition, other challenges to Greece’s outlook persist, including a high volume of non-performing loans and an elevated rate of youth unemployment, and the pace of growth will be gradual considering the depth of the country’s recession. Commenting on Greece’s economic outlook, Dr. Stylianos G. Gogos, Economic Analyst at Eurobank, elaborates:
“In 2018, Q1 real GDP in Greece increased for a 5th quarter in a row for the first time since 2006. This is a sign that the Greek economy is exiting out of the 3 years stagnation trap. However, the cyclical recovery is relatively weak given the deep recession of the previous years. Moreover, the Greek economy faces a major challenge in boosting its potential growth in the longer run. [..] Delays in the implementation of structural reforms and in the reduction of the stock of NPES [non-performing exposures], weaker than expected growth in the Eurozone and an increase in financial market volatility (e.g. due to the current developments in Turkey and Italy) are downside risks for Greece’s future economic outlook.”
Similarly, Nicholas Magginas, Senior Economist at the National Bank of Greece, also sees the economy slowly gaining steam, explaining:
“Tourism and other export oriented activities are showing a steady improvement which supports the labor market and trickles down slowly to the rest of the economy. This improvement is expected to be buoyed by increasing returns of the previous years’ reforms. Nonetheless, the pace of improvement in the financial position of households and less competitive business units remains very gradual and the achievement of a growth rate of 2% y-o-y or higher in 2018 and 2019 will remain highly dependent on competitive business activity.”