Better Economic News Out of Greece Masks Clouds on the Horizon

The latest GDP number out of Greece looks more promising than in the past (assuming it is to be trusted). The GDP contracted by only 0.2% (SA) from the previous quarter and 4.6% on a year-over-year basis.

Source: Eurostat                                                                                              

The Greek government wants to use this opportunity to obtain yet another bailout loan from the EU/IMF. In spite of this slowdown in GDP contraction and a somewhat better fiscal deficit, the Greek government is expected to run out of money by the end of next year.

Barclays Research: – … the programme could very likely run out of funds before the end of 2014 as lower-than-expected growth last year, extra costs for buybacks and the delays in implementing reforms have opened up a funding gap. In addition, at this stage, we don’t see how Greece could be in a position to return to market funding by the end of 2014, meaning that it will also need its bailout programme extending. Finally, long-term sustainability is still far from obvious and reaching the magical 120% debt-to-GDP ratio by 2020 will require substantial debt-relief measures.

A rift is developing within the IMF over the fund’s ongoing disbursements to Greece from funds that have already been committed (see story). The IMF has been pressuring the EU for some time to provide Greece with some “debt relief/extension” – possibly including outright “haircuts” to public sector loans. That means the Eurozone nations will need to accept worse terms and possibly a write-down of some sort in order to make the bailout plan more “sustainable”.

The European Commission however is not ready to kick off the discussions on the topic – at least not until after the upcoming German elections in late September. And the idea of relaxing conditions for current funding as well as additional funding for Greece is generating some skepticism in Germany.

The Local: – Germany’s central bank expects Greece to receive another bail-out loan later this year or by early 2014, the German weekly Der Spiegel reported Sunday, citing an internal Bundesbank document.

[Bundesbank’s] experts however rated the risks of the international loan programme as “exceptionally high” and the Greek government’s performance as “barely satisfactory”, the magazine said. 

The paper’s authors also voiced “considerable doubt” about the Greek government’s ability to implement essential reforms, said Der Spiegel.

The paper, reportedly written for Germany’s finance ministry and the International Monetary Fund (IMF), also criticised the latest credit tranche, saying it had been approved due to “political constraints”.

What makes the potential modification of Greek debt particularly troubling is that it can not be viewed in isolation. If Greece receives some form of relaxation of terms, Portugal is right behind them. Portugal will need its loans extended at some point as well, since the nation is unlikely to enter the private markets any time soon. And treating Greece differently from Portugal is not going to be possible. Now the Eurozone may have a double bailout on their hands – something many of the partner nations are unlikely to accept.

The piece has been cross-posted from Sober Look with permission.

4 Responses to "Better Economic News Out of Greece Masks Clouds on the Horizon"

  1. Rik   August 13, 2013 at 12:30 pm

    Greece will most likely run out of money much earlier because of the IMF connection.
    Bail out is paid in quarterly 'installments' each depending on targets. And as we all know no target is met and the IMF is supposed to make a problem (not sign up for the next one) if they donot. A non politically driven IMF should have done that already. While prognosed End-debt is already over the max 124% and a lot.

    • DiranM   August 16, 2013 at 3:13 am

      Would agree with you, sitting here in Greece; but it is surreal with the Government and its supportors like Axia Ventures touting a turnaround with a new competitive export-oriented economy and trying to drum up investment interest.

      Personally, I am sold on debt deflation and its risks – an American concept not taught in European economics education. A by-product is inevitable loan defaults as demand and cashflow continue to dry up. Also little rational to invest capital with scant prospects of future demand in a deflationary environment.

      In any case, empirical evidence from other German-inspired programs like this in places like East German, Baltic states, etc. demonstrated that after the initial crushing destruction of GDP, any recovery is very small, there is permanent population loss from mass emigration, unemployment remains permanently high and wages very low.

      All this is to say that the IMF seems to be on the ball in their risk assessment here wanting to find a way to exit…..

  2. Dzień Chłopaka   September 5, 2013 at 1:55 am

    It seems to me that before Greece still has a long way to go. Some good information coming from this country is unfortunately not enough. Especially since more and more often we hear that the Greek government probably will need the support again.