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George Theocharides: Examining Greece’s Economic Adjustment Programme

George Theocharides: Examining Greece’s Economic Adjustment Programme

Almost five years have passed since Greece signed the first Memorandum of Understanding with its international lenders, and yet the country is still faced with the unthinkable prospect of having to agree to a third economic adjustment programme by the beginning of this summer or else face the possibility of a default and an exit from the Eurozone. During this time, the country has gone through a very tough period of austerity measures which caused a deep recession, as well as exploding levels of unemployment and public debt. Obviously, there are many legitimate questions that need to be answered, such as: why is the country still faced with such mounting problems after two successive programmes? Is it due to the long-standing, complex underlying problems of the Greek economy which perhaps require more time in order to be resolved, the structure of the adjustment programme, or perhaps the poor implementation of it? 

In my last article, I documented the Irish and Portuguese cases with their respective adjustment programmes and how they were able to exit these relatively successfully and now have full access to the private financial markets. In this short article, my aim is to document Greece’s experience under the Troika’s MoU since 2010.

 

Pre-Troika Period 

Between the years 2004-2009, despite strong positive growth rates, the country suffered from considerable fiscal imbalances which led to increases of government debt to unsustainable levels. The economy then also suffered from the “Great Recession” which hit the global economy in 2008, leading to brief recessions in 2007-2008, and then an 18-quarter-long recession starting in the third quarter of 2009 until the fourth quarter of 2013. Furthermore, flawed statistics regarding the deficit and public debt provided by the Greek agencies had to be revised upwards for 2009 (to 15.7% of GDP for the deficit, and an amount of €300 billion (130% of GDP) for the public debt. Naturally, these events lead to fears from the private financial markets about a possible Greek sovereign default, leading to downgrades from the rating agencies to the junk sector (spring 2010), widening of bond yield spreads, as well as the spreads of credit insurance products on the Greek debt (credit default swap spreads). 

 

Troika Period

Unable to finance its economy from the markets, Greece agreed on May 2nd, 2010, to a €110 billion financial assistance package, through an economic adjustment programme with Euro member countries and the IMF (€80 billion from the EU countries and €30 billion from the IMF). The purpose of this package was to help Greece achieve fiscal consolidation through austerity measures, implementation of structural reforms to make the economy more competitive (especially when it comes to tax evasion and corruption), and a privatization programme that aimed to raise around €50 billion by the end of 2015, and thus help lower then debt burden. However, on the one hand, the austerity measures (which were unavoidable given the massive previous years’ deficits) led to a worsened recession. On the other hand, the inability of the Greek government to implement the privatisation programme (in practice, privatization proceeds up to now amount only to €5 billion, compared to a pre-agreed target of €50 billion by the end of this year) or the structural reforms, led to the need for a second bailout package (worth €130 billion, that includes an amount of €48 billion for bank recapitalisation). 

In addition, there was a requirement of the private creditors holding Greek debt to sign a deal forcing them to accept extension of maturities, lower interest rates, as well as a massive haircut of the principal value. The impact of the private sector involvement (PSI) led to a total reduction of Greece’s public debt of an amount around €110 billion. Furthermore, the international lenders, in order to reduce the debt level further have decided to change the debt structure by lowering the interest rate as well as prolonging the maturity. Despite the increased level of unemployment (currently more than 25%) and public debt (currently more than 170% of GDP), Greece was able to achieve significant results (positive growth rate for 2014 and a primary surplus, which led to access to the private financial markets in 2014). The second MoU, which officially ended in December 2014, was granted a technical extension for a two-month period until the final, and fifth review, would be completed. However, the recent events changed the dynamics, and created further uncertainty about a possible default or the need for a third programme. 

Based on the above facts, my opinion is that the reasons for the prolonged recession in Greece and the need for continuous support from its lenders has to do with all the three reasons that I pointed out at the beginning of the article – the austerity measures imposed by the programme, the poor implementation, as well as the deep and complicated structural problems of the Greek economy that needed time and a lot of resourcefulness to be resolved. 

 

Theocharides is an Associate Professor of Finance at Cyprus International Institute of Management (CIIM) and the Director of the MSc in Financial Services.

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