Perspectives

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15  
EcoPerspectives // 4 quarter 2018  
economic-research.bnpparibas.com  
Greece  
Life after adjustment programmes  
Although the Greek economy continues to recover, so far its performance has fallen somewhat short of expectations. After exiting the  
European financial assistance programmes, Greece’s executive arm has regained some freedom to act, although it is still under  
“enhanced supervision”. Finding the right trade-offs will be no easy task, between turning around domestic demand, maintaining  
competitiveness gains and consolidating public finances over the long term, especially with just one year to go before the next  
legislative elections.  
Greece completed its third European financial assistance  
1
- Growth and inflation  
programme this summer. The country finally seems to be making a  
fresh start after several long years marked by the Troika’s  
adjustment plans and inspection missions. Yet the crisis has left its  
scars in terms of public debt, unemployment and an ailing banking  
system, and the economic recovery has only just begun.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2
.4  
1
.8  
2.0  
1.1  
1.2  
0.7  
Activity: awaiting an acceleration  
0
.0  
0.0  
Although the recovery is rather well engaged, the economy is still  
having a hard time accelerating. Growth reached 1.3% in 2017,  
fuelled essentially by a rebound in exports of goods and services  
and an upturn in investment, while household consumption finally  
levelled off. At the end of H1 2018, recent economic data supports a  
recovery scenario, with robust export growth (+20% y-o-y in value in  
July, +11% excluding energy), dynamic job creations (+2.2% y-o-y  
in June) and a strong rebound in confidence surveys. Second-  
quarter GDP rose for the sixth consecutive quarter, the longest  
growth spell since 2006. Yet on the whole, growth seems to be  
struggling to regain momentum, with GDP of only 1.8% yoy in Q2  
-0.3  
-1.1  
15  
16  
17  
18  
19  
15  
16  
17  
18  
19  
Sources: National accounts, BNP Paribas  
2
- Confident recovery  
Economic Sentiment indicator  
• • • Consumer confidence  
1
30  
0
2
018.  
115  
And yet given the scope of the crisis and the ensuing shortfall in  
activity , one would think that growth would be a bit more robust, at  
-30  
1
least in the first years of the recovery. There are still a few factors  
that have yet to give the green light for the recovery to accelerate.  
First, the banking system is weak. Though on the road to  
improvement, it surely lacks the capacity to boost the supply of bank  
lending. Second, and most importantly, although the economic  
environment is not all that bad, it is less buoyant than in 2017. This  
implies a countercyclical acceleration of the Greek economy just as  
the European cycle is unfortunately entering a slowdown phase.  
100  
-60  
85  
70  
-90  
2006  
2009  
2012  
2015  
2018  
Source: European Commission, BNP Paribas  
All in all, the prospects of exiting the financial assistance  
programmes has restored the confidence of economic agents, and  
we expect growth to accelerate slightly, to nearly 2.5% in 2019, from  
European Commission and IMF teams are remaining cautious, and  
forecasting growth of no more than 1% to 1.2%.  
2
% in 2018. To achieve this, domestic demand would have to pick  
Enhanced supervision  
up despite a persistently tough environment for households:  
unemployment is falling, but it still affects 20% of the active  
population. Lastly, although major catching-up effects will surely  
boost growth in the years ahead, what is much less certain is the  
country’s potential growth rate, which is essential for evaluating the  
long-term sustainability of public debt. For the moment, the  
In a sign of renewed sovereignty over Greek economic policy, the  
Tspiras government published a vast programme for growth that  
aims to combat unemployment and job uncertainty (by raising the  
minimum wage and fighting against undeclared work), strengthen  
the banking system to that it can keep pace with the recovery, and  
reform the energy sector. For the current and future governments,  
the big challenge will be to address the social needs created by the  
crisis and to revitalise domestic demand without jeopardising recent  
1
Activity is currently up 3.5% in volume terms from the year-end 2013 low, but  
24.5% below the peak of early 2008. Although this gap is unlikely to be fully  
closed in the short term, the economy still has enormous potential to rebound.  
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EcoPerspectives // 4 quarter 2018  
economic-research.bnpparibas.com  
competitiveness gains, while operating under the scrutiny and  
pressures of creditors.  
Box: New debt reduction measures  
On 22 June 2018, as the European finance ministers prepared to  
authorise the last pay-out to Greece as part of the third financial  
assistance programme, they enumerated a new series of measures  
to reduce the Greek government’s debt and debt servicing charges.  
The country has agreed to “enhanced supervision by the European  
institutions. What that means is that Greece will be subject to more  
frequent assessments as part of its post-programme supervision  
than the other countries that benefited from adjustment programmes  
.
The maturity on loans granted by the European Financial  
(
Ireland, Spain, Portugal, and Cyprus). Greece will be monitored to  
Stability Fund (EFSF) as part of the second financial assistance  
programme (excluding PSI, for a total of EUR 96.4 bn) will benefit  
from a 10-year extension and an additional 10-year grace period. In  
the end, there will be no interest payments on these loans before  
make sure it complies with last June’s commitments, namely to  
continue reforming and to meet new fiscal targets (see box). What  
creditors fear most is that Greek economic policy in the years ahead  
will try to unravel parts of past adjustments.  
2032, and the average maturity will be 42.5 years.  
This supervision comes on top of the standard framework for  
monitoring fiscal policy in the eurozone, which Greece reintegrated  
this year. Athens, like the other European capitals, is currently  
finalising its 2019 budget proposal, which must be submitted to  
Brussels by 15 October. The country has committed to generating a  
primary surplus of 3.5% of GDP, a level that has already been  
reached and even surpassed in previous years. In the months  
ahead, the debate will focus on pension reform, which is to be  
implemented in 2019. The reform aims to save 1 pp of GDP on  
pension pay outs, which the IMF considers to be essential for  
ensuring the regime’s long-term sustainability and restoring critical  
fiscal manoeuvring room for the authorities. Assuming the country  
meets its fiscal objectives, the proceeds would be used in full to  
finance the targeted social spending measures. At this stage,  
however, just a year before the next legislative elections (at the  
latest), the Tsipras government seems to want to back track on this  
commitment. Only the future can tell whether the Europeans, whose  
assessment of the Greek situation has regularly diverged from that  
of the IMF since 2015, will let him have his way.  
. A second, smaller series of measures are conditioned on  
meeting specific targets (fiscal targets and managing doubtful loans  
in the banking sector) and pursuing reforms in the years ahead, in  
compliance with the Greek authorities’ commitments made in June.  
They include eliminating the interest margin applied to EFSF loans  
and transferring to Greece the profits made by the national central  
banks on Greek bonds held over the period 2019-2022 (about  
EUR 5 bn).  
.
Lastly, the sum of EUR 3.3 bn was added to the last payment by  
the European Stability Mechanism (ESM) to increase the size of the  
liquidity buffer available for the authorities to facilitate Greece’s  
return to the capital markets. The size of this liquidity buffer is  
expected to reach at least EUR 24 bn, the equivalent of 13% of  
GDP.  
On the whole, the Europeans esteem that these measures will  
reduce the debt of public administrations by 11 points of GDP by  
2040, and will help curb medium-term financing needs. They have  
pledged to re-examine Greece’s debt situation in 2032, the year in  
which the country’s financing needs will begin to rise again.  
Sources: BNPP based on the Council of the EU, International Monetary Fund  
Financing: very gradual normalisation  
3- A timid return to the capital markets  
For the past several months, the rating agencies have slowly and  
cautiously begun to raise the country’s credit rating, which Athens is  
counting on to orchestrate its return to the capital markets. After two  
successful operations in H2 2017 and early 2018, its third move has  
been postponed. Not only are the government’s financing needs  
covered for the next several months (thanks to low financing needs  
and a major liquidity buffer), but above all, the evolution of Italy’s  
political and fiscal situation has created unfavourable tensions in the  
sovereign debt market.  
10-y government bonds yield  
8
7
6
5
4
3
2
2017  
2018  
Source: Thomson Reuters, BNP Paribas  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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