Greece – A Tale Of Economic Carnage

  • Greek economy to contract by 10% in 2020
  • Unemployment will soar over 22%
  • Debt to GDP will break 200%
  • The cost of lockdown is EUR5 Billion a month

At a time when much of the focus in Europe has been directed onto the plight of Italy and Spain or the debate of mutualising debt through Eurobondsor Coronabonds, Spotlight wanted to reflect upon the difficulties facing that long-suffering nation, Greece.

The growth rate of the Greek economy slowed to just 1.0% year-on-year in Q4 2019 from 2.3% in the previous three-month period. (Source: National Statistical Service of Greece).

That was the weakest pace of growth since Q1 2017 and if one were to assess the full year of 2019, the economy grew by 1.9% so matching the pace booked in 2018.

Tough Outlook

The Greek economy had been expected to post a growth rate of 2.0% this year, however, that was before one had to factor in the impact of COVID-19. This virus is a genuine gamechanger for Europe and sadly, Greece is going to be badly hit.

The International Monetary Fund (IMF), not a favourite institution in Greece, has issued a forecast that the Hellenic Republic will fall into a steep recession of 10% this year. This rapid reversal in economic fortune is a direct result of the severe macroeconomic dislocation caused by the coronavirus pandemic.

This evaluation is much tougher than that of the Greek think tank, the Foundation of Economic and Industrial Research (IOBE). This body forecasts a contraction of just 5.0% in 2020, although it does also offer an extreme or “adverse” model that suggests a deeper contraction, i.e. -9.0% is possible if all economic drivers plunge to their worst-case scenarios simultaneously.

The recession of 2020 is expected to be followed by an expansion of 5.1% in 2021, the IMF said in its latest World Economic Outlook report, that was presented by Gita Gopinath, the chief economist.

Greece annual GDP growth

Gopinath stated that the baseline scenario that the IMF have adopted assumes the coronavirus pandemic will begin to retreat as year-end approaches. This was cautioned by the fact that a high degree of uncertainty still surrounds the evolution of the pandemic, so we are in the realm of best guesses.

The Managing Director of the IMF, Kristalina Georgieva added:

…I want to stress this may be actually a more optimistic picture than reality produces, … Epidemiologists are now helping us making macroeconomic projections. Never in the history of the IMF, have we had that. And what they are telling us is that the novel coronavirus is a big unknown, and we don’t know whether it may return in 2021. …

This would imply the orange circle in Figure 1 may be fanciful. There may well be no “V” shaped recovery for Greek GDP growth.

No Joy For The Jobless

The seasonally adjusted unemployment rate in Greece was unchanged at 16.4% in January 2020, its lowest level since April of 2011. Across the country’s regions, the lowest unemployment rates were recorded in Aegean Islands 12.9% and Crete 13.0% while Epirus-Western Macedonia at 19.8% registered the highest rate. One can see the pain is not, by any means evenly distributed.

Youth unemployment i.e. young people in the 15-24 age group continued to be the most affected sub sector among the unemployed. It was measured at 32.4% despite the fact the rate has been declining over the years from 39.6% in January 2019 and peaking at 60.2% in 2013. (Source: Eurostat)

Sadly, the IMF is not able to offer much comfort to Greece when it comes to job creation; it estimates that it will rise to 22.3% in Greece in 2020, while for 2021 it estimates that it will hover around 19%.

Greece unemployment

If the path of unemployment develops as the IMF suggest one can sense that fears will rise that older citizens may never work again whilst the youth wonder if they will ever work at all. Such a situation is likely to herald waves of protests driven by frustration as the unemployed demand to know how they will buy food and pay their bills?

Debt To GDP At 200%

The Greek fiscal position is set to deteriorate rapidly according to the IMF from a surplus of 1.0% to a deficit of 9.0% of GDP this year before recovering mildly to 7.9% 2021.

The primary balance is a metric to measure the difference between Government’s revenue (what it receives) and its non-interest expenditure (what it is spending, not including debt payments).

We have never been a major fan of measuring a nations progress by the scale of the primary balance…hopefully a surplus, because it is just half the story. Unless one enters a world of debt forgiveness or endless rescheduling, i.e. extend and pretend, debt must be serviced and repaid. [1]

The IMF expect Greece to have a primary balance that will be in deficit at 5.1% of GDP in 2020 and a 4.4% in 2021. The level of debt to GDP, which is already running at 181.2% of GDP will leap higher to 200.9% of GDP this year before falling back slightly to 194.8% in 2021.

Greece Debt to GDP

In February, the governing council of the European Central Bank (ECB) ended the limit imposed on the exposure of Greek lenders to the country’s sovereign debt…a decision driven by the ECB recognising an improved macroeconomic environment, the lifting of capital controls and record low Greek financing costs in 2019.

The ECB said that the Greek economy was improving and the ECB President, Christine Lagarde told the European Parliament’s committee on economic affairs on February 6:

…If the situation continues to improve and based on the criteria that we apply to all those purchases, I’m fairly confident that Greek bonds will become eligible as well,

Until now, Greek bonds were ineligible for purchases by the ECB as they are rated junkby all major rating agencies, thus failing a key ECB criterion.

The ECB said in March this year that the move will benefit Greek banks and the state, and it marked a return to normality given the strengthening of liquidity in the real economy. These assumptions are worthless now. There is no way that Greece will be upgraded by the ratings agencies in the medium-term.

The three main agencies assign the following long-term debt ratings to Greece:

Moody’s B3, S&P BB- Fitch BB

In Table 1, we indicate where such a rating features in the credit spectrum.

Credit ratings

Debt & Default

This begs a critical issue about debt servicing and repayment. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default.

A study by the World Bank in January 2020 [2] found that if the debt-to-GDP ratio of a country exceeds 77% for an extended period it slows economic growth, thereby decreasing revenue flows to the government and so inhibiting the ability to repay debt.

Spreads of Greek 10-year debt over the German benchmark support this view, as do the changing levels of Greek 5-Year credit default swaps (CDS), (Figure 4).

Greek Government Risk Profile Spread cf. Moving Averages and CDS Evolution

The analysis in [2] suggests that episodes of rapid debt accumulation have been associated with financial crises on approximately 50% of all occurrences. This must be a concern for Greece, the ECB and the Eurozone.

If the IMF forecast is correct then in 2020 if GDP collapses from EUR 198.21 Billion to EUR178.39 Billion i.e. by 10% and debt to GDP soars to 200.9% of GDP, one can expect Greek sovereign debt to rise to EUR356.79 Billion.

The pandemic of COVID-19 is undoubtedly an external shock, however, the trying domestic circumstances that have constrained the Greek economy are, in our opinion increasing the likelihood of Greece sliding into a new crisis. This is especially so when one considers the accumulated vulnerabilities, e.g. a larger share of short- term debt, higher debt service costs, and lower reserve cover, increase the probability of crisis.

Greek Government Debt Profile as at December 31, 2019

The PDMA report that Greece has actively sought to lengthen its weighted average debt maturity from 8.5 years in 2008, and this moved out to 20.5 years in 2019. [3]

Figure 4 indicates that much of the outstanding Greek debt has been absorbed by the official sector versus private investors.

In this context the Official Sectorcomprises, central banks, central government departments and agencies, government-controlled institutions other than commercial banks, and international institutions.

The ratio of official debt holders to private debt holders has rotated from 16%:84% in 2010 (best data we can find from the PDMA) to 82%:18% in 2019. That is a virtual 180° rotation. Still, one wonders how

forgiving they will be when interest payment and maturity sums fall due?

The hard reality is that Greece faces challenges now that it has exited the Third Fiscal Adjustment Programme [4]. One has to wonder if, given the fall in growth expected this year and the expansion of debt needed to cover expenditures caused by the economic dislocation that has stemmed from the COVID-19 pandemic if the measures taken by the PMDA, will prove sufficient to prevent a new debt crisis?

The PDMA set the following four targets as the basis of upcoming years’ debt management strategy:

  1. Coverage of the annual gross financing needs through a continuous and permanent access to the international capital markets, based on an effective Investor Relations strategy
  2. Active management of market risks that are incorporated in the Greek Public Debt Portfolio
  3. Management of the cash reserves of both the Greek State and the General Government Entities
  4. Liquidity management, i.e. the management of the short-term cash position of the Greek State

Staying Afloat

As Greece hurtles toward running a debt to GDP level of 200% Yannis Stournaras, Governor of the Bank of Greece, said his county’s experience during the sovereign debt crisis that began in 2009 had fully illustrated the importance of keeping an economy afloat as it struggles with low growth and high debts.

He said the recent package of fiscal measures proposed by the Eurogroup of Eurozone finance ministers had failed to go far enough.

…Keeping the difference between the growth rate and interest rate at a positive level, that is critical. We have to minimise this snowball effect that we saw in the Greek crisis, … Whether you call it Coronabonds’ or something else, what we need is joint action. …

The Greek economy is small. It is only equal to 10.4% of the Italian, and just 1.6% of the whole Eurozone economy. However, just as in 2009, when Greece was the loose strand that could have unravelled the Eurozone, so in 2020, it will be again.

The way to stop it is for the ECB and other sovereign members to say that they will keep Greece afloat.

If it is a question of doing whatever it takes there has to be a move toward mutual debt issuance or a complete debt write off activated by the ECB. In effect we enter the realm of perpetual sovereign debt.

Spartan Style Survival

Greece is, of course, trying to contain its growth, employment, and debt vulnerabilities. The nation correctly cancelled carnival celebrations in late February and despite a few dissenters most of the population heeded government advice and remained at home.

The result has been a remarkably low number of deaths. As of Friday, April 17 the data read:

Cases and Deaths of Coronavirus/COVID-19 In Selected European Countries

Greece did set an excellent example in acting so quickly, although the think-tank, Hellenic Foundation for European and Foreign Policy (ELIAMEP), agrees this was dictated by inherent national weaknesses. Such as limited health care funding, a lack of intensive care beds and an aging population; 32.5% are aged over 55-years.

The shutdown bites hard and Greece needs a good holiday season as 18% of GDP is generated by tourists who mostly come in the summer. Will Greece and other European nations be out of lockdown by the high summer months? Will it be safe to travel? The nation must hope so as the shutdown is said to be costing the economy between EUR3.5 Billion and EUR5.0 Billion a month

We do not wish to be messengers of doom and gloom but without the diverse manufacturing base that Italy has, it may well be that once again Greece is the flash point that undermines the Euro just as it did 11-yers ago.


[1] One may contend that Greece has enjoyed such a scenario following bailouts, debt haircuts, reduced interest rates and a repayment rescheduling.
Greece ended up borrowing EUR255 Billion from its Eurozone partners in three humiliating bailouts that cost the nation its financial sovereignty.

[2] Chian Koh, Wee, Ayhan Kose, M., Nagle, Peter S., L. Ohnsorge, Franziska and Sugawara Naotaka “Debt and Financial Crises”
World Bank Group Policy Research Working Paper 9116 © January 2020

[3] This declined to 7.9 years in 2009 when the first Greek debt crisis began

[4] The Greek Third Fiscal Adjustment Programme will come to a successful end in August 2018.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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