Significant post-election challenges await coalition

The European Parliament elections on Sunday handed SYRIZA a historic victory but the overall results are unlikely to force snap polls at this moment, according to an analysis by MacroPolis.gr.

As the dust begins to settle after the vote, attention has returned to the economic challenges ahead, which remain a demanding task for the New Democracy and PASOK coalition.

The short- to medium-term priorities for the government involve implementing the bailout programme, securing debt relief, covering the lack of liquidity, restoring growth and tackling unemployment.

THE BAILOUT PROGRAMME

The completion of the drawn-out troika review in mid-April paved the way for the disbursement of first sub-tranche of 6.3 bln in late April. The remaining two subtranches of 1 bln each are due to be disbursed in June and July subject to the implementation of prior actions.

The budget execution so far shows a primary surplus of 1.05 bln to April despite a widening of the revenue shortfall to 622 mln. Revenue collection remains key for the achievement of the primary surplus target of at least 2.75 bln (1.5% of GDP) in 2014.

The medium-term fiscal strategy passed through parliament earlier this month calls for a primary surplus of 4.19 bln euros (2.3% of GDP) in 2014, 0.8 percentage points higher than Economic Adjustment Programme (EAP) target.

The next troika visit is scheduled in July and one of the thorny issues is that of further reform to the pension system. The merging of all supplementary pension funds of the public sector into the private sector’s main pension fund is a prior action for the July disbursement.

On top of fiscal consolidation, the implementation of structural reforms in several areas will be in the troika’s focus.

SECURING DEBT RELIEF

Despite initial expectations, the Finance Minister Yannis Stournaras did not present any debt relief plan at the Eurogroup on May 5. The announcement following that meeting indicated that: “The relative merits of possible debt sustainability measures, as stated by the Eurogroup on 27 November 2012, will be considered in the context of the next review,” which is due in September.

The government has reportedly assessed a plan incorporating a conversion of the Greek Loan Facility (GLF) variable rate (currently at Euribor plus 50 basis points) to 1% constant for the next 50 years. This could result in total savings of 25 bln (14% of GDP) over the 50-year period. The government’s plan also incorporates the deferral of interest payments on GLF loans for 10 or 20 years, similarly to those previously applied to EFSF loans.

In any case, developments on this crucial front are closely linked to wider developments in the euro area in the post-EU elections period.

The upcoming release of the IMF’s fifth review of the Greek programme in June is expected to provide more insight into the Fund’s stance on debt sustainability and could put further pressure on eurozone partners to adopt a concrete solution.

LACK OF LIQUIDITY

Credit to the private sector has been limited over the past few years. Credit expansion turned negative in January 2011 and has been hovering at around 4% over the past two years. In the corporate sector, there have been only three monthly readings with net loan additions since January 2012.

Similarly, loans to sole proprietors posted net additions of just 100 mln over the past 15 months. The household sector is showing persistent net deductions since April 2010 without any sign of potential turnaround in the near future.

The fact that non-performing loans have risen to about a third of total loans is among the key reasons banks are still in a deleveraging mode. Also, lending criteria have been made much stricter for corporates and households remain reluctant to take out loans. The recent successful recapitalisation of Greek banks eliminated previous capital concerns and could create opportunities for credit expansion should the economy start to rebound and the huge stock of NPLs is gradually reduced or resolved.

Despite payment of state arrears to the private sector of 5.4 bln in 2013, 1.9 bln of new arrears were created in 2013. The total figure is currently at 5.2 bln and is seen as a drain on market liquidity.

RESTORING GROWTH

GDP contracted 1.1% in the first quarter (Q1) of 2014, the slowest rate of decline since Q1 2010. Greece has experienced negative growth since Q3 of 2008. The cumulative nosedive stands at 25.6% over the past six years.

The official sector, the Bank of Greece and rating agencies expect a GDP rebound of up to 0.6% in 2014. In contrast, the OECD projects 2014 will be another recessionary year, although at a modest -0.3%.

The 0.6% GDP growth this year assumes a deceleration in the decline of private and public consumption to -1.8% each, while gross fixed capital formation is estimated to rebound by 5.3% in 2014 after falling by 12.8% in 2013.

Following the release of Q1 GDP data, it has been calculated that for the official target of 0.6% growth to be achieved GDP needs to grow by 1.1% in each of the next three quarters. This would require a stronger tourism season in Q2 and Q3, as well as exports returning to growth.

Tourism is expected to record another record year in 2014 after tourist arrivals and travel receipts soared 18.7 and 16.4% respectively in 2013. Initial forecasts see a rise of arrivals and revenues by 3.4 and 6.6% in 2014.

UNEMPLOYMENT SKY HIGH

Despite a reduction of 1.2 percentage points (pp) since it peaked at 27.7% in September 2013, unemployment remains among the most crucial political and social issues in Greece.

The latest reading for February stands at 26.5%. The number of unemployed is at 1.3 mln, which is three times higher than in February 2009. Youth unemployment remains persistently above the 55% park. It is followed by the 24-34 age bracket, where the jobless rate is in excess of 34%.

The official sector projects unemployment will ease by at least 1 pp this year and a further 2 pp in 2015. In contrast, the OECD projects a slower reduction of 0.7 pp cumulatively in 2014-15.

Prime Minister Antonis Samaras recently announced a very ambitious plan for creating a total of 770,000 jobs by 2020. Three quarters of those jobs are projected to be created in the following sectors: tourism, agriculture and fishery, and packaging.

So far, all the measures that have been adopted to provide more flexibility to the labor market have proved largely fruitless. In addition, the sharp reduction of households’ disposable income, couples with the implementation of strict austerity measures, has further eroded social cohesion.