GDP must be pri­or­ity of third pro­gram

The new ESM bailout plan should pay more at­ten­tion to growth-en­hanc­ing ini­tia­tives to be suc­cess­ful

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS The start of ne­go­ti­a­tions be­tween the Greek gov­ern­ment and the lenders over the new bailout pro­gram and the in­ter­nal po­lit­i­cal de­vel­op­ments in the rul­ing SYRIZA party have dom­i­nated the news lately. How­ever, at the end of the day, the out­come of all de­lib­er­a­tions will be judged by the abil­ity of the Greek econ­omy to grow in com­ing years. A cred­i­ble agree­ment could con­trib­ute to this ex­tent.

The deal struck at the eu­ro­zone sum­mit on July 13 was based on three pil­lars. Greece had to de­liver a set of mile­stones by pass­ing pack­ages of leg­is­la­tion through Par­lia­ment to ob­tain bridge fi­nanc­ing and ini­ti­ate talks for a new, three­year ESM pro­gram, to­tal­ing up to 86 bil­lion eu­ros. Greece did so and got a bridge loan of more than 7 bil­lion eu­ros from the EFSM fa­cil­ity, which en­abled it to and clear ar­rears to the IMF and re­deem Greek bonds held by the Eurosys­tem worth about 3.5 bil­lion eu­ros on July 20, avoid­ing de­fault. Ne­go­ti­a­tions over the new pro­gram are on­go­ing but it is not easy to pre­dict whether they will be con­cluded in time to al­low for a bailout dis­burse­ment to pay off bonds worth 3.2 bil­lion eu­ros held by the ECB on Au­gust 20. If this is not pos­si­ble, the coun­try will have to get another bridge loan from the EFSM or another en­tity to avoid bank­ruptcy.

The sec­ond pil­lar of the sum­mit agree­ment con­sisted of po­ten­tial, ad­di­tional of­fi­cial sec­tor debt re­lief sub­ject to Greece de­liv­er­ing on its com­mit­ments, fol­low­ing the con­clu­sion of the first re­view of the ESM pro­gram. This re­view could take place in the fall and even later. Debt restruc­tur­ing will be along the lines of the agree­ment reached at the Eurogroup in Novem­ber 2012. It will take the form of re­pro­fil­ing the Greek debt by ex­tend­ing ma­tu­ri­ties, pro­vid­ing in­ter­est hol­i­days and per­haps con­vert­ing float­ing in­ter­est rates into fixed. Ad­di­tional debt re­lief has be­come nec­es­sary af­ter de­mands by the IMF but Greece has to de­liver to get it from its Euro­pean lenders-part­ners.

The third pil­lar of the sum­mit agree­ment is the cre­ation of a new de­vel­op­ment fund in Greece to which public as­sets worth 50 bil­lion eu­ros could be trans­ferred for pri­va­ti­za­tion. Many doubt whether the state has these as­sets and the abil­ity to pro­duce sim­i­lar pri­va­ti­za­tion pro­ceeds. The process will take many, many years and the ini­tial plan was for part of the fund­ing to be used for pay­ing back ESM funds used for bank re­cap­i­tal­iza­tion. Another chunk will be used for debt re­pay­ment and the rest for growth ini­tia­tives.

The new, to­tal po­ten­tial bailout is es­ti­mated at be­tween 82 and 86 bil­lion eu­ros. About 30 bil­lion eu­ros will be di­rected to­wards debt re­pay­ment to the IMF, the Eurosys­tem and pri­vate in­vestors, and about 17 bil­lion eu­ros or so will be in­ter­est pay­ments. Up to 25 bil­lion eu­ros will go to­wards the re­cap­i­tal­iza­tion of the bank­ing sec­tor. The rest of the money will set­tle ar­rears etc.

It is re­ally un­for­tu­nate for a coun­try get­ting ready to exit the sec­ond bailout last year to have to go through this process again. How­ever, it is also an op­por­tu­nity for both Greeks and the lenders to cor­rect past mis­takes and build on suc­cesses.

Although ev­ery­body talks about struc­tural re­forms, most fail to rec­og­nize that Greece was graded top of the class by the OECD in the over­all re­form re­spon­sive­ness in the 2007-2014 pe­riod. They also fail to men­tion that the coun­try’s rank­ing rose to 62nd place in the World Bank’s ease of do­ing busi­ness sur­vey in 2015 from a dis­mal 108th in 2008. This is in ad­di­tion to the tremen­dous turn­around in public fi­nances, de­picted in small pri­mary sur­pluses in 2014 and 2013 from a pri­mary deficit of 10 per­cent of GDP in 2009. A sim­i­lar pic­ture emerges from the cur­rent ac­count and the unit la­bor costs.

How­ever, all these suc­cesses have been marred by the dra­matic fall in GDP and em­ploy­ment. Fewer peo­ple are em­ployed to­day than in 2000. This is the weak point of all eco­nomic pol­icy pro­grams so far and has been the case de­spite con­sid­er­able progress in re­forms and the sta­bi­liza­tion of public fi­nances.

Un­doubt­edly, Greece has to un­der­take more struc­tural re­forms to en­sure fis­cal con­sol­i­da­tion given the ad­verse im­pact of de­mo­graph­ics on pen­sions, and pro­mote com­pe­ti­tion in prod­uct and in­put mar­kets to fa­cil­i­tate pri­vate in­vest­ments and boost ex­ports. In this con­text, sig­nif­i­cant debt re­lief should also be an up­front fea­ture of the new pro­gram to help ease fis­cal ad­just­ment, add cred­i­bil­ity to the coun­try’s ex­pected ef­fort to ac­cess world mar­kets in a year or two and re­move un­cer­tainty about a po­ten­tial Grexit.

The cycli­cally-ad­justed pri­mary bud­get, which denotes the un­der­ly­ing fis­cal stance, could be used in set­ting the new yearly tar­gets of the ESM pro­gram to avoid im­pos­ing ex­ces­sive aus­ter­ity and hurt growth prospects. More­over, the rel­e­vant author­i­ties should move swiftly to over-re­cap­i­tal­ize banks in or­der to re­store con­fi­dence and ease the re­stric­tions of cap­i­tal con­trols on eco­nomic ac­tiv­ity.

The new ESM pro­gram should pay more at­ten­tion to growth-en­hanc­ing ini­tia­tives to be suc­cess­ful. In this re­spect, fur­ther fis­cal ad­just­ment should be mi­nor while debt re­lief and ef­forts to restart the bank­ing sec­tor and boost in­vest­ments and ex­ports should take prece­dence. This way, the tran­si­tion to the coun­try’s new eco­nomic model, dom­i­nated by ex­ports and in­vest­ments, will speed up and the Greek econ­omy will en­ter a long pe­riod of sus­tain­able growth.

A cred­i­ble bailout pro­gram can con­trib­ute to this.

Debt re­lief and ef­forts to restart the bank­ing sec­tor and boost in­vest­ments and ex­ports should take prece­dence.

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