Cost of impasse over numbers piling up
Latest data constitute a warning of the impact from Greece and creditors disagreeing on fiscal forecasts
ANALYSIS Another week of back-and-forth between Greece and its lenders seems to have brought us no closer to an agreement between all the parties involved in the country’s bailout. Today’s Eurogroup meeting may produce some progress, but the complexity of the situation facing Athens, the eurozone and the International Monetary Fund means it is likely that any forward movement will involve inching, rather than hurtling, towards an agreement.
One of the key areas of disagreement is Greece’s fiscal performance. The government insists that the primary surplus for 2016 provides all the evidence needed that there should be no concerns about Greece meeting its fiscal targets in the coming years. Finance Ministry estimates put the primary surplus for 2016 at 2 percent of gross domestic product, against a target of 0.5 percent.
In an interview with Germany’s Bild newspaper last week, Finance Minister Euclid Tsakalotos suggested that last year’s primary surplus is actually 1.7 percentage points above the target, ie 2.2 percent of GDP in total. On Friday, reports indicated that government officials believe the final figure, which is not due to be announced until April, will be around 3 percent of GDP.
There is skepticism on the creditors’ side. Even before we get to debating how large last year’s primary surplus was, some of those who are lending Greece money are not convinced that enough of the overperformance is structural and that much of it may be driven by one-off occurrences. It will require further scrutiny of the final data to come up with a definitive answer to this question. The director of the International Monetary Fund’s European Department, Poul Thomsen, told another German newspaper, Handelsblatt, last week that the Fund may revise its fiscal forecasts for Greece once it has last year’s statistics at its disposal.
This is crucial because the volume of measures being demanded of Greece by the institutions has been set at 3.6 billion euros largely due to the fact that the IMF believes Greece will fall short of the 3.5 percent of GDP primary surplus target it has been set for an, as yet, unspecified period after 2018.
Athens hopes that if the IMF rethinks its figures, this may lead to a lower volume of measures being demanded and the first step in the grand bargain between the gov- ernment and the institutions being taken.
However, there are several added layers of complexity that have to be addressed. For example, the IMF does not only have doubts about the structural nature of Greece’s primary surplus, it also has lingering reservations about the reliability of the fiscal data coming out of Athens.
“Lack of fiscal transparency was clearly one of the factors that led to Greece finding itself in a difficult spot in 2010,” IMF Managing Director Christine Lagarde said in response to a question when she spoke at the Atlantic Council on February 8.
“A lot has been improved but I’m not sure that the job is entirely completed. We are still seeing frequent revisions of some of those numbers. Everybody revises, let’s face it... but it’s a fact that Greece revises quite often and with significant variations.”
This suggests that the Fund will want to scrutinize the figures for 2016 particularly carefully before making any adjustment to its position. This is unlikely to be a swift process. The Hellenic Statistical Authority (ELSTAT) said last Wednesday that it agreed to an IMF observer being present at a recent inspection at its headquarters by European Commission and European Central Bank officials as part of the effort to rubber stamp Greece’s fiscal data. ELSTAT is due to officially announce the size of the 2016 primary surplus on April 21, and Eurostat, the European Commission’s statistical arm, is expected to confirm this figure on April 24.
The other factor that complicates matters is that the European Commission’s forecasts are in line with the Greek ones. Brussels published last week its Winter Forecasts, which put Greece’s 2016 primary surplus at 2 percent of GDP. During a visit to Athens on Wednesday, European Economic and Monetary Affairs Commissioner Pierre Moscovici appeared to suggest that the forecasts from Brussels are more reliable than the IMF’s. He pointed out that the Commission had been correct in its predictions in the past and that its estimates continued to be “realistic.”
His comments were a clear example of the crisscross tug-of-war that Greece is involved in with the institutions, which often have divergent views and contrasting motivations. It will be no surprise if it takes some time for each side to untangle itself from this situation and find enough common ground to agree on how the bailout review can be completed.
Of course, the more time that passes without a resolution, the greater the uncertainty that gnaws away at the economy and the more damage is done to the chances of meeting or beating this year’s fiscal targets.
The GDP figures announced last week by ELSTAT in its flash estimate showed that there was a 0.4 percent quarter on quarter (QoQ) decline in the final three months of last year. This was a disappointment following QoQ growth in the second and third quarter of last year. As an initial assessment, it is hard not to think that the doubts which returned towards the end of the year as a result of the difficulties in concluding the program review dampened the recovery.
If Greece and its creditors needed a reminder of the damage that can be done by drawing out the current uncertainty, the Q4 GDP data provided it. However, there is another way of viewing these statistics.
Despite the disappointing end to the year, the flash estimates suggest that the Greek economy saw real growth of 0.3 percent of GDP last year, whereas the budget had predicted a contraction of 0.3 percent. At the same time, the primary surplus target of 0.5 percent was comfortably beaten – although it will be a few weeks before we can all agree by how much.
If this could be achieved in a year when the government and the institutions haggled for months over the completion of the first program review (including the adoption of 3 percent of GDP in new measures), a range of taxes were introduced or increased and pension reforms passed, imagine how well the economy and public finances could perform if they are free of constant meddling and apprehension.