Greece still not out of the woods

ESM’s method of gauging eurozone states’ economic vulnerability shows country remains in danger zone

Greece is the laggard in a list of the eurozone countries ranked according to their economic strength by the European Stability Mechanism (ESM).

The ESM marks range from 1 for the most vulnerable to 4 for the most secure economies, with Greece collecting 1.8 points, against 2 for Portugal, 2.1 for Spain and Cyprus, and 2.7 for Ireland, which are the other countries that have required an ESM bailout program in the last few years.

The ESM’s method of calculating each score aims to identify in a timely manner problems which may threaten a country’s capacity to pay off its debts. The significance of this instrument is clear given that the ESM is the body that issues loans to eurozone countries experiencing difficulties.

The study, which was published yesterday, stresses that if this method had been used to assess the countries before the outbreak of the financial crisis it would have signaled a warning as it would have shown the escalation of risks. The marks are based on six indices:

The loan requirements of each country, the conditions and the structure of its debt.

A country’s economic power, determined among other factors by its gross domestic product, its trade balance, the reading of its World Economic Forum competitiveness index, the cost of labor and its unemployment.

Its fiscal position (debt, deficit, primary deficit etc).

The sustainability of its credit sector as well as other possible risk factors such as aging, state collateral and foreign investments).

Institutional parameters such as governance efficiency, legislation quality, entrepreneurship ease etc mainly based on World Bank indices.

Private debts and properties (cor- 1.0666 porate and household borrowing, credit expansion, property prices).

For countries graded below 2, such as Greece, ESM considers the risk as “high.” For marks between 2 and 2.5 the risk is increased, from 2.5 to 3 it is medium and over 3 it is low.

Had the ESM method applied earlier, Greece and Portugal would have been branded increased-risk countries from 2005 and high-risk since 2009. Greece scored 2.2 in 2005 and 1.7 in 2008.