Greece

Greece: in crisis, again

The Greek economy is still in recession and the EPI grades Greece’s current economic performance at a D level, with the EPI score projected to be close to 68% in 2016.

Greece has been going through a deep financial and sovereign debt crisis that led to a multi-year recession, when the country’s real GDP shrank almost by 30% in real terms between 2008-2013. The EPI score in Greece reached 59%, or an F level, in 2011, the lowest score among euro zone countries in the past decade. The so-called troika of international creditors – International Monetary Fund, European Central Bank, and European Commission –provided the biggest financial program in the world to the Greek government that included both sovereign debt restructuring and large bank recapitalization. The Greek government debt reached 177% of GDP in 2014, and became mostly debt to the official sector (not to private sector) after Greece restructured its private debt and replaced it with loan from IMF and EU. After five years of recession, economic growth showed some signs of improvement in 2014 and the government adjusted its fiscal deficit and started structural reforms.

But after nationalist political party Syriza won the elections in early 2015, the new government decided to re-negotiate the terms of financing with international creditors and demanded less austerity measures and better debt repayment terms. The international creditors rejected the initial proposal and Greece held a referendum about leaving the Eurozone and the IMF-EU program. Still, the majority of Greeks voted to stay in the euro zone and continue the stabilization program.

In August 2015, Greece and the so-called troika of international creditors agreed on a new three-year bail-out program. Greece will receive about EUR86bn and in return will have to implement a package of fiscal and structural reforms. In September, Greece held early elections and Syriza won them again, forming the Syriza-Independent Greeks government.

The 5-Minute Economist forecasts that Greece’s economy will struggle to grow under the new three-year program as fiscal austerity measures, that include higher taxes and government spending cuts, would weight on growth compounding popular dissatisfaction. There is a high risk that Greece would leave the euro zone in the next few years but these are not our expectations, as Europe wants to make sure that Greece pays back its debt and continues structural reforms.

Greece’s economic performance has been the worst among OECD countries. In 2014, the EPI score was below 69%, or a D level, mainly driven by an extremely high unemployment rate of 26%. GDP growth was close to 1% in 2014, first time since 2007, but turned into 2.3% recession in 2015, after the political crisis in 2015, and we expect the recession to continue in 2016. The government budget deficit has fallen substantially from more than 15% of GDP in 2009 to about 3.6% projected in 2016, as international creditors’ financing was conditional on painful fiscal austerity measures.

Greece’s economic future remains highly uncertain, as the implementation of the new austerity program remains to be seen and there is already a high level of dissatisfaction among the population. The 5-Minute Economist projects unemployment levels to remain high and the economy to stay in recession until 2017. The budget will remain tight, while fiscal deficit is likely to be slowly decreasing, following the demands of international creditors. The 5-Minute Economist projects the EPI Score to recover to 80%, or a D+ level, by 2020 but risks remain high. Namely, the risk of Greece leaving the euro zone exits and the exit would lead to a deep financial crisis that would include recession, large currency devaluation, and bank runs.