Mittwoch, 16. April 2014

The Greek "return" to the markets has a German "guarantee". By Ansgar Belke

The German Ministry of Finance has publicly interpreted the plans of the Greek government as a proof of a successful stance of the Greek programme and of returning trust of financial markets in the Greek government and economy. Aiming at “multiple equilibria”, it thus intends to contribute to the success of the issuance.

But why should euphoric investors stand ready for the issuance, although the starting position of Greece is partly worse than in 2010 and which until a couple of months has been classified a lost case? 

In any case, fundamental economic data cannot be accounted for this shift in views. They have more worsened than improved since spring 2010. The initial Troika programme had underestimated the fiscal multiplier and thus the depth of the recession which was partially unavoidable. However, one element which could not have been anticipated was that Greek exports did not increase, whereas they increased in the case of Portugal, which faced also sluggish markets (Spain is its biggest market) and also faced a domestic credit crunch.  The lack of export growth made the recession much longer and deeper than it would have been otherwise and also made the fiscal adjustment much more difficult.

Going forward there does not seem to be much hope for a sustained recovery unless exports start growing. This will require deep structural reforms. Not just the adoption of new laws in parliament, but profound changes in the way the administration works. But without export growth the current debt level is not sustainable and there will need to be repeated OSI until the economy starts growing again.

There have been two pieces of news from Greece recently:

  1. the government has achieved a primary surplus in 2013, and
  2. exports were 2013 lower than in 2012.

The Greek government emphasizes the first figure, whereas we believe the second (lack of export growth) is the more important one in the long run.

But have markets which seem to be keen on the Greek bond issuance become blind, caught in irrational exuberance? Not really, because Greek government bonds still deliver a very high yield, compared with German bunds. What is more, they enjoy a kind of German government guarantee: Chancellor Merkel has promised in 2012 after the haircut on Greek debt that there will be no second private sector involvement (PSI). And there is also a guarantee  through the European Central Bank. It is no accident that the ECB is currently preparing the markets for Quantitative Easing in the euro area just in the period when Greece announces and communicates its plans of its comeback to the capital markets. Hence, four years and two rescue packages after the outbreak of the crisis, speculators are called upon to be the great bearers of hope for Greece!

In reverse, this implies that, in the future, at best official creditors will be involved (OSI), among them, above all, those euro area partner countries which own the big share of the Greek sovereign bonds through the rescue fund ESM. Either they will have to dispense with their money any time in the future, or repayment will be shifted so far into the future that the next generation will inherit the problem. But don’t expect the ECB or the IMF to be participating: they will be treated as senior creditors!



Indeed, Stournaras anticipates further debt alleviations, which have been held in prospect by the euro finance ministers already in 2012, among them higher maturities and lower interest rates for already paid out emergency loans of the euro partner countries.

As emphasized above: without export growth the debt level is not sustainable and there will need to be repeated OSI until the economy starts growing again. So let us wish the Greek government  good luck and hope that the lack of export growth of the country was significantly caused by a lack of credit for Greek firms and that the announcement of the upcoming ECB Quantitative Easing measures will contribute to a solution of this problem.

The venture may work also in the long run if the Greek government successfully rides multiple equilibria: if investors are credibly conveyed the impression that the Greek programme is run successfully and exports are revived fundamentally and not dependent on ECB action, then investors will gain confidence and will return and lead Greece economically back on track.


Prof. Dr. Ansgar Belke is full Professor of Macroeconomics and Director of the Institute of Business and Economic Studies (IBES) at the University of Duisburg-Essen. Since 2012 he is (ad personam) Jean Monnet Professor. Moreover, he is member of the Adjunct Faculty Ruhr Graduate School of Economics (RGS Econ) and visiting professor at the Europa-Institute at Saarland University, Saarbrücken, and since 2009 Member of the European Parliament's Monetary Experts Panel.  

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