Because the Ministry of Finance is not afraid of a new debt crisis

Of Tasos Dasopoulos

The relatively recent experience of the multi-year economic crisis has led many – experts and non-experts alike – to compare the current situation, with high inflation, forthcoming ECB interest rate hikes and war uncertainty in Ukraine, to the prelude to a new debt crisis. for Greece.

The truth is that the first debt crisis started with a global crisis. Following the earthquake in 2007 caused by the collapse of US investment banks and the spread of the crisis in Europe in 2008 and 2009, Greece was found to be the “weak link” in Europe. The economy suffered from huge twin deficits (the budget deficit had reached 15.8% of GDP in 2009 and the current account deficit 16.2% of GDP) and debt at 120% of GDP, double that of – then‒ Eurozone average. The crisis erupted in the year in which Greece would have to refinance a debt of about 50 billion in one year, of which 16.8 billion was interest. The markets then said “no”, asking for too high interest rates. Thus, the vicious circle of the Memoranda opened.

Today things are completely different. Greece together with the EU experiences a purely exogenous crisis, with many episodes. The first was the coronavirus pandemic, which froze economic activity and increased debt and deficits. After the opening of the market, in the middle of 2021, it was converted into energy, due to insufficient supply and problems in the supply chain. The problem was exacerbated by the war in Ukraine, which added to the risk of a food crisis and even higher fuel prices due to Moscow’s blackmail, mainly in the EU. , in response to the sanctions imposed on her. The difference, however, is that, from a recession of 9% in 2020 due to the coronavirus, Greece has fully recovered in half a year (in the first half of 2021 we still had restrictions due to the coronavirus), recording a growth of 8.3% , while reducing its deficit by 3% of GDP and its debt by 13% of GDP, maintaining expectations for positive growth for at least the next 5 years.

The resilience of the economy did not come without a price. It took eight years, three Memoranda, tough austerity, income collapse, very high unemployment and hundreds of changes in the State, the economy, labor, banks and other businesses and, of course, 275 billion loans from European institutions and IMF for the fortification of the economy in the face of successive crises.

Debt safe

The first element of stability is that today public debt, although it remains the highest within the Eurozone, at 193.3% of GDP, is more “safe” than that of Italy, Spain and Portugal and many Central European countries . The reason is that through the Memoranda, out of the 355 billion of the current debt, 2/3 of it (242 billion) is in the hands of the so-called official sector (ie in the hands of the Eurozone and the European Stability Mechanism), locked in interest rates less than 1% and expire in 30 years. The main thing: From this debt is repaid today only the bilateral loan of 52.3 billion with the countries of the Eurozone. Of the remaining 103 billion on the market, 38.7 billion have been bought by the ECB through PEPP. The financing needs this year do not exceed 16 billion euros, of which the interest is 3.2 billion euros. Greece currently has cash of 38.6 billion euros, which can cover the financing needs for over three years. Neighboring Italy, for a debt of 2.7 trillion. about 900 billion euros will have to be borrowed from the markets. It is clear, then, which of the two countries is burdened by the forthcoming rise in ECB interest rates.

In view of the increase in ECB interest rates that will begin next month, the management of the Central Bank of the euro has pledged to continue to support Greece, buying securities where the interest rates demanded by the market will be very high. Also, with the recovery of the “certificate” of the investment grade within the first half of 2023, the yields of Greek bonds will decline.

The economy is recovering

Apart from the positive characteristics of the debt, Greece is now on a growth trajectory, which at average levels for the period 2021-2026 will reach 3.5% with the help of Community funds amounting to 70 billion euros from the Recovery Fund and the NSRF 2021-2027. This means a rapid reduction in debt, which is expected to reach 150% of GDP in 2025, a return to primary surpluses in 2023 and a balanced budget also in 2025.

At the same time, the income of households is supported and gradually increases and the resilience of the citizens themselves is now greater. Government planning wants to make up for lost time in crises. Support measures have reached 43 billion in the pandemic, while from November 2021 until now there has been income support with measures against the accuracy of about 8.5 billion. Unemployment fell from 17.2% in 2020 to 13, 2%. At the same time, tax and contribution reductions of about 5 billion have been made, retroactively distributed 1.4 billion to 1.7 million retirees, while the minimum wage has increased by 9.7% this year.

Banks lend again

Banks are returning to the economy, having reduced red loans to 11.6% at the end of the first quarter of 2022, and are expected to reduce red loans to single digits by the end of the year. At the same time, they have made the first moves to increase credit expansion to households.

Among other things, during the pandemic, Greece once again reformed its insurance policy, creating a compensatory fund for supplementary insurance, and set up a debt settlement grid to finally clear red loans from banks. With the help of resources from the Recovery Fund, it has planned another 108 structural reforms that aim to improve the functioning of the State and the productive model of the economy.