Handelsblatt: The pandemic and the energy crisis took Greece back

First the recession of the coronavirus in 2020, after the billions of aid for the companies affected by the padlock, now the high inflation of energy prices: In 2022, nothing is going according to the plan for the Greek Minister of Finance Christos Staikouras, which is already in his third year, according to Handelsblatt.

Due to unforeseen expenses, the former “country of crisis” is again struggling with growing deficits. This emerges from the latest edition of the International Monetary Fund (IMF) Fiscal Monitor. According to it, in 2021 the primary fiscal deficit amounted to 5.9% of gross domestic product (GDP). This was the second highest deficit in the Eurozone after Malta, where the deficit was 8% of GDP. The eurozone average was 4.2%.

The high ratio is worrying, because the Greek economy has already recovered significantly from the effects of the pandemic last year. After a 9% decline in 2020, GDP grew by 8.3% in 2021. However, the deficit ratio fell only from 7.9% to 5.9%.

The main reason is the state aid due to the coronavirus. Finance Minister Staikouras distributed about 17 billion euros last year to businesses hit by padlocks and other pandemic restrictions. The aid amounted to 9% of GDP.

The 2022 budget is also already outdated. The government will spend an additional 4 billion euros in the first half of the year to curb rising electricity, gas and gasoline prices for businesses and households. The amount could be further increased in the second half of the year. Rising energy prices are also reflected in the trade balance. The deficit almost tripled on an annual basis in February.

Concern about Greek bond yields

The Athens Minister of Finance is also concerned about developments in the bond market. Last August, the yield on the 10-year Greek bond had fallen to 0.53%, the lowest level since the introduction of the euro. When Greece entered the market with a ten-year bond worth three billion euros in mid-January, Staikouras already had to offer investors a 1.84% coupon. Meanwhile, the ten-year yield is almost 3%.

The state debt agency (ODDIH) wants to raise another 9 billion euros this year, according to the draft plan published at the end of 2021. Whether it will remain so, however, is uncertain in view of the increase in yields.

This evokes bad memories: After Greece ran a budget deficit of 15.4% in 2009, the country lost access to the capital market in the spring of 2010. This was the beginning of an economic crisis that lasted eight years.

Is a new crash planned now? Analysts at Standard & Poor’s do not see this risk. On Friday, they upgraded Greece’s credit rating to BB +. This means that for S&P, as well as for the Canadian rating agency DBRS and the German Scope Ratings, Greece is now only one step away from the category of debtors owed for investment.

S&P analysts justify the upgrade with the good growth prospects of the Greek economy, which is expected to grow by 3.4% this year and an average of 3% per year until 2025. The agency also reports the high liquidity reserves of the state and the the Conservative government’s ambitious reform agenda as further strengths. Prime Minister Kyriakos Mitsotakis aims to return his country to the coveted investment level next year.

The IMF and the ESM are sure

In fact, despite the rise in bond yields, the situation today is different from 2010. Greece has by far the highest debt ratio of all euro countries. However, about 80% of its liabilities are due to public creditors, such as the Euro Stability Fund (ESM).

Only about 20% of Greek public debt is in the form of negotiable bonds, and about 1/4 of it is in the European Central Bank as a result of bond purchase programs. What also reassures analysts is that the country could only be refinanced from its reserves for about three years without new issues.

The IMF is also confident about the evolution of the debt. The Fund expects Greece to return to a primary surplus of 1.1% of GDP in 2023. The surpluses are expected to gradually increase to two percent by 2027.

After Greece’s public debt ratio reached a record 211.9% in 2020, the IMF expects it to fall to 185.4% this year. In 2027, the ratio is expected to decrease to 160.7%.

ESM chief Klaus Regling is also not worried about the creditworthiness of his biggest debtor. It mainly points out the long maturities of the Greek debt, on average 20 years, compared to the EU average of eight to nine years, and the lower interest rates. At the Delphi Economic Forum, where the ancient Greeks consulted their oracle, Regling now assured: “Greek public debt is sustainable.”