Analysis by trio of European creditors forecasts Greek debt to peak at 201% of GDP in 2016 and that debt relief may be necessary
Greece’s European creditors have underlined the temporary nature of the country’s surprise return to growth by warning that they have “serious concerns” about the spiralling debts of the Eurozone's weakest member.
The economic news came as Greece’s parliament met in emergency session on Thursday to ratify a new bailout deal, although it was unclear whether the multibillion-euro agreement had the vital backing of Germany.
The three European institutions negotiating a third bailout package with the government in Athens said that the Greek economy had plunged into a deep recession from which it would not emerge until 2017.
According to an analysis completed by the European commission, the European Central Bank and the Eurozone bailout fund, Greece’s debts will peak at 201% of its national output (GDP) in 2016.
The study says that Greece’s debt burden can be made more bearable by waiving payments until the economy has recovered and then giving Athens longer to pay. However, it opposes the idea of a so-called “haircut” – or reducing the size of the debt. It is a course of action the International Monetary Fund, which joined the three European institutions in negotiating the latest bailout, thinks may be necessary for Greece’s debts to become sustainable.
“The high debt to GDP and the gross financing needs resulting from this analysis point to serious concerns regarding the sustainability of Greece’s public debt,” said the analysis, adding that far-reaching reforms were needed to address the worries. It forecasts that the Greek economy will contract by 2.3% this year and a further 1.3% in 2016 before returning to 2.7% growth in 2017.
Greece’s debt to GDP ratio will peak next year but will still be 175% in 2020 and 160% in 2022. The IMF views a debt to GDP ratio above 120% as unsustainable.
The analysis emerged shortly after Greece stunned the financial markets by announcing that its economy grew by 0.8% in the three months leading up to the crisis that forced Athens to close the banks and impose capital controls.
Figures from Greece’s statistical agency ELSTAT showed that the country grew more strongly between April and June than the UK, which advanced by 0.7%, even though the last few weeks of the quarter in Greece were dominated by reports of money leaving the country and fears of a debt default.
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ELSTAT also revised away a fall in GDP in the first three months of 2015 and now says that the economy was at a standstill during that period.
As a result, Greece was no longer technically in recession over the quarter since the economy’s output did not decline for two successive quarters.
The GDP data and news that Brussels backed IMF concerns over debt sustainability came as a boost for the Greek prime minister, Alexis Tsipras. Despite rebellion in the ranks of Tsipras’ leftist Syriza party, the 400-page bailout deal is thought likely to pass through the Athens legislature with the support of opposition parties in a vote not expected until the early hours of Friday.
However, the rescue package, worth up to €85bn (£60bn) over three years and urgently needed to prevent the debt-stricken country defaulting and to keep it in the euro, must still be approved by the other Eurozone member states at a meeting of finance ministers in Brussels on Friday afternoon.
The deal, which surrenders powers over huge areas of economic and social policymaking to Greece’s international creditors, also has to be ratified by a number of national parliaments, including Germany’s – a process Athens wants completed in time for it to make a major €3.2bn payment to the European Central Bank on 20 August.
Germany, however, has repeatedly signalled it will not be rushed into green-lighting the plan and said it needs further clarifications before giving it the go ahead. Deputy finance minister Jens Spahn cast doubt on whether the deal would be approved on Friday, saying the Greek government had “come a long way” and shown a “high degree of willingness to reform” but adding: “We need more details in some areas.”
One explanation for the surprise pick up in Greek growth over the second quarter was that imports collapsed - thus boosting the country’s net export numbers - as the government of Alexis Tsipras became embroiled in long talks with creditors.
A breakdown of the figures also showed that deflation played a part in boosting GDP. Activity contracted slightly in the second quarter but prices fell faster, resulting in a rise in real GDP, which is adjusted for changes in the cost of living.
ELSTAT warned that the flash estimate of growth in the second quarter was likely to be revised after more data had been collected.
“Users should note that the present flash estimates are expected to be revised when provisional estimates are produced and disseminated on August 28 on the basis of updated primary data that will have become available at that point.”
The worst of the Greek crisis occurred in July, with the banks shut for three weeks and restrictions put on cash withdrawals. As a result of the almost complete shutdown of the economy, the International Monetary Fund believes the Greek economy will shrink by around 2% in 2015 as a whole.
Some analysts believe that the decline will be much more profound given that capital controls are still in place.