Growth Seen as Greece’s Only Option

by on January 14, 2014 5:53 pm BST

Greece is looking for more help from the eurozone in the form of ongoing lowering of interest rates on existing loans, relief on financing structural funds and to further extend maturities on loans. In the sixth year of Greece’s recession that plunged the nation into emerging market status, the Greek Financial Minister Yannis Stournaras said “we don’t want and we’re not asking for a haircut,” regarding a write-off of the extremely large loans Greece needed to stay afloat. Over €240 billion is loans have been extended out to Greece since their economical demise, and many believe it is unlikely that Greece will ever be able to payback the amount, plus interest.

Austerity has carved out any production from the Greek economy, but the hard measure of drastic spending cuts was the primary term of the loan agreements in order to shape up the slumping budget deficits. The government reported a primary budget surplus of €700 million in 2013, and they expect a larger surplus in the next year going forward. However, Eurostat will assess whether the surplus stands before debt-servicing costs. Prior to the surplus report, the eurozone offered further assistance is a budget surplus was indeed achieved. “That will set the conditions for some sort of debt relief exercise. We’ve worked hard and delivered. There was a decision in November 2012 and we expect that decision to be respected,” said Prime Minister Antonis Samaras.

The additional aid is expected to be limited, but is margin above borrowing costs were reduced to zero from 50 bps, currently, Greece would save €265 million per year and €3 billion by 2022. Another potential option is maturity extension. Currently, loans have an average of 30-years to maturity with a grace period for repayment of 10-years on about 75 percent of its total borrowing. A previous idea was to extend that out to 50 years, and this could smooth out Greece’s repayment schedule and pad any potential bumps down the road. It could also allow for further growth or debt repayment. The annual repayment would be reduced to €5 billion from €8 billion.

Unfortunately, these additional measures would not reduce Greece’s 156.9 percent debt-to-GDP. Only growth can reduce this with inflation reducing the vale of debt overtime, but Greece faces the deflation and the highest unemployment rate on the globe at 27.8 percent. “We might again have to start talking about investment in Greece – setting up a Marshall Plan,” said Carsten Brzeski, aneconomist at ING, referring to the rebuilding effort in Europe by the United States after World War II.

Recent manufacturing data showed contraction in Greece, but the International Monetary Fund (IMF) forecasts Greece growing .6 percent in 2014 and jumping to 2.9 percent in 2015. If growth forecasts are correct and Greeks can find jobs, inflation will pick up. Greece may, then, be able to get on top of its finances.