The former crisis country is struggling again with rising deficits.
(Photo: Reuters)
Athens First the Corona recession in 2020, then the billions in aid for the companies affected by the lockdown, now the high inflation of energy prices: In 2022, for the Greek Finance Minister Christos Staikouras, nothing is going according to plan for the third year.
Because of unforeseen expenses, the former crisis country is once again struggling with rising deficits. That shows the latest edition of the Fiscal Monitor of the International Monetary Fund (IMF). Accordingly, in 2021 the deficit in the primary balance of the budget was 5.9 percent of gross domestic product (GDP). That was the second-highest deficit in the euro zone after Malta, where the gap was 8 percent of GDP. The average value in the euro zone was 4.2 percent.
The high rate is worrying because Greece’s economy has already recovered significantly from the consequences of the pandemic over the past year. After a nine percent decline in 2020, GDP grew by 8.3 percent in 2021. Nevertheless, the deficit ratio only fell from 7.9 to 5.9 percent.
The main reason is the Corona state aid. Finance Minister Staikouras distributed around 17 billion euros to companies hit by lockdowns and other pandemic restrictions last year. The aid added up to a good nine percent of GDP.
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The 2022 budget is already outdated. The government will spend an additional four billion euros in the first half of the year to cushion the rising electricity, gas and petrol prices for companies and private households. The amount could continue to grow in the second half of the year. The rising energy prices are also reflected in the trade balance. The deficit almost tripled year-on-year in February.
Worry about Greece’s bond yields
The Athens finance minister is also concerned about developments on the bond market. The yield on the ten-year Greek bond fell last August to 0.53 percent, its lowest level since the introduction of the euro. When Greece went public with a ten-year bond with a volume of three billion euros in mid-January, Staikouras had to offer investors a coupon of 1.84 percent. The return on the ten-year paper is now almost three percent.
The state debt agency PDMA wants to raise another nine billion euros this year, according to the issuance plan published at the end of 2021. In view of the rising yields, however, it is uncertain whether this will remain the case.
This brings back bad memories: After Greece generated a budget deficit of 15.4 percent in 2009, the country lost access to the capital market in spring 2010. That was the beginning of an eight-year financial crisis.
So is a new crash imminent? The analysts at the rating agency Standard & Poor’s do not see this danger. They upgraded Greece’s credit rating to BB+ on Friday. This means that Greece is now just one step behind the league of debtors worth investing in at S&P, as is the case with the Canadian rating agency DBRS and the German Scope Ratings.
The analysts from S&P justify the upgrade with the good growth prospects of the Greek economy, which is expected to expand by 3.4 percent this year and by an average of three percent annually until 2025. The agency cites the state’s high liquidity reserves and the conservative government’s ambitious reform agenda as further plus points. Prime Minister Kyriakos Mitsotakis aims to return his country to the coveted investment grade rating next year.
IMF and ESM are confident
In fact, the situation today is different from 2010, despite rising bond yields. Greece has by far the highest debt ratio of all euro countries. But around 80 percent of the liabilities are with public creditors such as the Euro Stability Fund ESM.
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Only about 20 percent of Greece’s government debt is in tradable bonds, and about a quarter of that is held by the European Central Bank as a result of bond-buying programs. What also reassures the analysts: the country could refinance itself without new issues for around three years from its reserves alone.
The IMF is also confident about the debt development. The fund expects Greece to return to a primary surplus of 1.1 percent of GDP in 2023. The surpluses are to gradually increase to two percent by 2027.
After Greece’s public debt ratio hit a record high of 211.9 percent in 2020, the IMF expects it to fall to 185.4 percent this year. In 2027, the rate is expected to fall to 160.7 percent.
ESM boss Klaus Regling is also not worried about the solvency of his biggest debtor. In particular, he points to the long maturities of Greek debt, averaging 20 years compared to the EU average of eight to nine years, and the lower interest rates. At the Economic Forum in Delphi, where the ancient Greeks consulted their oracle, Regling now assured: “The Greek national debt is sustainable”.
More: The old danger is returning: Greek banks are threatened with new loan defaults