Article / 07 September 2016 at 14:37 GMT

Greece is still grinding toward Grexit

Managing Partner / Spotlight Group
United Kingdom
  • The Greek economy grew between April and June; although only by 0.2%
  • An estimate by the statistics service show it shrank by 0.9% year-on-year
  • Following sales-tax increases and pension cuts, consumer spending has fallen
  • The economy has contracted by 25% since the debt crisis in 2009
  • It is time to be seriously contemplating “Grexit” once again


Customers queue outside a Greek bank after capital controls were imposed in 2015. Photo: iStock

By Stephen Pope

It has been a while since I took a look at the tricky trouble spot of the Eurozone...yes, you got it...Greece. Perhaps it was because too much attention has been directed toward how the Eurozone will be affected by the UK leaving the wider European Union, or what the next excuse from European Central Bank president             Mario Draghi will be at his press conference tomorrow?

With that in mind I will conduct an economic health check on this distressed nation.

The broad picture

The Greek economy advanced 0.2% during the second quarter of 2016, recovering from an upwardly revised 0.2% contraction in the previous period. This was, however, lower than a 0.3% expansion in the preliminary estimate.  

Gross fixed capital formation increased 1.0% while household consumption edged down 0.2%, government spending retreated 0.7%, exports declined by 1.0% and imports fell 0.4%. The National Statistical Service of Greece estimated that the economy had contracted by 0.9% year-on-year.

Source: National Statistical Service of Greece 

Greecw's seasonally-adjusted unemployment rate came in at 23.5% in May 2016, unchanged from the April rate and down from 25.0% a year earlier. This is, however, still the highest rate in the Eurozone.

The youth unemployment rate in Greece increased to 50.3% in May from 47.4% in April of 2016, still running at over double the national rate. The sharp rise and limited recovery can be traced back to the sovereign debt crisis and inability of Greece to adjust within the straightjacket of the euro as it was at a record low of 20.1% in May of 2008.

The unemployed still feel little hope as job vacancies fell 2.1% year-on-year to 15,367 in Q1 2016 from 15,694 in the same period of 2015. What is surprising is that with the pressing need for internal devaluation as a policy tool to improve economic efficiency, labour costs are higher now than in the pre-crisis period. Labour costs decreased to 87.60 index points in Q2 2016 from 91.30 index points in Q1, however, this compares to 84.4 index points in Q1 2008.
Source: National Statistical Service of Greece, Eurostat

Buoyed by bailouts

Greece is being kept afloat by an ongoing series of international bailouts...

  • #1 May 2010 €110 billion ... #2 October 2011 €219 billion ... #3 August 2015 €85 billion 
  • ∑ €304 billion 

... issued on condition of successive spending cuts and reforms. Future instalments of cash are still dependent on satisfactory reviews as to how successful Greece has been at implementing cutbacks and reform.

  • In July 2011 the repayment period of the first bailout was extended from seven to 15 years.

  • In October 2011 50% of outstanding Greek debt was written off. 

  • The subsequent bailouts have been largely driven as Greece has been unable to service its bailout obligations. 

The third bailout process leads to the disbursement of the second tranche of the programme, amounting to €10.3 billion. The is disbursed in several steps, starting with a first disbursement in June 2016 of €7.5 billion and of this €5.7 billion are used to cover debt servicing needs and €1.8 billion for the clearance of an initial part of arrears to support the real economy.  

Subsequent disbursements, to be used for arrears clearance and further debt servicing needs will be made after the summer. The disbursements for arrears clearance will be subject to positive reporting by the European Institutions on the clearance of net arrears and disbursements for debt servicing needs after the summer will be subject to the completion of a list of milestones that Greece has signed up to.

This comes at a time when Greece is still feeling the impact of an influx of migrants although the ongoing loan programme has been a contentious issue for creditors. Greece recorded a level of Government debt to GDP at 176.9% in 2015 and the issue of debt relief has recently seen Germany and the International Monetary Fund holding opposing points of view.

The IMF insists that Greece cannot meet its budget goals without a further easing its debts, while Germany remains highly sceptical of cutting Athens more slack. Angela Merkel, the German Chancellor, received an electoral body blow last weekend as Alternative Für Deutschland pushed her CDU party into third place in the state election of Mecklenburg-Western Pomerania. (SPD 30%; AfD 21%; CDU 19%).

Germany is facing a rising wave of euroscepticism and any wavering on debt forgiveness, after Germany has already paid so much toward the Greek bailout will harm the CDU electoral prospects at the general election in October 2017. It is almost unthinkable that in the CDU, there are questions as to Merkel being a political liability.

For now, Germany and the IMF has hammered true European style a compromise whereby Greece will get partial debt relief but not until 2018...but only if Greece undertakes even more swinging reforms.

A move to the far right in Germany will make Angela Merkel
less likely to extend relief to Greece. Photo: iStock

Gloomy prospects

Deeper cuts will not help Greece and despite domestic economists suggesting that there will be a recovery in H2 2016, they are assuming no downturn in consumer confidence or spending. That will be a flight of fantasy if more cutbacks are imposed from Athens.

The European Commission and Bank of Greekceboth project a 0.3% economic contraction in 2016 while the OECD forecasts a gentler 0.2% decline. A darker tone emerges from the credit rating agencies Moody’s and S&P — they expect the economy to shrink 0.7% and 1.0% respectively. 

Therefore, if more cuts are required I am struggling see how the EU sees the Greek economy staging recovery of 2.7% in 2017.

Given the UK left the an unthinkable “Grexit” so unlikely?

The UK vote to leave the EU on June 23 certainly upturned the tables of conventional thinking and maybe there is life in my old call for Greece to leave the single currency after all. I still believe it is as right now as it was then.

Back in 2008/9 it was regarded as the first step on a slippery downward slope for at that time it was widely feared that if Greece went then the markets would put pressure on other ailing nations such as Ireland and Portugal.

However, now the mood may have altered and perhaps such a move would not prove to be such a catastrophe. Europe has safeguards to limit the financial contagion, (in that regard Italian banks are more problematic) and it's seen that Greece is in effect just a small tiny part of the Eurozone economy.

If free from the yoke of the euro, it would regain financial flexibility and be able to operate with a currency that actually reflected its true level of economic competence. Greece may have an issue in accessing the international capital market where 10-year borrowings could initially soar by as much as 500 basis points. The current Euro yield on the Greek 10-year debt is 8.22%.

“Grexit” and the adoption of a new independent although severely weaker currency would face an immediate issue of currency flight risk and so the Bank of Greece would have to impose capital controls that in the short term would harm the economy.

The weaker currency that would result from leaving the euro is not a panacea, however, following nine years of struggle and strife, the current plight of Greece is terminal.

— Edited by Martin O'Rourke

Stephen Pope is managing partner at Spotlight Ideas

Michael O'Neill Michael O'Neill
Great article, Stephen. I think Greece should "reboot". Let the creditors burn and give the 50% unemployed youth a chance at a life.
opportunist opportunist
There is not such polit ical setup elsewhere in Europe yet - short term pain against long term gain. I know Brexit but there is a big difference - UK was not perceived to live off EU money while Greece is just the opposite from the time it's join the EU if not even sooner. Sad it be this crisis has only political solution left - how much peaceful we'll see. Until then just trade assets better cashflows tied to them in relative way one against another, macro setup clearly d etermined by ballooning B/S of central banks becoming "markets" elsewhere.
Stephen Pope Stephen Pope
Dear Michael,

Thank you for your kind words. Certainly one has to feel for the Greek the Spanish the best educated and least hopeful generation.

Sadly there seems to be a air of making pointless unproductive roles during the summer season. I hear of hotels where there are even pool attendees whose sole purpose is the walk among the sunbathers and see if they want their sunglasses cleaned. Useful...sure...but not a task one cannot do oneself. The trouble with that is that if a guest has a need to remove suntan oil or cream ext from a smeared lens, if one does it oneself it is as though one denies the sunglasses cleaner their reason for being there.

Non-jobs are almost worse than no jobs.

Stephen Pope Stephen Pope
Dear Opportunist,

the entire situation within the Eurozone appears to be in a muddle. Greece was never in a sharp enough economic state to join an politco-eco club where Germany set the rules. We can see how creaky other nations are as well...Italy, Portugal etc.

The reason for keeping Greece in back during 2009 were based on the fear of a market rout by turning on successive struggling nations. Draghi's untested OMT scared speculators off when it would have been a good exercise to see just how far yield spreads had to widen before his big bazooka was launched into action. But he created a free ride for the speculators on spread tightening.

The money lent to Greece has been "given" to will not be coming back ever. The restrictions of the one size fits all economic policy has extracted too high a price in terms of human suffering and sense of despair. I imagine that no one in the EZ wants to let Greece go because it will imply €300Bn has been wasted... Steve


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