Article / 11 August 2015 at 10:15 GMT

What's the cost of Syriza to Greece? 5% in GDP

  • Greece growth forecasts down from +2% to -3% in less than a year
  • Slump would have been less severe under previous government 
  • Syriza government has set the country back at least a year

By Mads Koefoed

Amid news that Greece and its creditors have reached agreement on a third bailout worth €86 billion, it is worth reflecting on the costs of the 'Syriza experiment' thus far. 

Available economic data for the Greek economy unmistakably point to an economy in the midst of a nosedive. More data will be released in coming weeks as national parliaments in the euro area will vote on the bailout. The Greek parliament must immediately pass 35 "prior actions" to unlock the package.

Stock and bond markets
Things were looking brighter for the Greek economy a year ago. In August 2014 the European Commission's economic conditions index stood at 102.2, having recovered more than 20 points from the depths of the depression. 

Later, a GDP report covering Q3 would show growth of 1.5%, the highest since 2008. It would also, as it turned out, mark the highest growth rate before the economy started to slide again.

Admittedly, all was not well in Greece, far from it. Wages had plummeted in real terms. Pensions had been cut, and the unemployment rate was still north of 25% (26.2% for August 2014). Against this backdrop it is perhaps not surprising that Syriza emerged a clear favourite for many Greeks, and the party went from strength to strength in various polls. 

Towards the end of 2014 it was clear that Syriza was on the brink of grabbing power and given the party's various explosive remarks, including the lack of support for euro membership, it is of no surprise that investor confidence started to wane. 

Why would you invest in a country where not only the political landscape was uncertain, but also the currency? Taking on euro debt for investment only to find yourself with assets denominated in another (drachma 2) currency behooves few investors.

The then-prime minister Antonis Samaras, from the New Democracy party, which ruled in a coalition with PASOK, announced a presidential candidate on December 9 2014, only to see the candidate defeated (in a third round of voting) on December 29. 

New elections were scheduled for January 25 and the rest, as they say, is history. Syriza swept to power and the party even gained further support in the coming months as it stood defiantly against creditor demands. 

Support has dwindled somewhat in recent weeks as the prime minister Alexis Tsipras has negotiated a deal with the international credits: a deal which could end up being even stricter had Syriza had not left the negotiation table and called a referendum on the creditors' then-proposal.

A fresh batch of data out of Greece is dismal reading. The country is undoubtedly back in recession by now with industrial production tanking 4.5% year-on-year in June and manufacturing PMI also showing a sharp contraction with a reading of 46.9. 

Back in mid-to-late 2014 with indicators pointed north the 2015 GDP consensus forecast was close to 2% with some even looking for 3% and the economy was expected to pick up further steam in 2016 with growth at 2-2.5%.

Fast-forward to the present day and the outlook for the Greek economy is dimmed with 2015 GDP expected to show a contraction of 1.2%. Just yesterday an EU official suggested that the contraction could be much larger at 3% (and 2016 will probably be flat). From +2% to -3% in less than a year!

 Fresh economic data from Greece makes dismal reading. Photo: iStock

This is not to say that all was fine with the old New Democracy-PASOK coalition – far from it. The current instability would likely have been avoided and ergo the current slump in economic activity, but the old coalition had been continually dragging its feet when it came to reforming the country and carrying out the promised privatisations. 

With the new bailout programme (very nearly) in place much of the uncertainty will ease and investments (from both domestic and foreign investors) can begin to flow back. There is still, however, the small matter of the next election which could come quite soon as Tsipras seeks to consolidate his power in Syriza. Greece is, on the words, not a closed chapter yet, and the Syriza experiment has set the country back at least a year. 

Let the recovery begin... again!

– Edited by Oliver Morrison

Mads Koefoed is head of macro strategy at Saxo Bank
im197 im197
Hello Mads.

I was in your presentation in Athens just when SYRIZA had come to power.
I remember we discussed how the showdown be between Greece and its creditors could induce uncertaity about the economy, but I dont believe any of us were expecting this kind of mess.

I have a few questions perhaps you could answer
1. Do you believe that this agreement is actiually beneficial for the country and will actually help it grow out of this mess? i.e. is it pro growth?
2. Do you believe that this new agreement will actually be enforced by Greek politicians and that another political crisis will not emerge?
3. Given measures agreed upon will most certainly initially deepen the recession, what are the reasons one should invest in Greece and what companies would you choose?

thanks for the input
Zdravkov Zdravkov
@im197 if the answers of first two questions above is YES, NBG is for taking.....
Mads Koefoed Mads Koefoed
1) The reforms will eventually be beneficial, but are no short-term fix. Furthermore, the (rather steep) wage deflation in Greece has helped improve competitiveness considerably.
2) We maintained throughout 1H'15 that a bailout package remained the base case, but the probability of another crisis/Grexit/etc. is by no means negligible.
3) If you have the stomach for it - and is convinced that Greece will stay in the euro (and not default) - then a portfolio of Greek banks could be an interesting, albeit risky, way to go.


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