With the advent of autumn, the crisis in Greece has entered a new phase. Summer electoral euphoria has faded, holidays are over and society is once again faced with the biggest problem - how to achieve a sustainable economic development model. The Centre for Planning and Economic Research is active in this area and its experts consult the representatives of international creditors during their visits to Athens. Professor Giannis Monogios manages the fiscal and monetary policy department and advises the Minister of Finance Yiannis Stournaras. Maria S. Topalova talked with him not only about the sustainability of Greek debt and the sources of economic growth, but also about widely discussed financial terms such as OSI and GREXIT.
A study of yours published last week found that the situation regarding the Greek debt has deteriorated in recent years, while one would expect the opposite - for it to improve. Could you explain why?
There are a number of reasons that have brought the ratio of debt to GDP to levels higher than those of 2010. The truth is that the main reason is the deeper than expected recession than expected in the country, which has been continuing for five years now and positive growth is not expected before 2014 or 2015. Therefore, the main reason for the increase in debt, despite the PSI haircut, is that the recession has been deeper and we also have primary deficits, which are added to the debt and increase its size.
We see in your study again that servicing the Greek debt is possible in 8 favourable scenarios. Which of these are likely to happen?
Last week, the Centre for Planning and Economic Research announced the results of a study, which aimed to explore the extent to which the Greek debt could be serviced. According to the second Memorandum, the Greek debt, as you know, has to reach 120.5% of GDP. At present, in 2012, we believe that the debt will be around 166% of GDP at the end of the year. So, we studied whether this ratio of 166% could reach 120% and developed 8 alternative scenarios. In practice, there are 4 scenarios and 4 alternatives to them based on certain assumptions about how the economy would develop from now on. We used the growth rate of GDP from a macroeconomic model that takes into account the change in GDP, interest rates, as they would develop by 2020, the formation of primary surpluses necessary to reduce the ratio of debt to GDP and we studied the extent to which this debt could be serviced. In practice, in 7 out of the 8 scenarios, the debt does not seem to follow a sustainable development model due to the reasons I previously mentioned. Therefore, it seems that it cannot be servicedin the absence of a targeted intervention to reduce the debt. In the last scenario, the ratio of debt to GDP stands at 118%, more specifically 118.4%, but is still based on assumptions that I will immediately state. Remember, however, that we are talking about scenarios; these are not forecasts but approximate estimates. Therefore, the results of the analysis are as reliable or accurate as the assumptions we make about them. If our assumptions change, the results will obviously be different. So, I will examine the last scenario where servicing the debt is possible, but under certain conditions. These conditions are basically four in number. The first condition is a return to positive growth rates in 2013 or 2014 and onwards, and possibly a lower average interest rate on the existing debt. Currently, the interest rate is around 4% in real terms, and in our study, we believe that a rate of about 3.5% would be very useful for debt sustainability. In addition to the lower interest rate, we developed scenarios where the fiscal adjustment to the amount of 11.5 billion euro cost cutting would be implemented for two or four years. The third condition we used was the assumption that the amount needed to recapitalize the Greek banks to the amount of around 45 billion euro, which they would obtain through the second Memorandum, would not be added to the national debt and would not worsen its ratio to GDP. Instead, it would come through the permanent European Stability Mechanism (ESM), which will start to function. This extremely important parameter needs to be studied because this automatically reduces the original amount of the debt and it is easier to service a lower level of debt. The last hypothesis formulated is that the privatization programme is progressing on a more realistic basis and it is not expected to bring 50 billion euro, as indicated in the Memorandum but 15 billion euro, i.e. 1/3, between 2013 and 2015. Finally, there is the likelihood of OSI, Official Sector Involvement, i.e. a future haircut of the debt of the official sector, held by European countries. In this respect, a possible reduction would contribute more to the contraction of the ratio of debt to GDP. In conclusion, these are the prerequisites and conditions under which, if the Greek economy developed as expected, servicing the Greek debt in 2020 would be possible. All these things put together form a framework for negotiations, for we Greeks, to try to achieve debt sustainability.
Which of these prerequisites are most probable in your personal opinion?
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