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Victoria Mindova

Gikas Hardouvelis is one of the most influential financial analysts in Greece. Eurobank’s chief economist and a professor at the University of Piraeus, he was an economic adviser to Prime Minister Lucas Papademos, who headed a three party coalition government from November 2011 to May 2012. In a conversation with Victoria Mindova, he hides neither his disappointment in the state policy towards the Greek banks, nor, however, his optimism that Antonis Samaras’ government has a chance to correct the mistakes of the recent past.

Greece has adopted the fiscal adjustment measures and the budget for next year. The bailout, however, is late. Why is that?

The bailout is late because the supervisory Troika’s report on the development of the reform effort is late too. The report itself has been delayed also because there is a disagreement between the International Monetary Fund and Europe on whether there should be a second haircut of the Greek debt or not. This is the so-called OSI (Official Sector Involvement) or the debt that the official sector holds. The Greek government at the time of Lucas Papademos insisted on OSI. The Europeans did not want to reach into their pockets to grant more money and so a middle road was found last February, when Greece implemented the PSI (Private Sector Involvement).

Now, the problem is back, because the Greek economy has shrunk more than the lenders’ plan anticipated. We do not know how it will develop and what kind of compromise will be worked out. We will wait for the formal report by the supervisory Troika.

So far, the lenders have not accurately forecast the impact of recession on the Greek economy. The austerity measures have had a much larger negative impact on economic development and the economy cannot withstand more pressure.  Of course, it is not easy for the lenders to say, "Give Greece more money," because the country did not perform its duties on time in the recent past.

Greece may now have satisfied its obligations and may have adopted a law including all the measures under the bailout agreement, but the other counterparty, that is, the 16 Eurozone countries and the IMF, no longer trusts us so easily.  Greece will receive the promised aid in the end, but it will not come quickly.  Greece needs liquidity to emerge from the recession. As an economist, I think that many of the present fiscal adjustment measures should take place later, over 2015-16, and that the European money should arrive faster. For the time being, however, the opposite is happening - fiscal consolidation measures are being taken first and the funding comes afterwards.

Is it likely for Greece to default on Friday, when the bond loan of five billion euro to the European Central Bank will mature and the country has not yet received the financial aid?

No, there is no such danger. The Ministry of Finance will again issue short-term T-bills to raise the necessary funds to cover the maturing bills.

Was it an information trick the warning by Minister of Finance Yiannis Stournaras that if Greece did not vote the measures by the beginning of November, the country would not be able to meet its needs and was likely to default?

No, it was not a trick.  It is the reality. For example, the maturity of the T-bills issued in August takes place in November. This necessitates the issuance of new short term T-bills in order to pay off the old ones.  But to issue new T-bills the ECB has to give the green light.  In addition, arrears of the State sector towards private sector providers are increasing, depriving the market of much needed liquidity.   Exporters are also facing immense liquidity problems.  Healthy companies are pressured. This liquidity will not come unless the new measures were voted. Remember also, the Greek state is still running a primary deficit and the liquidity constraints in the private sector will not be resolved without a recapitalization of the Greek banks.

Will there be a new debt restructuring, and if so in what form? Will it be in the form of new cuts in the value of bonds held by private investors (new PSI) or in another form?

In 2013, we will enter the sixth year of recession. Therefore, the debt as a percentage of GDP is still growing. The larger part of the Greek debt is now in the hands of European countries and the International Monetary Fund. This means that if there is a new debt haircut, it will depend on decisions of European leaders and the International Monetary Fund.

Whether the debt is sustainable or not depends on whether the Greek economy can pay the interest rates on that debt. If Greece starts to produce a primary surplus in 2013, then it will be able to pay the interest. When we emerge from the recession, debt servicing will no longer be such a big problem. What will remain a problem, of course, will be the size of debt, which will be hanging as a Damoclean sword, always reminding investors the default possibility. Thus restructuring or some other sort of financing may eventually occur.

Do you expect a restructuring of the Greek debt in 2013?

Politically it is extremely difficult for Europe to adopt a similar restructuring to PSI and so soon. We may, however, see a tiny reduction in debt from lower interest payments.  I do not see a bigger restructuring just for Greece. If a bigger restructuring is undertaken, it will be a general restructuring of debt, not only in Greece but also in other countries, as for example recapitalizing European banks directly through ESM and not via state funding.

Does this mean that we will expect Europe to provide a general solution to the debt crisis?