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MANAGING GREEK INDEBTEDNESS:
How Greece can regain fiscal credibility
and avoid the recessionary debt-trap
Nicos Christodoulakis
Athens University of Economics and Business
“Public Financial Management in Times of Crisis”
Hellenic Observatory, European Institute, LSE
London, 22 October 2010
Greece in the Bermuda triangle
Fiscal exhaustion
2009: Deficit 12.6%
Debt 122% GDP
Unsustainable
External
Imbalances
2006-08: 14% GDP
Deep recession
2009: -2%, 2010: -3.4% to - 4%
Greek economy was perennially facing challenges,
but recent problems went out of imaginable proportions
z
Growth vanished in 2009 & 2010, but before it
was strong and survived global crisis in 2008
z
CAD always a pain, but became explosive
only after 2006.
(Main reasons: shipping orders and spree in luxury imports
See: a recent study by the Bank of Greece)
z
Debt-to-GDP surged after 2008, but until then
it was falling for about 10 years, gradually .
The twilight of Growth. For the first time after 10
years, Greece is lagging behind the EU average
5
4
3
2
1
0
-1
-2
Growth rates of GDP per annum
2010: IMF prediction
-3
-4
94
96
98
00
02
04
Source: IMF WEO 2010, Greek Budget Plan 2011
06
08
10
External imbalance explosive, after 2005.
Rise in imports of goods, shipping orders.
Source: IMF WEO Data 2010
-4
-6
-8
-10
-12
-14
CURRENT ACCOUNT
AS PERCENT OF GDP
-16
00
01
02
03
04
05
06
07
08
09
10
New Public Debt surged after 2008
Source: Eurostat, Greek Budget Plan 2011
Additional Debt per Year, Euro billion
2010
2009
2008
2007
2006
2005
2004
2003
2002
avg(2008-2010)
30.0 Euro bn
avg(1996-2007)
10.9 Euro bn
0
5
10
15
20
25
30
35
Types of Debt Distress
Kumar, Masson, Miller: IMF WP, 2000
“Global Financial Crises: Institutions and Incentives”
ILLIQUIDITY: Servicing and paying back the debt,
currently difficult, but feasible in NPV terms
Î credit assistance, roll-over, temporary stand-still
policy effort to increase servicing capacity
INSOLVENCY: In present value terms, servicing and
paying back the debt infeasible
Î debt restructuring, conditionality, major reforms
Risks of misdiagnosing debt distress
A. Taking illiquidity as insolvency
e.g. Mexico 1994, Korea 1998
Demanding excessive effort, hurting growth
B. Taking insolvency as illiquidity
e.g. Argentina before 2001.
Delaying deep-scale action, pathologies increase,
Î correction even more demanding
Thesis: In 2009, there was a one-off fiscal catastrophe,
not a permanent systemic failure
z
In the beginning of the crisis, Greece
suffered higher spreads similarly with other
countries in the Eurozone with large fiscal
and/or External imbalances
z
Markets saw it mainly as a liquidity shock,
caused by the credit crunch.
z
There was no question of solvency in early
2009. CDS similar with Italy, Portugal
Right after the crisis, Greece suffered higher spreads
similarly with other countries in the Eurozone
300
ELLAS
IRELAND
250
SPAIN
PORTUGAL
200
150
100
50
0
-50
01
02
03
04
05
06
07
08
09
In 2009, fiscal deterioration was circumstantial.
Half of new debt was due to new fiscal laxity
BANKS
New
INTEREST
Defense
Revenue Loss
New
Government
consumption
Source: Greek Budget Report 2010
In 2009, there was a huge Primary DEFICIT
for the first time since 1993
Primary Balance of Ordinary Budget (excl. Inv., Euro bn)
8
4
0
2010 est,
2011 forecast
-4
-8
2003
2004
2005
2006
2007
2008
2009
Source: Stabilization Plan 2010, Greek Budget Plan 2011
2010
2011
Policy management during the crisis:
Some suggestions
I.
II.
III.
IV.
Debt management
Fiscal austerity management
Constitutional constraints ahead of the
coming EU reforms in the SGP
Combine consolidation with some growth
Plus: Preserve political stability, promote
consensus and legal enforcement
to avoid speculation on policy reversals in
the near future.
I. Debt management
z
Establish regular and sizeable TB auctions
z
No tax, no audit for capital repatriation if it buys
at par and holds Greek bonds for some time.
z
Encourage use T-Bills as IOUs in private sector
to raise attractiveness to small savers
z
Issue market-exchangeable bonds
Î On planned privatisations,
Î profitable utilities (PPC, OTE), a la NGB, etc.
II. Strengthen fiscal credibility
z
Remove the factors that led to the spree in 2008-09:
Otherwise, party pressures to repeat it before the next elections
as a compensation to the current austerity will be enormous.
z
No more tax surprises: Concentrate on improving the
revenue collection mechanism
z
Instead: Tight fiscal management
z
Constitutional constraints
2. Tight fiscal management:
Nothing new, but takes so long!
z
Centralize revenue collection, e.g.
National Insurance payments could be collected by
Inland Revenue.
Make N.I. compliance similar to Tax compliance
z
Establish Single Payment Authority, not allowing
Ministries to “generate” future obligations.
z
Disconnect Local Authorities Budget from the trends
in Central Government Budget, especially VAT
revenues.
III. Constitutional constraints
z
State guarantees on loans to public
utilities, only by legislation, not merely by
Minister’s approval.
z
Court decisions for retro-active
remuneration in public sector salaries, not
allowed.
z
To eliminate pre-electoral spree, make
appointments in unfunded public positions
illegal.
IV. Today, Greece needs to mix fiscal
consolidation with a growth impetus
There are only three quick ways to spurn growth:
z
Increase public investment funds.
To avoid widening the deficit,
defer national co-financing for two years,
(EC decision Apr. 2009)
z
z
Privatize/IPO state enterprises
Real-estate development via tax incentives and
accelerated land-use permits.
If recession is milder and deflation is avoided
Î debt dynamics may be a lot less dreadful
Government Debt as % of GDP
155
150
145
140
135
130
125
120
A: Official
115
B: Alternative
110
2009
2010
2011
2012
2013
2014