Greece Set For Growth After Bailout Exit, Says Berenberg Economist

Greece exits the last of its bailouts Monday (Aug. 20), the fifth and last euro zone country to do so, and an economist at Berenberg said the country could turn into a growth leader if it continues with its reform efforts.

“We expect GDP to increase by 2.0 percent in 2018, 2.2 percent in 2019 and 2.4 percent in 2020,” Carsten Hesse, European economist at Berenberg said in a telephonic interview with International Business Times.

Greece’s economy grew for a fifth straight quarter January to March; in year-on-year terms, it grew 2.3 percent. Seasonally adjusted data showed gross domestic product grew 0.8 percent in the first quarter.

Greece got more than 260 billion euros from its euro zone partners and the International Monetary Fund (IMF) to stave off the crisis which shrank its economy by over 26 percent. During the period, however, the country implemented important pro-growth reforms, rebalanced its large fiscal and current account deficits, improved competitiveness, turned around its labor market, brought down its bond yields, and secured more EU funds to support investments.

From Tuesday, Greece will have to get by without new loans from its official lenders — IMF, European Stability Mechanism, European Central Bank (ECB) and the European Commission — and attract money exclusively from private sources.

“Nothing really changes immediately because they received a lot of cash from the bailout program and they issued quite a lot of bonds over the last 6-9 months, so they have a cash buffer of around 24 billion euros which should be enough to cover their needs for the next 2 years,” says Hesse.

Greece follows the other four euro zone ex-bailout countries -- Ireland, Spain, Cyprus and Portugal. Hesse cited the healthy expansions enjoyed by the economies of Ireland, Portugal and Spain for his optimism on the Greek economy. He said Greece could lead the euro zone in growth if it continues its reform efforts to raise its supply potential and make its tax rates more competitive.

Although still far below the 2008 peak, Greece’s employment has rebounded in the past few years and Greece has added 300,000 jobs since the fourth quarter of 2013.

The employment gains looked set to continue, Hesse said, citing the following reasons: economic recovery in Greece and its export markets will boost overall demand; the boom in tourism will continue, requiring more workers; Greece has become more competitive for employers as labor unit costs have fallen; rising business confidence will support more investments and create more jobs; and the current capital controls that weigh on economic activity will be eased further and will eventually be fully removed.

CHALLENGES REMAIN

But challenges remain. Among the long-term challenges are high public and private debt, a large stock of non-performing loans, high tax rates, weak educational performance and emigration.

Hesse says the risk to watch is whether Greece reverses reforms to such an extent that markets take fright again.

Although Greece’s business confidence has improved significantly from the trough caused by the Tsipras/Varoufakis government in early 2015, it still lags behind the other Mediterranean countries. Its tax levels are still very high and Hesse said a cut in corporate taxes would boost growth over the long term.

He thinks the European Union wants to make Greece a success story. Additional efforts to tackle its low productivity, expensive pension system, large public sector and weak banking sector would add to Greece’s chances of success.

Hesse expected the bond yields to fall further, but large liquidity reserve could reduce the risk spreads on government bonds. Greek 10-year bond yields have fallen dramatically since the third bailout in 2015, similar to the trends in bond yields of both Ireland and Portugal following their final bailouts in November 2010 and May 2011, respectively.

As euro zone bond yields are likely to remain subdued while the ECB normalizes its monetary policy only gradually, Greece could see its 10-year benchmark bond yields fall toward 3 percent next year, he said.

The 10-year Greece bond is currently trading around a yield of 4.32 percent.