Greece announced yesterday a deal with its creditors opening the door for a third bailout. The Greek parliament is expected to vote on the plan on Thursday before the Euro-group meets on Friday and other national parliaments vote. This should allow an initial €25 billion tranche to be disbursed in time for Greece to meet a €3.2 billion bond payment to the ECB on August 20th.
Greece has apparently agreed to implement an additional 35 “prior actions” in exchange for a relaxation of the fiscal targets specified by the plan. Instead of achieving a primary budget surplus of 1% of GDP this year, Greece is now expected to run a small deficit of 0.25%, while 2016’s expected surplus has been cut from 2.0% to 0.5%. This suggests that Greece will need to implement little extra austerity in the near term also.

However, the extremely optimistic economic & fiscal projections underlying the plan suggest that it might not last for very long.
Recent survey evidence suggests that the economic impact of capital controls has been catastrophic, with measures of activity collapsing to levels way below those seen even when the economy was contracting at annual rates of 9% in 2010/11.
Of course, such extreme weakness may end when the controls are lifted. But it is not clear that will be very soon. And even if it is, GDP could still fall much more sharply this year than the 2.1% to 2.3% estimate reportedly factored into the bailout’s fiscal projections.

Most of the independent analysts expect a contraction of about 4% or worse. And lasting damage to Greece’s economy and financial system, as well as its fundamental lack of competitiveness, could prolong the slump into next year and beyond.
This, in turn, suggests that even the amended fiscal targets will prove extremely demanding, if not utterly unachievable. Indeed, the downturn in the economy looks likely to push the primary budget sharply back into deficit in the coming quarters. That would leave the surplus targets requiring considerable extra austerity, with corresponding further damage on the economy and to people.

Advertisements