Brussels blog

Financial commentators, like financial markets, move in herds.  Is the herd wrong about Greece?

The herd takes the view that Greece will sooner or later have to restructure its debt.  According to herd thinking, the €110bn rescue plan arranged for Greece by its eurozone partners and the International Monetary Fund merely buys some time for the Greek government – and for its European bank creditors.  The herd predicts a “haircut”, or loss, for Greek bondholders of 30 to 50 per cent of the face value of their bonds.  All this is likely to happen towards the end of 2011 or in early 2012, says the herd.

But the herd should listen to what the IMF is saying and should take a close look at the latest statistics from the Greek central bank.  First, the IMF.  The Fund’s highest-ranking officials are unquestionably impressed with Greece’s progress in meeting the tough conditions set for receiving financial assistance.  More than that, the IMF experts are convinced that the risks of a Greek default outweigh the potential benefits, both in terms of the danger of international contagion and in terms of what is objectively the right course for the Greek economy.  The IMF makes the important point that the pressing task for Greece is to reduce its primary deficit – the deficit net of interest payments – not the public debt.  Debt reduction will follow in due course.

Next, the Greek central bank’s data.  Figures released on Monday showed that the central Greek government’s deficit fell sharply by almost 42 per cent in the first half of this year compared with the same period of 2009.  Budget deficit reduction is proceeding faster than foreseen under the eurozone-IMF plan.  The tax increases, wage cuts and chopping of the public sector that Prime Minister George Papandreou is carrying out are cutting consumption and taking a heavy toll on people’s living standards.  But these measures are already making a visible contribution to putting the public finances back in order.

Are the central bank’s data reliable?  Well, it is undeniable that Greek statistics fell into disrepute after the newly elected socialist government disclosed last October that the national budget deficit was far higher than its predecessor had admitted. And yes, this is a problem that goes back all the way to the covert statistical fiddling that was carried out to ensure that Greece qualified for eurozone entry in 2001.  But the central bank is at the forefront of those Greek institutions that want to put the past behind them.  Most economists I know do not question the accuracy of the latest Greek figures.

No one can doubt that Greece still has an arduous mission ahead.  The Greek public debt is likely to soar to close to 150 per cent of gross domestic product over the next three years.  But the history of the European Union shows that other countries with high debts have managed to bring them down quite successfully – pre-crisis Belgium and Ireland are just two examples.

More troubling, in my view, is the question of where Greece’s economic growth will come from in the future.  The old Greek model, if you can call it a model, is finished.  The new model is not yet built.  But to judge from the results of the first phase of the Greek austerity programme, it would be premature to regard a debt default as automatic.