MANAGING GREEK INDEBTEDNESS: How Greece can regain fiscal credibility and avoid the recessionary debt-trap

Transcription

1 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

2 Greece in the Bermuda triangle Fiscal exhaustion 2009: Deficit 12.6% Debt 122% GDP Unsustainable External Imbalances : 14% GDP Deep recession 2009: -2%, 2010: -3.4% to - 4%

3 Greek economy was perennially facing challenges, but recent problems went out of imaginable proportions Growth vanished in 2009 & 2010, but before it was strong and survived global crisis in 2008 CAD always a pain, but became explosive only after (Main reasons: shipping orders and spree in luxury imports See: a recent study by the Bank of Greece) Debt-to-GDP surged after 2008, but until then it was falling for about 10 years, gradually.

4 The twilight of Growth. For the first time after 10 years, Greece is lagging behind the EU average Growth rates of GDP per annum 2010: IMF prediction Source: IMF WEO 2010, Greek Budget Plan 2011

5 External imbalance explosive, after Rise in imports of goods, shipping orders. Source: IMF WEO Data CURRENT ACCOUNT AS PERCENT OF GDP

6 New Public Debt surged after 2008 Source: Eurostat, Greek Budget Plan 2011 Additional Debt per Year, Euro billion avg( ) 10.9 Euro bn avg( ) 30.0 Euro bn

7 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 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 debt restructuring, conditionality, major reforms

8 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 Delaying deep-scale action, pathologies increase, correction even more demanding

9 Thesis: In 2009, there was a one-off fiscal catastrophe, not a permanent systemic failure In the beginning of the crisis, Greece suffered higher spreads similarly with other countries in the Eurozone with large fiscal and/or External imbalances Markets saw it mainly as a liquidity shock, caused by the credit crunch. There was no question of solvency in early CDS similar with Italy, Portugal

10 Right after the crisis, Greece suffered higher spreads similarly with other countries in the Eurozone ELLAS IRELAND SPAIN PORTUGAL

11 In 2009, fiscal deterioration was circumstantial. Half of new debt was due to new fiscal laxity BANKS New Defense INTEREST Revenue Loss New Government consumption Source: Greek Budget Report 2010

12 In 2009, there was a huge Primary DEFICIT for the first time since 1993 Primary Balance of Ordinary Budget (excl. Inv., Euro bn) est, 2011 forecast Source: Stabilization Plan 2010, Greek Budget Plan 2011

13 Policy management during the crisis: Some suggestions I. Debt management II. Fiscal austerity management III. Constitutional constraints ahead of the coming EU reforms in the SGP IV. Combine consolidation with some growth Plus: Preserve political stability, promote consensus and legal enforcement to avoid speculation on policy reversals in the near future.

14 I. Debt management Establish regular and sizeable TB auctions No tax, no audit for capital repatriation if it buys at par and holds Greek bonds for some time. Encourage use T-Bills as IOUs in private sector to raise attractiveness to small savers Issue market-exchangeable bonds On planned privatisations, profitable utilities (PPC, OTE), a la NGB, etc.

15 II. Strengthen fiscal credibility Remove the factors that led to the spree in : Otherwise, party pressures to repeat it before the next elections as a compensation to the current austerity will be enormous. No more tax surprises: Concentrate on improving the revenue collection mechanism Instead: Tight fiscal management Constitutional constraints

16 2. Tight fiscal management: Nothing new, but takes so long! Centralize revenue collection, e.g. National Insurance payments could be collected by Inland Revenue. Make N.I. compliance similar to Tax compliance Establish Single Payment Authority, not allowing Ministries to generate future obligations. Disconnect Local Authorities Budget from the trends in Central Government Budget, especially VAT revenues.

17 III. Constitutional constraints State guarantees on loans to public utilities, only by legislation, not merely by Minister s approval. Court decisions for retro-active remuneration in public sector salaries, not allowed. To eliminate pre-electoral spree, make appointments in unfunded public positions illegal.

18 IV. Today, Greece needs to mix fiscal consolidation with a growth impetus There are only three quick ways to spurn growth: Increase public investment funds. To avoid widening the deficit, defer national co-financing for two years, (EC decision Apr. 2009) Privatize/IPO state enterprises Real-estate development via tax incentives and accelerated land-use permits.

19 If recession is milder and deflation is avoided debt dynamics may be a lot less dreadful Government Debt as % of GDP A: Official B: Alternative