Greece Through The Crisis: Taking Stock and Looking Ahead The Economist 16th Roundtable with the Government of Greece Athens, July 3, 2012
Key points Greece has come a long way in the past two years mainly by adjusting its cost base McKinsey & Company 1
An unprecedented fiscal adjustment between 2009 and 2012 EUR billion 4.8 10.4 4.7 2.2 1.0 XX XX Primary deficit (% GDP) Total deficit (% GDP) Interest expense Primary deficit 9.8 15.6 10.3 9.1 7.3 36 Troika program in effect 12 23 24 20 12 13 15 24 15 13 11 11 5 2 2008 09 10 11 2012E Primary deficit of other economies Ireland 6.7 Spain 6.6 Portugal 0.2 GDP 233 232 227 215 203 SOURCE: EC The economic adjustment programme for Greece, March 12; EC Economic forecast, Spring 11; ELSTAT McKinsey & Company 2
Greece managed to restore in two years more than one third of the competitiveness lost during the Euro decade Real harmonized competitiveness indicator 1 (1999 Q1=100) vs.37 trading partners Δ Q1 2001 - Q4 2009 Δ Q4 2009 - Q4 2011 115 114.8 110-9 105 100 +24.1 105.8 95 90 90.7 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 1 Based on unit labor costs indices for the total economy SOURCE: ECB; Bank of Greece McKinsey & Company 3
Contraction has been achieved primarily on the cost side (95%) Primary deficit, EUR billion Tax increase in fuels, tobacco, spirits One off taxes VAT increases Pension cuts Public sector wages cuts Defense spending slowdown Deferral of public investment program Cuts in public employees headcount and salaries Streamlining of health insurance expenses Pension cuts Deferral of public investment program 24 2 12 Intro of solidarity contribution Tax increases (VAT, excise, RE) 10 1 6 5 2009 Revenue Cost 2010 Revenue Cost 2011 SOURCE: EC The economic adjustment programme for Greece, March 12; press search McKinsey & Company 4
Key points Greece has come a long way in the past two years mainly by adjusting its cost base Further adjustment needs stronger output and lower sovereign risk McKinsey & Company 5
Less than 15% of total bailout funds made their way to the real economy EUR billion 69 142 59 44 36 26 29 19 3 2010 2011 2012 Total Redemptions PSI "sweetener" Interest Primary deficit Available cash SOURCE: Ministry of Finance; press McKinsey & Company 6
Investments are shrinking even faster than GDP since the crisis outbreak Nominal GDP at current prices Percent (EUR billion) Private consumption Public consumption Investment Trade balance 233 232 227 215 209 73 (169) 73 (168) 75 (169) 75 (162) 75 (157) 18 24 (55) -14 20 18 (42) -11 18 16 (37) -9-7 17 15 (31) -5 16 15 (30) Real GDP growth Percen t 2008-0.2 09 10 11 2012E -3.3-3.5-6.9-4.8 SOURCE: Eurostat; IMF Mar 2012 review; ELSTAT McKinsey & Company 7
Investment-driven growth will remain elusive unless Greek sovereign risk recedes to reasonable levels for doing business Our probabilities for Grexit (Greek Exit) remain unchanged in the range between 50% and 75% over the next 12 to 18 months. Citigroup; June 18, 2012 Carrefour, Europe's biggest retailer, is pulling out of Greece in a sign companies are struggling to do business in a country where demand has plunged due to a debt crisis and whose future in the euro is in doubt. Reuters; June 15, 2012 Credit Agricole in talks over Greek bank sale. Top insurer pulls cover for exports to Greece. Euler Hermes says won't underwrite new Greek business. Reuters; July 2, 2012 Reuters; May 30, 2012 Yields on 10-year government bonds Percent 35 30 Entry of Greece in EMU 25 20 15 10 5 0 2000 02 04 SOURCE: Thomson Reuters Datastream; Eurostat; McKinsey 06 Greece Portugal 08 Ireland Italy Spain France 1 st MoU 2009 deficit restatement Lehman bankruptcy 10 2011 Germany McKinsey & Company 8
Key points Greece has come a long way in the past two years mainly by adjusting its cost base Further adjustment needs stronger output and lower sovereign risk 3+2 recovery and enablement challenges need to be addressed decisively by the end of the year McKinsey & Company 9
The vicious circle that needs to be broken From illiquidity to insolvency Banks withdraw credit to preserve capital adequacy Underperforming revenues widen the deficit Fiscal stress sustains sovereign risk & deters investment McKinsey & Company 10
The virtuous cycle: 3+2 fights to be won at all cost Introduce the Economic Development & Reform Unit (EDRU) under the PM, to oversee and coordinate structural and enabling initiatives Establish the Talent Placement Restoring liquidity in the domestic market Reactivating the domestic banking system Generating fiscal surplus by outsmarting tax evasion Unblock stalled infrastructure projects (e.g., motorways) and launch 3-4 new growth-critical projects using bilateral and PPP arrangements Revise the Fast Track framework and upgrade Invest in Greece Launch 5 vertical programs to remove administrative & regulatory barriers; Office (TPO) to provide growth incentives in a new economic development legal framework hire and deploy local and international Introduce internationally proven best practices in tax talent (~200 Set up the National Liquidity Immediately Finalize Relief terms & conditions Growth Fund for evasion the (> recapitalization 3 bn) detection, to segmentation of Greek banks; and collection FTE) into pivotal immediately address the maintain liquidity option crunch restore of leverage intrinsically investment latest Selectively robust EU summit businesses review decisions tax system to simplify senior public (20-100 employees) using Address strict criteria crucial and conditions and ease tax pressures in areas sector positions flows issues a common affecting commercial private investor appetite (sovereign underwriting platform overseen portfolio by tail the risk, Bank valuation, of Greece warrants affecting on growth HFSF stake) and design Create an additional Small appropriate Business concessions Support Fund providing dedicated funding (< 200 Mn) for Lay small the / regulatory SOHO businesses foundation to ensure to allow social broad equality restructuring and consolidation synergies McKinsey & Company 11
Key points Greece has come a long way in the past two years mainly by adjusting its cost base Further adjustment needs stronger output and lower sovereign risk 3+2 recovery and enablement challenges need to be addressed decisively by the end of the year Igniting the Greek economy on these fronts can turn on a bright light at the end of the tunnel McKinsey & Company 12
The IMF base case scenario projects more than 13 'lost' years for Greece GDP at 2005 prices indexed at 2007=100 Real GDP growth; % 100 98 2007 real GDP at 210 bn Post-recovery GDP growth rates reach pre-crisis levels 4 2020 real GDP 3at ~ 208 bn 96 94 2 1 0 92-1 90-2 88 86 84-3 -4-5 -6 0 2007 08 09 10 11 12 13 14-7 15 16 17 18 19 2020 SOURCE: IMF Mar 2012 Review; ELSTAT McKinsey & Company 13
49 billion in GVA and 520 thousand new jobs could be added in the next decade ESTIMATES GVA billion at 2010 prices Employment Thousand jobs Rising stars Retail 2 Agriculture Food manufacturing Energy Tourism 2 83 2 20 8 13 13 27 104 5 22 10 15 18 34 132 9 24 13 19 22 45 +49 1 (+59%) 2.280 30 80 810 470 240 650 2.430 60 720 520 280 80 770 2.800 100 780 610 360 80 870 +520 (+23%) 2010 2016Ε 2021Ε 2010 2016Ε 2021Ε Almost quadrupling growth rate in a 10-year horizon vs IMF projections Positive contribution in trade and fiscal balances by 16-17 bn and ~ 7 bn ~20% real productivity increase 1 ~ 55 billion in GDP terms; 2 Tourism and Retail are depicted in 2009 figures instead of 2010 SOURCE: Greece 10 Years Ahead McKinsey & Company 14
There is potential to add 12-20% on top of forecasted GDP by acting on these 13 sectors of the Greek economy IMF projection ESTIMATES Additional impact from G10YA Sectors GDP EUR billion; 2010 prices 227 246 27 293 47 Equivalent to 55 billion GDP upside identified in Greece 10 Years Ahead less 8 billion captured in IMF forecast 227 219 246 2010A 2016E 2021E SOURCE: Greece 10 Years Ahead McKinsey & Company 15
Concluding remarks Greece is almost halfway there the progress of the last two years should not be underestimated or underappreciated The second half needs pro-growth adjustment and a more benign international perspective that does not scare investors away It s time to focus 5 immediate priorities should consume 80% of the agenda and the energy of the Greek government till the end of 2012 Regaining momentum is key! Decisive steps now can overturn the gloomy outlook for the rest of this decade McKinsey & Company 16
Greece Through The Crisis: Taking Stock and Looking Ahead The Economist 16th Roundtable with the Government of Greece Athens, July 3, 2012