Market Extra: Greece exits bailout, but ‘public debt tragedy’ persists

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Greece ended an eight-year stretch of bailouts Monday, but it will be years before the economy fully recovers from a collapse that at one point left the country on the brink of exiting the euro.

Moreover, economists fear that Greece is exiting its bailouts just as tailwinds from global — and eurozone — economic growth are fading and as turmoil elsewhere in the region, notably Italy, poses new challenges for policy makers.

Pantheon Macroeconomics

To be sure, Greece’s economy is looking better. Real gross domestic product expanded at 0.9% quarterly pace in the first quarter and economic sentiment is on the upswing, noted Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. And while unemployment remains high at just below 20%, it is falling steadily. Industrial output remains 20% below its pre-crisis peak, though up 15% from its 2014 trough.

Still, even if these trends continue, “it will take an excruciatingly long time for Greece to return to the levels of prosperity it enjoyed before the financial and sovereign debt crises,” Vistesen said in a Monday note (see chart above).

Greek stocks rose Monday, with the Athex Composite Share Price Index GD, +0.32%  up 0.3%. The index is down more than 11% year to date versus a 1.5% fall for the pan-European Stoxx SXXP, +0.57%

Vistesen, like others, puts much of the blame on Greek politicians and the brinkmanship that ensued in the wake of Greece being forced into the arms of the International Monetary Fund and the European Union in 2010, requiring three bailouts. A recovery was cut short as a six-month showdown between the government and its creditors nearly broke the country’s banking system before a deal was reached in July 2015, he noted.

Greece’s European creditors also have questions to answer, he said. A deal was struck earlier this year that will defer payments on 96 billion euros worth of bailout loans, or 40% of the country’s total debt, until 2033, while extending the maturity on some of the country’s other loans. The final bailout tranche was increased, giving 22 months’ worth of cash reserves beginning this month.

While that sounds great, Vistesen noted the catch: Greece must commit to a primary surplus — a surplus excluding interest payments — of a “whopping” 3.5% of GDP until 2022 before transitioning to a ratio of 2% to 3% of GDP until 2060.

“The idea is that Greece will avoid debt relief as long as it sticks to this plan,” he wrote. “But this makes little sense; no country can precommit to a primary surplus for such an extended period.”

Even worse, the demands to maintain primary surpluses robs Greece of the flexibility it was supposed to obtain by exiting the bailout program in the first place. The bottom line, Vistesen said, is that it remains hard to see how EU politicians will be able to avoid eventually providing Greece outright debt relief.

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