For now, the goal of the ongoing talks is to find a solution to Greece’s debt situation that would bring a bailout via additional lending and performing a haircut on the existing debt (of up to 70%). This would take the debt/GDP ratio down from 160% to 120% by 2020 – comparable with Italy’s current level but higher than Portugal’s (around 106% in 2011, according to the IMF). The goal of bringing Greece’s debt/GDP ratio down to the same level as these troubled countries looks somewhat hollow and slightly absurd, especially as no one can guarantee that these objectives can be met against a backdrop of contracting GDP (and tax base). Winning time and ring-fencing Greece is what it is all about.

 

The Italian economy stopped growing some time ago, and its debt/GDP has consistently exceeded 100% for some time, and debt service has become a significant issue. Italian GDP slid around 4.8% over 2008_10 and is projected to continue falling this year, which also implies a shrinking tax base. Greece has a service_based economy, with mining and manufacturing combined accounting for less than 10% of gross value added and around 8.7% of GDP (the difference between the latter two indicators is equal to net taxes on products), so it is hard to imagine where it could find sustainable growth drivers as long as it relies on a relatively strong euro. Almost half of Greece’s GDP in 2010 (55.8% of gross value added) was generated by construction, wholesale and retail trade, real estate, public administration, education, healthcare and the defense sector. None of these sectors can drive the economy going forward, especially as long as austerity continues while structural reforms, privatization and job creation hit the skids.

It is not easy to see how Greece can switch to a sustainable growth path within a year or two (as assumed by the current projections), enabling it to service debts on a market basis going forward. In recent years, the country has been able to collect around 40% of GDP in general government revenues, but spending has fluctuated at around 50% of GDP. It is hard to envisage how Greece can collect more revenues and reduce the deficit, and it is equally hard to imagine how it can cut public spending (not in nominal terms, but as a percentage of GDP) if economic contraction proves deeper and longer, not to mention the ensuing social problems. Hence, more bailouts and haircuts are likely to subsequently be required for the country, but it will eventually stop getting them at some point.

Evgeny Gavrilenkov is the Chief Economist of Troika Dialogue