Greece: a new post-Troika phase?

Content available in
February 10th, 2015

Greece is once again the focus of attention in Europe. After failing to elect a President, the previous government was forced to dissolve parliament and early elections were held. Syriza, the party winning the elections, is starting its tenure with the renegotiation of the country's debt and more flexible austerity measures as the main electoral promises it needs to keep. Let us take a look at the country's economic situation.

Since the start of the crisis in 2008, Greece's GDP had shrunk by 27%. This slump came to an end in mid-2014 when the economy started to grow again, a rise that the IMF expects to consolidate this year with 2.9% annual growth. The continuation of macroeconomic imbalances forged before the crisis forced the country to carry out far-reaching measures in different areas: from adjustments in its public accounts (the primary budget balance went from –10.5% of GDP in 2009 to a surplus of 0.8% in 2013) to gains in competitiveness (unit labour costs1 have fallen by 14.3% since 2007), including corrections in external imbalances (the current account balance went from –11.2% of GDP to 0.7%). In spite of this progress, the country's huge economic depression pushed unemployment up to a peak of 27.8%.

The high level of public debt is still the main cause for concern as it is difficult to sustain. Although public debt reached 175% of GDP in 2013, close to 80% is held by official creditors (the IMF, EFSF and ECB) under advantageous terms. Firstly, in spite of the country's high levels of debt, its financing costs are relatively low. For example, the interest paid on the debt was 4.3% of GDP2 in 2014 but this cost was effectively 2.7% as the ECB returns any interest it receives on Greek debt to the country's Treasury. By way of comparison, the cost of Italy's debt is 4.7% of GDP and in Spain it is 3.3%, although both countries have a much lower level of public debt than Greece. Also, Greek debt has a long maturity, on average 16.5 years, far longer than the 6.3 years for Spanish public debt. In fact, most of the loans provided by official organisations do not need to be paid back until after 2023.

The new government therefore faces an extremely delicate economic and social situation, with significant repayments this year but favourable prospects in the medium term. The Greek economy started to grow three quarters ago and its aid programme agreed with the Troika offers financial terms that can help it to continue taking measures to ensure a long-lasting reduction in unemployment and sustained growth in the medium and long term.

1. Nominal unit labour costs compared with its 23 main trading partners.

2. This is due to the fact that official creditors accepted cuts in the interest rates on their loans to Greece.