Five proposals for post-programme Greece

Investment shock needed for sustainable growth after eight years of hardship

After eight years of hardship, Greece is finally emerging with renewed optimism from this difficult time. The factors behind this positive trend are the sacrifices of the Greek people and the solidarity of Athens’ European partners. This has been manifested in the unprecedented volume of loans (€240bn) given to Greece on truly concessional terms, including markedly low rates and long maturities.

Although the international economic environment is relatively volatile at the moment, I have long believed that the Greek case is manageable for an exit from the memorandums of understanding in late August without a precautionary credit line. Such an exit would be similar to the cases of Portugal, Ireland and Cyprus, countries with similar adjustment programmes.

This option was confirmed by the Eurogroup of finance ministers in its decision of 21 June, which secures the full sustainability of Greece’s public debt until 2032 and leaves open the possibility of additional longer-term debt relief measures.

The decision provides for a further deferral of European Financial Stability Facility interest and amortisation by 10 years, as well as the return of profits on Greek bonds held by euro area central banks starting in 2018. The post-programme surveillance framework aims to ensure the completion of key structural reforms initiated under the European Stability Mechanism programme against agreed deadlines and provides for close monitoring of Greece’s economic, fiscal and financial situation.

Either the cash buffer option, whereby the country holds enough cash to be able to support itself for around two years without needing to raise funds on capital markets, or the precautionary credit line option are short term. The real question is what comes after the first post-memorandum year.

Policy-makers must focus on conditions for Greece to achieve a sustainable return to capital markets. I would like to make five proposals that could make such a return feasible in the near future.

First, in the light of adverse capital market conditions, political developments in Italy and uncertainty in global trade relations, the government will need to increase the buffer as much as possible to shield the Greek economy for the next two years. Thankfully, policy-makers have already taken such measures on board. In July the government increased the buffer to €24.1bn, sufficient to guarantee Greece’s gross financing needs until August 2020.

Second, regaining the investment grade held in 2008 is as important as ensuring debt sustainability. My proposal is to set up a new advisory task force to help obtain the investment grade as soon as possible by presenting roadshows abroad to investors and analysts. This should be at the top of Greece’s policy agenda over the next two years. Its significance is comparable to meeting the Maastricht nominal criteria that allowed the country to enter the euro area.

Third, during the reinvestment period the European Central Bank may examine the eligibility of Greek government bonds under its public sector purchase programme. The ECB commented in June that it is ready to keep up reinvestments for ‘an extended period of time’ after the programme ends in December. This has clear benefits for the cost of borrowing of both sovereign, bank and corporate debt.

Fourth, the government, in co-operation with the Bank of Greece, should publish a plan detailing measures and dates for the full lifting of capital controls. No return to markets can be permanent or credible while such controls are still in effect. This would help win back the trust of depositors and facilitate the return of around €20bn hoarded domestically, in informal depots and safety deposits, while also boosting investor confidence.

Fifth, a key requirement for a permanent return to capital markets is the sustainable recovery of the Greek economy with growth greater than 2%. Given the prolonged fiscal consolidation and private disinvestment that has taken place, the country needs an investment shock. I would reaffirm a proposal I made in the summer of 2014, which links reduced primary surplus targets with a drastic gradual reduction of corporate tax rates in line with the fiercely competitive corporate tax rates applied by Greece’s neighbours.

If such steps are taken, Greece will soon be able to draw a line under the last eight years of economic hardship and move into a much more confident future.

John Mourmouras is Senior Deputy Governor of the Bank of Greece.

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