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Light at the end of Greek tunnel flickers

by Danae Kyriakopoulou

Light at the end of Greek tunnel flickers

October saw the release of the International Monetary Fund’s latest World Economic Outlook report. Amid downward revisions to global growth, Greece strikingly found itself in the minority of economies to see their forecasts revised upwards for the remainder of 2016 and for most years through to 2021.

The IMF is at the optimistic end of a forecasters’ spectrum that includes the European Commission, the Organisation for Economic Co-operation and Development, and the Greek finance ministry and central bank.

Despite some divergences, a general pattern is evident: the light at the end of the Greek tunnel is expected to appear in 2017, with GDP growth forecasts averaging around 2.5% for that year.

Improved relationships
Looking at the IMF’s track record, one is entitled to be sceptical. As the chart shows, the Fund has miscalculated the timing of Greece’s rebound throughout the country’s economic crisis. This time could be different. The most positive development concerns the improved relationship between the government and the so-called troika of creditors – the European Central Bank, the European Union and the IMF.

OMFIF Bulletin November 2016 DK Greece

Gone are the days of Yanis Varoufakis, the former finance minister, and his flair for confrontation. Although anti-troika sentiment still forms part of its internal rhetoric, the government realises that its political future is tied to the success of the assistance programme.

A potential delay in the conclusion of the programme’s second review, due to begin this month, risks fuelling uncertainty. At the 11th Athens Stock Exchange Roadshow held in London last month, there was a shared feeling among officials from the Greek government, the European Investment Bank and the European Bank for Reconstruction and Development that the programme’s second review will be completed successfully.

But a closer look reveals that, while political risks have abated, the real economy faces important challenges. Notably, the thorny issue of debt sustainability is outstanding, with IMF participation in the programme far from secured.

Moreover, disagreements remain between the European institutions and the Fund over the fiscal surplus targets for the indebted economy, while pressure from the IMF board to join the programme has weakened.

Greece’s domestic economic challenges
A huge stock of non-performing loans, excessive rates of taxation and Greece’s poor record on tax collection add to domestic economic problems. Non-performing loan levels are around 60% of GDP. Unlike Italy, a market for NPLs hardly exists.

On taxes, Greece was the only EU country to increase its corporation tax rate in 2015. Collection remains a challenge, with tax arrears standing at more than €80bn – equivalent to around half of GDP.

Moreover, not only are taxes set suboptimally high on the tax rate-tax base nexus, creating disincentives to invest and work in the formal economy, but they have also been frequently revised. This makes the predictability of taxation almost impossible, weakening incentives to invest.

There are external risks too. Spending by British tourists fell by 36% in July following the UK vote to leave the EU and the accompanying fall in sterling. As a result of strong feeling on some parts of the ECB council that quantitative easing has run out of steam, the ECB will probably decide in December to start tapering its bond buying programme.

In these perilous domestic and international circumstances, the light at the end of the Greek tunnel forecast by the IMF may soon start to flicker.

Danae Kyriakopoulou is Head of Research at OMFIF.