Greece needs €100bn debt relief as permanent depression looms
Greece needs a debt write-down of almost €100bn (£70bn) if the country is to stand a chance of clawing its way out of a “prolonged and severe depression”, according to a leading think-tank.
In a stark analysis, the National Institute of Economic and Social Research (NIESR) laid bare the impact of VAT hikes and strict budget targets that it said could become “self-defeating”.
As Greek bank shares saw a third of their value wiped-off for a second day, NIESR’s analysis showed Greece’s economy will slump back into recession this year and next.
By the end of 2016, the economy is forecast to be 30pc smaller than at its peak in 2007 and 7pc smaller than before it joined the euro in 2001.
“We don’t see Greece getting back to the level it was when it joined the euro in 2001, let alone anywhere near where it was before this crisis struck, so this is a prolonged and severe depression for Greece,” said Jack Meaning, research fellow at NIESR.
Economists said Greece’s creditors would need to write-off or restructure €95bn of its €320bn debt pile, or around 55pc of gross domestic product (GDP), in order to reduce its debt stock to around 130pc of GDP, from a projection of 186.9pc this year.
NIESR said this would make an International Monetary Fund (IMF) debt target of 120pc of GDP by 2020 - which it considers to be the maximum sustainable level - “at least possible”.
The think-tank’s forecasts showed the economy is expected to contract by 3pc in 2015 and 2.3pc in 2016, remaining in recession until the second half of 2016.
Under current projections, Greece’s economy is not expected to get back to its pre-euro size until the first half of 2023.
Simon Kirby, principle research fellow at NIESR, said: “You have to go back to the Great Depression to find economies hit harder by crisis. The 1920s were bad enough for the UK and that was nowhere near this.”
Mr Meaning said there remained a “large chance” of a Greek exit fom the single currency, with VAT hikes likely to hit the economy more than suggested by ordinary fiscal multipliers.
“Certainly, as the prospects for Greece deteriorate while inside the euro area, questions over Greece remaining a member will persist,” NIESR said.
"We don’t see Greece getting back to the level it was when it joined the euro in 2001, let alone anywhere near where it was before this crisis struck, so this is a prolonged and severe depression for Greece." Jack Meaning, NIESR
Mr Meaning said strict primary surplus targets imposed on Athens by its creditors could end up becoming “self-defeating”, shrinking the economy and making the country’s debt pile even larger in relative terms.
“In order to meet those targets, the Greek government will have to take demand out of an already depressed economy,” he said.
NIESR also calculated the impact of removing reduced VAT rates from a number of essential items. VAT hikes are expected to weigh on output by 0.25pc this year and around 1pc in 2016 and 2017.
"Greece is particularly susceptible to a VAT rise because of the importance of tourism, so if this weakens [the economy] more than currently built in, its impact will be larger,” said Mr Meaning.
NIESR’s recommended debt write-down is much larger than the 30pc implied by the IMF’s latest debt sustainability analysis, which warned that Greece may need a full moratorium on debt payments for 30 years.
Europe has ruled out a nominal haircut on debt, and Mr Meaning said NIESR’s analysis would imply a “very significant extension” on debt repayments that would take its rescue payments “a long way” into the future.
Experts at Fathom Consulting warned that forcing Greece to implement more belt tightening would asphyxiate the economy while proving fruitless for the country's creditors.
"Greece has been in recession these last four or five years, and it's going to remain in recession for the next four or five years if this deal is accepted, and the recession is likely to get worse," said Erik Britton, a director at Fathom.
"They are already at riot levels of unemployment, curfew levels of unemployment, political instability levels of unemployment, and they're staring down the barrel of another five years of that or worse.
Mr Britton warned that Greece's creditors would not receive "one cent" of bail-out cash if the third bail-out programme was approved.Fathom, which is run by former Bank of England economists, also warned that the capital controls imposed by the current government would slash 2pc off Greek GDP this year.
Mr Meaning said fiscal transfers to Greece were inevitable.
"There will be a permanent fiscal transfer in one way or another between the rest of Europe and Greece," he said.
"The question then becomes, when does that happen and how is it managed? And for how much? Greece could leave and default on the entirety of its debt or it could be that it's managed. An interesting point is that within the euro area, the amount of debt that needs to be written off in order to achieve that is less than the full default. So the burden for the rest of Europe could be less if it stays than if they go."telegraph
