Greece Is Back In Recession; This Does Not Bode Well For A Debt Deal

MAY 13, 2015 @ 1:05 PM

Forbes

Tim Worstall

CONTRIBUTOR

We’ve the GDP figures for the various eurozone countries out today and Greece is officially and definitively back in recession. This does not bode well for the ability of Greece and the troika to come to a debt deal as recessionary times mean that the Greeks will find it near impossible to run the primary budget surplus that any deal would be predicated upon. There is a contrary view which is that the Eurogroup will agree that a surplus isn’t possible in such circumstances but that’s almost certainly not the way to bet.

Here’s the GDP figures:

Crisis-stricken Greece has fallen back into recession, as the economy contracted by 0.2pc in the first three months of the year.

Figures from the country’s official statistics agency showed the debt-laden economy was the second worst performer in the 19-country bloc after Estonia. The figures follow a 0.4pc contraction in the fourth quarter of last year, putting the economy officially back into recession.

The general view being touted is that this is a result of the uncertainty surrounding whether there is to be a bailout again or a default:

The economy expanded 0.8 percent in 2014 after six years of contraction wiped out about a quarter of the nation’s output. The European Commission last week cut its forecast for Greek GDP growth this year to 0.5 percent from a previous forecast of 2.5 percent.

Myself, I’m not so sure about it being uncertainty over a bailout at all. Whether there would be another bailout, a deal done over the debt, wasn’t really an issue back in October and November of last year. But that’s when the economy went into reverse. So I think it’s more likely that it was uncertainty about Syriza taking power, as they did in January. This isn’t to state that Syriza itself is bad for economic growth (nor, obviously, to say that it is good for it) but only that uncertainty is bad for it.

The problem with this is the following. Greece needs a new debt deal, a third one. We all know that and we all also know that there’s no way at all that it will be negotiated and sorted out before the end of the summer at the earliest. In order to get from here to there Greece simply needs the last €7 billion or so of the second bailout. It just doesn’t have enough cash to both run the state and also make its debt repayments without it.

However, it can only gain access to that cash if the Eurogroup and IMF agree that it is meeting the targets set under that second debt deal. They’ve already agreed, at least as a negotiating position, that Greece doesn’t need to run a 3% primary surplus this year, 1 to 1.5% would be good enough as a sign of intent. But in an economy in recession, as Greece now is, officially and definitively again, it’s near impossible to run a primary surplus without imposing yet more economic pain upon the populace. What is usually thought of as entirely counterproductive pain as well, as we generally think that in a recession a government should be running a budget deficit, not a surplus.

So, there’s two ways this could go. The first would be, well, you’re not doing what you said you would, no last tranche for you and what follows is Greek default. But that’s a horrible problem for Greece: because you can only really default if you are running a primary budget surplus. For if you’re running a deficit then you’ve got to borrow to pay for government and if you’ve just defaulted on everyone who will lend you money?

The second way would be for the IMF and Eurogroup to argue that, well, sure, you’re in recession we can’t expect you to be running a budget surplus at this point. But I really do doubt that that’s the way to bet.

My best guess (and this is a guess, as it’s politics we’re talking about here) is that this news that Greece is back in recession makes a default more likely and also more painful for Greece when or if it happens.