Spain has been in the spotlight for the past few days. However, I think Greece will soon become the center of attention once again as it welcomes a group of very, very important people. Representatives from the IMF, ECB, and European Commission (a.k.a. the Troika) are in the country, but not to relax in Santorini; they’re there to assess whether or not Greece should receive 31.5 billion EUR, which is part of the 130 billion EUR bailout package agreed in March.
So how are things looking in Greece?
A quick glance at its balance sheets in the first quarter might lead one to say that there’s nothing Greek officials have to worry about. It’s debt-to-GDP ratio dropped by 33% to 132.4% during the quarter from Q4 2011.
However, a closer look reveals that Greece was only able to crunch those numbers because of the Private Sector Involvement (PSI) wherein 85.8% of Greek bondholders agreed to take losses on their portfolios. These haircuts erased 75 billion EUR worth of Greek.
And the bad news doesn’t end there.
According to Prime Minister Antonis Samaras, Greece is in a “Great Depression” that is comparable to the one of the early 1930s. Word on the street is that the Bank of Greece predicts that the economy will shrink by 5% this year. Unfortunately, the dismal performance of the economy has caused the government to lag behind its austerity plan targets.
Although the government has been able to trim down spending, the budget deficit still stood at 9% at the end of 2011. Keep in mind that in order to receive bailout funds, Greece has promised to reduce the deficit to just 3% of GDP.
Cutting down the deficit to just a third of current levels ain’t no walk in the park. In order to reach those targets, Samaras believes that a tax hike and the sale of other public assets are necessary. But of course, how can anyone raise taxes in a recession? And given the current predicament, I’m sure all potential buyers of public assets would simply just submit lowball offers.
That said, some economists believe that Greece may actually need a third bailout worth 50 billion EUR just to keep the engine churning.
Before we can talk about another bailout though, there’s still the question of whether Greece can even receive the final bailout installment. A spokesperson from the European Commission said that it would have to look into its findings before it can release the funds in September.
The problem with this is that it leaves Greece in dilemma. On August 20, Greece must make a 3.8 billion EUR interest payment to the ECB. The country also has a boatload of other debt repayments that it must make in September. If the country fails to receive bailout funds before then, it could push Greece to the brink of default.
Unfortunately, many believe that the Troika is convinced that Greece will not be able to cut its debt-to-GDP ratio down to 120% by 2020. This being one of the major stipulations of its bailout package, don’t be shocked if they hold back from giving the last set of bailout funds.
And if and when Greece defaults on its loans, we might just see a Grexit and a return of the drachma.