Progress on the Greek government's structural reform program has been "impressive" and could succeed in reducing the country's debt to GDP (gross domestic product) ratio to sustainable levels, the Organization for Economic Cooperation and Development (OECD) said Tuesday.
On July 21, the International Monetary Fund (IMF), European Union (EU) and European Central Bank (ECB) agreed a fresh 109 billion euro ($155 billion) bailout package, including voluntary participation from the private sector, which – temporarily at least – closed the Greek financing gap. The package was conditional on structural and fiscal reform to the country's economy.
If those reforms are fully implemented, Greece's debt to GDP ratio could peak in 2013 and fall back, according to the OECD's economic survey of Greece, which used "conservative" estimates of growth and bank interest rates to conclude that the Greek debt to GDP ratio could fall below 60 percent within 20 years.
“Reforms carried out over the past year are impressive. This achievement does not always seem to be properly appreciated in Greece or abroad. With improved competitiveness, we are seeing the first signs that the much needed macro-economic adjustment is gradually taking place," OECD secretary-general Angel Gurria said in a statement accompanying the release.
However, he warned, "A key prerequisite of success is that the burden and benefits of reform be, and be seen to be, broadly and fairly shared. Clearly, the key to success will be in implementation, which will have to be impeccable."
Markets have struggled to believe in the ability of the Greek government to bring about the sweeping reforms to revenue collection, government spending and public sector service delivery required to bring the country's moribund economy back to sustained growth.
However, the OECD said, the Greek authorities have "energetically and resolutely" implemented reforms and fiscal consolidation, cutting the budget deficit by 5 percent in 2010.
Communicating to the market and to the Greek people the importance of the austerity program will be vital to its success, the OECD noted. The sustained protests in Syntagma Square in Athens as the Greek parliament voted through the austerity bill showed the depth of resistance locally to what is likely to be a painful period of economic adjustment.
Likewise, the government will need to face the backlash from breaking up the notoriously deep networks of vested interests and special rights and dealing with widespread tax evasion.
"Social acceptability of adjustment also demands a fair burden sharing, which requires a firm stance against tax offenders, and vested interests of groups of workers or owners of special rights protecting their rents," the OECD said. "It is also essential to communicate more widely that the reforms are in the long-term interest of Greece. There are no easy solutions, nor realistic alternatives to drastic policy changes."
The OECD report makes only a marginal reference to the possibility of a Greek default – a situation many in the market still consider an inevitability. If so, the hardest hit would be the Greek banks themselves.
However, as the OECD report noted, proposed reforms to the European Financial Stability Facility, which would allow the bailout mechanism to inject capital into the banking sector, could provide some confidence that the industry could survive a selective default.