Greece’s Recovery Coming – But at a Cost
Greece's economy, in its fifth year of recession, is showing "tentative signs" of stabilization despite on-going political uncertainty, according to the latest research note from Credit Suisse. The bank pointed to increased industrial production and exports, as well as an improvement in competitiveness that is "well under way, " but also warned of the growing social cost.
"Despite the ongoing recession and the political turbulence of the past few months (election period, euro exit talk), fiscal and economic data in Greece have been surprising positively so far, " researchers at the bank wrote.
Credit Suisse said there has been an improvement in exports of petroleum products, metals and pharmaceuticals, and though this accounts for only 15 percent of the Greek economy, the increase could help limit the size of the recession ahead of further fiscal tightening .
"Most of the data so far have beaten expectations of a few months ago and suggest the economy is performing less poorly than we and other forecasters thought."
However, "the adjustment has not come without a cost, " the report said, with fast-paced labor market reform and wage reduction contributing to "extremely high" social tensions.
According to Credit Suisse, the government must beware of growing public discontent as unemployment hit 25 percent in July and gross domestic product drops more than 20 percent.
"Social tensions have increased in the country and represent a risk for the government and the successful implementation of the [adjustment] program…Unsurprisingly, extreme political parties have gained momentum, " the note added, alluding to the rise of the far-right in Greece, and beyond .
These factors support the argument for a slower pace of fiscal reform, the report's authors said, supporting the call to give Greece "more time" as advocated by the International Monetary Fund (IMF) and by
Indeed, the strong social reaction should be "taken into consideration" in the latest talks with the troika (the IMF, European Commission and European Central Bank) to finalize 13.5 billion euros ($17.5 billion) of cuts for 2013.
"In our view, implementation would be hard in a country where 70 percent is objecting to the EU/IMF program…[and] there is limited rationale for further aggressive tightening, " the report said. "Bringing back growth is far more important , not only for the broader economy, but for debt sustainability."
"The focus should be more in the structural reforms, in our view, where less progress has been made, rather than on the fiscal measures."
The IMF forecasts that Greece will miss the debt-to-GDP target of 120 percent by 2020, giving credence to calls that Greece needs not only more time, but a restructuring of its debt — despite resistance from the European Central Bank and the European Union.
Credit Suisse also said a Greek exit from the euro zone was "unlikely" as talks progress between Greece and the troika. Officials said on Tuesday that a deal over further reforms and cuts will be reached before Thursday when an EU summit will be held. Leaders are expected to discuss whether to give Greece the next tranche of aid that it needs to survive at that meeting.
Credit Suisse is not alone in its improving outlook for Greece. Citigroup has also lowered the chances of a Greek exit within the next two years from 90 to 60 percent.
Previously, the group had said there was a 90 percent chance of a "Grexit", a term created by its chief economist, Willem Buiter, that has become widely used.