By TIM WALLACE, stuff.co.nz

‘Congratulations prime minister, you have brought Greece back from the brink!” These are words that Alexis Tsipras must have feared he would never hear.

 
Less than three years ago, Tsipras held a fierce, stubborn referendum to reject reform packages set out by the northern European nations who were taking political risks to finance the bankrupt state.
 
He won the vote: 61 per cent of Greeks voted no, “oxi”, and the defiant word became a rallying cry on the streets of Athens. But a week later he had to sign up to the deal anyway. Tsipras’s own position looked in doubt, as did that of his country.
 
Eight years of recession left the economy 25 per cent smaller than it was before the twin blows of the credit crunch and Greece’s debt crisis.

Yet now Tsipras is preparing to exit the bailout programmes completely, the country’s economic prospects apparently utterly transformed.

The gushing praise in the quote came from Angel Gurria, head of the OECD, last week – the leader of a pro-capitalist group, cheering the work of the leader of Greece’s radical leftists.

“I would like to congratulate you, your administration and the whole of Greece for an impressive stabilisation effort and one of the most ambitious reform packages we have seen at the OECD in recent times,” said Gurria. “This is starting to bear fruit.”

Tsipras smiled, hugged Gurria and promised to keep reforming the economy – and demanded debt relief. The reason for the cheer is clear.

Greek GDP is set to grow by 2 per cent this year and 2.3 per cent next year, the OECD estimates. If the forecasts come true it will grow more quickly than the eurozone average in 2019.

Unemployment is down from almost 28 per cent in 2014 to just over 21 per cent. The trend gives more workers money in their pockets and leaves fewer in need of benefits. Economists across Europe are impressed.

“For the first time in years, the clouds over Athens seem to be just starting to clear,” says Shweta Singh, at TS Lombard. “Albeit from a very low base, things are starting to look up.”

“For the first time in years, the clouds over Athens seem to be just starting to clear,” says Shweta Singh, at TS Lombard.

 

Growth is broad-based too. Exports are up, in part because the long squeeze on wages has made Greece a more competitive economy. Traditional hotspots of shipping and tourism are rising – inbound visitor numbers rose 17 per cent on the year in 2017.

But so are other industries. The Athens stock market has almost doubled in two years. Long-troubled banks are leading the charge.

Lenders are successfully flogging packages of bad loans to investors, cleaning up their own books after years of doing battle with piles of non-performing loans. Shares in sectors from healthcare to plastics have jumped, with domestic and export growth boosting different parts of the economy. Manufacturing surveys show growth running at levels not seen since before the crash.

Stronger growth can be seen in government finances too. Greece ran a budget surplus of 0.8 per cent last year. Excluding debt interest payments it hit 4 per cent – well above the level the International Monetary Fund thought the battered economy could sustain.

Credit ratings agency Fitch upgraded Greece in February and praised it again last month, having anticipated a primary surplus of half that level.

But Tsipras’s comments about debt relief were made for a reason. “The Greek economy does not need any additional burdening measures,” he said.

A combination of deep reforms and debt restructuring could put Greece’s finances on an impressive path to stability.

 

That alludes to the still-astronomical problem of Greece’s national debt. This remains close to 180 per cent of GDP on Eurostat’s measure, more than double the eurozone average of 86.7 per cent.

Under current plans, the OECD estimates Greek national debt will fall to around 120 per cent of GDP in 20 years’ time – still a substantial burden – before rising once more to almost 140 per cent by 2060. That raises the horrifying prospect that Greece may not be on a sustainable path at all.

“Public debt is still high and this is a source of constant vulnerability,” Gurria warned, in a change of tone. “Investment has dropped by 60 per cent since the onset of the crisis.”

There are external risks too. Export growth aided the recovery. But eurozone growth has peaked, so the demand from abroad, sucking in Greek products, could weaken. Competitiveness has been regained only through a brutal squeeze on pay.

Average annual incomes are down from a peak of more than €18,500 (NZ$31,526) in 2010 to just over €12,000 now.

Large numbers of new jobs being created are part-time or temporary. Rates of severe deprivation have doubled.

Yet pay growth is weak in much of the eurozone, so Greece cannot easily increase wage levels without removing its vital competitive edge.

More encouragingly, there are some solutions. The most important of these could help manage the debt burden.

The countries that bailed Greece out are expected to agree to more debt reduction before Athens exits the rescue scheme in August.

Last week, Mario Centeno, the Eurogroup boss, said: “The final decision on the implementation of the debt measures will be conditional on full implementation of the programme. We will now continue discussions on these issues in the weeks ahead, also on the debt strategy.

“On the basis of a successful review, the Eurogroup will decide in June all the elements that can help facilitate the exit of Greece from the programme by August.”

Despite the cautious tone, there is little doubt Greece is on the way out. “It is a given they will exit the programme in August,” says Erik Nielsen, chief economist at UniCredit. “Tsipras wants to go down as the guy who got them out of this bailout.”

The reason for the Eurogroup’s mild tetchiness is historic. In the past Greece has had to show progress to unlock each chunk of cash. It needs no more funds, so that approach no longer works, leaving creditors pondering how to enforce reforms.

The OECD proposes a long list of reforms to help the economy, from cutting red tape on accessing the professions to boosting tax collection and hugely scaling up vocational training.

Its analysts believe these measures, even without debt relief, could bring Greek debt down to 100 per cent of GDP by the 2050s, a much healthier path.

Tsipras sounds committed to continuous improvement, but voices in Brussels and Berlin fear that passion could fade in time. A general election is due next year so a new government may have ideas of its own.

None the less, a deal is likely with some form of agreement from Greece to keep on reforming, without unbearably intensive scrutiny.

The debt relief itself will not be a free pass – nobody expects any loans to be written off. Options include extending the terms of bonds, giving more grace periods on repayments, and returning to Greece the profits made on its bonds, which are held by the ECB, among others.

A combination of deep reforms and debt restructuring could put Greece’s finances on a very impressive path to stability.

The OECD estimates this would bring debt down to 60 per cent of GDP by 2060 – less than half the level on the current trajectory.

That is a very long-term project and the reforms will not all be popular – but the prospect is certainly not one you would say “oxi” to in a hurry.