A lot of attention has been focused on whether a Greek exit from the eurozone was imminent due to the severity and length of its economic troubles. The debate over the catastrophic consequences of its potential exit (or “Grexit”) from the European currency bloc caused rivers of ink to flow in 2015.
News of Greece’s debt issues has been eclipsed recently by immigration issues in Europe. And Greece and its international creditors did reach an agreement, after all, on a third bailout plan in August 2015 that allowed the ailing country to keep the euro as its currency. But does this mean that Greece is off the hook?
Unfortunately, the answer is no. The Greek government had to introduce capital controls in August in order to avoid the collapse of the shaky banking sectors. Further austerity is set to curb economic growth for the next three years at least, and structural measures will have to be implemented in return for emergency money, amid still-high political uncertainty and social tension.
Greece’s short-term economic outlook continues to look grim: Real GDP shrank in third-quarter 2015, while recent key economic indicators hint at further economic contraction in the fourth quarter. Furthermore, even though the August bailout agreement has significantly reduced the short-term risk of Greece leaving the eurozone, uncertainties over whether the Greek government will stick to its reform commitments continue to weigh on its short-term outlook.
For the moment, Dun & Bradstreet is continuing to forecast a slight GDP contraction in 2016 (about 1%), primarily on the assumption that capital controls will remain in place at least through the first half of 2016, curbing exports growth and, to a lesser extent, domestic demand.
Greece is also plagued by a persistent shortage of credit in the economy. Lending to the private sector shrank further in November, according to data from Bank of Greece. Nonfinancial corporations experienced a sharper contraction in bank credit than households: Credit to the former went down by 5% y/y, while lending to the latter declined by an average 2.7% y/y (consumer credit shrank by 2.9% y/y, while mortgage lending fell by 2.8% y/y).
Against this backdrop, Dun & Bradstreet economists expect negative credit growth to continue to impinge on credit risk and payment performance; business failures and payment risks should start gradually decreasing only from the second half of 2016.
On a more positive note, the European Stability Mechanism (ESM) unlocked €2.72 billion in November to recapitalize Piraeus Bank. The disbursement was part of a wider recapitalization plan (worth some €25 billion) aimed at shoring up the Greek banking sector. Under the August bailout agreement, Greece’s four biggest banks had to raise private capital to qualify for recapitalization money from the ESM. Two of those banks, Eurobank and Alpha Bank, raised enough private capital to forego recap funds altogether, while Piraeus Bank and National Bank of Greece still needed capital injections.
Daniele Fraietta has been a D&B economist for more than two years. He currently covers some Western European countries, notably Italy, Greece, Spain and Ireland. For D&B, Daniele has also developed the new econometric framework for commodity prices and exchange rates forecasting. He has an MSc in Economics from the University of Rome Tor Vergata, a Master in Business Administration from The Polytechnic University of Milan, and a Master in International Business from the Chapman College of Business.