Facing Grexit Again?

by Theodore Pelagidis

Brookings Institution
July 24, 2014

According to BlackRock’s quarterly Sovereign Risk Index Greece is among the countries most likely to go bankrupt That follows the relatively recent statement of the German finance minister Wolfgang Schäuble that Greece “..would have to continue to meet the troika's demands for reforms or risk leaving the eurozone.” The statement reflects disquiet among creditors to recent efforts by the Greek government to relax fiscal austerity measures to calm voter anger, following the defeat of the coalition government in the recent European elections (interpreted by many as increasing political/country risk--the radical left “Syriza” could possibly take power in the next elections). The use of such strong language is not just surprising; it also brings us back to the 2012 ‘Grexit talks’, a time in which the country was facing the real possibility of leaving the eurozone. Last week, Focus magazine reported that Nonperforming Loans (NPLs) in Greek Banks pose a serious threat to the “Grecovery” prospects, currently at the sky-high level of 33.5 percent, up from 31.9 percent at the end of 2013.

Much has been said about the results of the austerity program implemented in Greece by the ‘Troika’. Heavy taxation during 2010-2012 resulted in a cumulative inflation rate of almost 10 percent which substantially hit exports and competitiveness, undermining the internal devaluation target of increasing competitiveness at the same time.

In the meantime, the repeated postponement of hardcore structural reforms and privatizations let the burden fall almost entirely on the private sector through a storm of heavy taxation and huge wage cuts. As for the extraordinarily high level of wages in particular, these were mainly nested in the clientelistic, partitocratic state, notorious for excessive spending and corruption, and not in the productive sector of the economy. Wages were never the main problem of the productive private sector; red tape, legal ambiguity and state-sponsored monopolies were the problem.

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Read the BlackRock's Report (PDF)