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Barclays: Will Greece be able to survive some choppy waters after the programme

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Greece remains one of the weak spots in the euro area, but the country has come a long way since the crisis years, Barclays says in a new report focusing on the risks of a fully-fledged contagion if the political situation worsens in Italy.

Greece printed positive growth in 2017 after years of recession or stagnation: real GDP contracted by a quarter between 2008 and 2017, Barclays notes. There is also a rebound in confidence and economic sentiment further improved in the first four months of 2018 on the back of the expectation of Greece’s programme graduation and the return of the sovereign to the international capital markets, while capital controls are being relaxed gradually. GDP grew by 0.8% q/q in Q1 18, increasing for a fifth consecutive quarter – GDP dynamics not seen since 2006. The fiscal performance has been stronger than the targets envisaged in the programme. With real growth close to 2%, a primary surplus target of +3.5% of GDP for this year looks within reach.

Greece is now less than three months away from the completion of the fourth review and eventually graduating from the third bail-out programme. If Greece manages this, it is likely that its European peers will engage again on discussions on further OSI that would aim at reducing the (NPV) stock of public debt to sustainable levels. Any debt relief would in alllikelihood be conditional on sound policies being implemented and may be delivered gradually in the framework of a post-programme surveillance (public debt stood at 178.6% of GDP by end 2017), Barclays says.

But even if gradual and only on NPV terms, it could be a big win for the Syriza government (general elections are planned for Sep 19; but snap elections cannot be fully ruled out by May 2019 at the time of the European election). The Bank of Greece estimates that an extension of maturities, smoothing of interest payments and lowering the primary surplus target to 2% of GDP (instead of 3.5% of GDP) after 2020 would set the debt dynamics on a sustainable path.

On the negative side, first, Barclays warns that banks are still hampered by high levels of NPLs despite the programme strategy to reduce the non-performing exposures (NPEs) and the out-of-court workout schemes. NPEs still stand at 43% of total exposures. Second, after programme graduation in August and without a follow-up of another programme (eg, a precautionary credit line), the ECB’s waiver on GGBs will probably not be extended, thus increasing the haircut on GGBs and impairing banks’ liquidity and profitability. Third, improvements on institutional and governance issues have stalled over the past two years.

Will Greece be able to survive some choppy waters after the programme? By the end of the programme (expected for this August), the Greek treasury should have accumulated liquidity of c. EUR20bn, which should cover financing needs throughout 2018-19. Therefore, we do not expect the government will need a new official financing programme after August 2018. But Greece is likely to remain under close surveillance and possibly some degree of policy conditionality. We do not think that Greece will ask for a precautionary credit line, likely keeping GGBs outside of the scope of ECB’s PSPP.

 

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