Greece: A Macroeconomic Outlook

Recession in Greece is projected to close to -1.5% for the year 2015, according to the Institute for Economic and Industrial Research. The Institute has warmed that recession may be prolonged if the right changes in the economy do not get implemented, so that investments can start to roll in the country.

 

The Greek economy has the last chance to adjust itself according to the last memorandum signed, and signed to implement. If changes do not come about quickly in the areas of taxation, pension insurance, recapitalization of banks (including bad loans), and the newly created privatization fund of public properties, then investments will not take place, so desperately needed.

As for 2016 the future cannot be predicted with safety. Recession may continue to persist, as the Greek economy is faced with distortions that is making it react very slowly to economic changes. Unemployment will continue to remain high at 28%, and with this, insurance funds face liquidity problems, distribution of pensions, and overall sustainability of the system.

Meanwhile the recapitalization of the four systemic Greek banks has begun. The goal is to find capital to cover 3.6 billion euros, so as to limit the amount of increase in share capital needed. For example, for one bank its target is to have shareholders contribute 600 million euros in the increase in share capital, or sell shares at lower than par value. In both instances the bank’s capital is enhanced, thereby reducing the amount of capital needed.  The stress tests are expected to be announced by the end of October.

In the table above we observe the Lender of Last Resort (LLR) , which is a central bank offering loans to member banks experiencing financial difficulty. The LLR functions in two ways: as a means to protect those that have deposits in the banking system, and to provide liquidity to banks so as to prevent a possible bank run. The Greek government closed the banks in the summer for 5 weeks. If there is no other means a bank can seek liquidity, it turns to the central bank, and this makes the central bank a lender of last resort.

Capital controls remain in place as they were imposed in the summer (2015). There is a lack of liquidity in the Greek market, and the most effected are small and medium businesses, especially those that import raw materials. Some rules have been eased, like sending money abroad.