Is Greece Ready to Stand on Its Own Feet?

By Nikolaos Karamouzis

Later this summer, a major event in Europe’s evolution will take place: Greece, the major culprit

of Europe’s past fiscal and economic irresponsibility, is due to exit formally the last of its bailout

programs. Just as the eurozone crisis began in Greece eight years ago, so too will it formally end

here.

Or will it? As Greece prepares in August to shed almost a decade of official financial oversight

that has come at enormous social and economic cost, the discussion in Athens, Brussels, Frankfurt

and Washington is focused on the day after. Greece’s economic fortunes have improved

dramatically as it implemented almost a decade of creditor-driven reforms. Growth has returned;

the government primary budget is in surplus; the current account is roughly in balance;

international competitiveness has substantially improved; the credit rating is upgraded; both

exports and foreign investments have seen an upswing over the past two years; and the

unemployment rate is gradually declining.

The main question is whether Greece is ready to stand on its own feet. Has Greece’s political

leadership learned the lessons from the tragic experience of the past eight years?

Not everyone seems certain. Some official stakeholders, concerned about the transition period,

want the country equipped with some sort of official contingency precautionary credit line, or at

least want to ensure the government has piled up a sufficient cash buffer—likely close to €20

billion—in case Greece is unable to finance itself in the markets. But a new official program,

which a precautionary credit line would entail, may be perceived in the markets as a signal that

Greece is still not capable of keeping its own house in order.

The real challenge for Greece is how to boost its budding economic recovery while also

strengthening policy credibility and market trust. Only sustainable growth, reforms, a market and

business-friendly environment, and adherence to fiscal stability can do that. And only

unconventional policies in pursuit of those aims can impress markets. That approach should

include a program of public land development, massive privatizations, a radical reform of public

administration, an attractive framework for foreign investment and a pro-growth tax and pension

reform. A protracted exit from the last bailout that damages credibility only risks extending the

malaise.

The moves made between now and the bailout program’s end in August will determine if Greece

can truly manage a clean and viable exit. The first step is to put together a credible and business friendly national growth and reform plan, based on a broad social and political consensus.

The goal must be a sustainable revival of private investment, which collapsed during the crisis, and the plan must offer a detailed timetable and list of priorities. Greek banks also must be prepared to reassure investors unequivocally that the financial system is sound.

This spring, Greece’s banks will undergo yet another stress test while also implementing

the new IFRS9 international bank accounting rules. Greece cannot move ahead so long as there

are lingering doubts over the financial strength of its banks.

To further reduce market uncertainty, Greece’s official creditors will need to decide on the

restructuring of the Greek public debt, no later than in the first half of 2018 according to their

earlier commitments. A final debt deal should ensure its viability in market terms, while also

keeping debt-servicing obligations at manageable levels over the long term.

Over the next six months, until Greece’s current bailout formally expires, the International

Monetary Fund must remain engaged in the program. Markets will need to see that the IMF is on

board with both the restructuring of the public debt and the solvency of the banking system

following the stress tests. A negative public stand could jeopardize a clean exit.

In addition, the Greek government under the Syriza Party, and the main opposition party, New

Democracy, should affirm their commitment to honoring the country’s fiscal targets: annual

budget surpluses, excluding debt service, equal to 3.5% of gross domestic product every year

until 2022. Any discussion about revising that target or changing the fiscal mix should be delayed

until market trust is fully restored. Such primary surpluses are indeed excessive and recessionary,

but under the current circumstances, the benefits of enhancing the country’s fiscal credibility

outweigh the costs.

Last but not least, Greece should remove all capital controls no later than August 2018. This will

serve as a powerful sign of confidence in the country’s prospects and credibility in its policy

initiatives, while it is likely to lead to an improvement of Greece’s credit rating.

Greece’s optimum strategy is for all stakeholders to work together over the next few months to

manage a clean and sustainable exit and a return to economic and social normality. The

economy’s recent gains can be reversed very rapidly under irresponsible policies. Credibility and

trust are fragile and have to be strengthened.

Mr. Karamouzis is chairman of Eurobank and the Hellenic Bank Association.