Past EU/IMF bailouts show risks, pluses for Greece

By Michael Winfrey – Analysis

PRAGUE (BestGrowthStock) – As Greece struggles to tame its debt with international aid, the three other European Union states to get bailouts in the global crisis — Latvia, Romania and Hungary — offer Athens grounds for both hope and alarm.

In the 12 to 18 months since the three countries obtained emergency financing from the International Monetary Fund and other donors, all three have won back enough respect from financial markets to resume issuing bonds.

Latvia has fended off heavy market pressure to devalue the lat — an important omen for Greece, which insists it will stay in the euro currency zone despite its uncompetitive economy.

But all three countries have missed targets for cutting their budget deficits by big margins. All of them found spending cuts and tax hikes pushed their economies into much deeper recessions than expected, and all were forced to renegotiate budget targets with the IMF.

“The expectation that Greece can manage its fiscal problems with only a 4 percent contraction of GDP is a little far-fetched compared with what happened in central and eastern Europe,” said Nigel Rendell, strategist at Royal Bank of Canada.

“If the Greeks want to get some idea of what they might be expecting, they may want to look north. But they may not want to look there for long, because the medicine is going to be very, very unpalatable.”

In exchange for a 110 billion euro ($143 billion) package of emergency loans from euro zone governments and the IMF, Greece pledged on Sunday to slash its budget deficit from 13.6 percent of gross domestic product last year to 8.1 percent this year and 2.6 percent in 2014.

History suggests that is not impossible; Sweden improved its cyclically adjusted primary budget balance by 13.3 percentage points in the seven years to 2000, while Denmark improved its balance by 12.3 points in the four years to 1986, according to an IMF study.

Greece’s ability to hit its fiscal targets, or at least come close to them, may be crucial to restoring market confidence and allowing Athens to resume financing itself by the end of the three-year bailout period.


But Latvia, Romania and Hungary began to miss their original targets within months of their bailouts starting.

Latvia, which agreed on a 7.5 billion euro bailout in December 2008, ended up posting a budget deficit of 9.0 percent of GDP for 2009 instead of the 4.9 percent which it had initially promised.

That was because its economy shrank 18.0 percent last year, far worse than an original forecast for a 5.0 percent contraction.

In Romania, which signed up to a 19.9 billion euro bailout in May 2009, a 7.1 percent economic contraction last year — worse than the 4.1 percent forecast — produced a budget deficit of 7.2 percent, instead of the original target of 4.6 percent.

Hungary, which agreed a 20 billion euro bailout in October 2008, originally pledged a deficit for last year of 2.5 percent, based on a forecast that the economy would shrink 1.0 percent. But GDP tumbled 6.3 percent and the deficit was 4.0 percent.

In addition to making budget deficits larger relative to the size of the economy, falling GDP has frustrated austerity measures by increasing unemployment and forcing governments to spend more than expected on welfare.

Greece’s bailout plan assumes its economy will shrink 4.0 percent this year and 2.6 percent next year, but many analysts think its austerity steps may hurt growth much more than that.

“I think it will be tough,” said Ben May, an economist at London-based Capital Economics. If Athens manages to push through all the austerity measures it has announced, “potentially, growth will be far weaker,” he added.

“There are substantial downside risks,” said Rendell, citing Argentina’s 2000-2001 crisis in which austerity, shrinking GDP and lower budget revenues created a vicious cycle that drove up deficits.

“It became a downward spiral…The omens are not good.”


There are important differences between Greece and the other countries. The three central European states suffered from a drop in external demand due to the worst global downturn since the Great Depression; the European economy as a whole is now recovering.

Also, Greece may have more room for deep structural reforms that could make a dramatic difference to its deficits. Clamping down on rampant tax evasion, cutting redundant state bodies and ending an arcane system of public sector bonuses could improve its budget balance by several percentage points.

But some comparisons are not as positive. The central European states barely wavered on asking for outside help, and although Latvia suffered months of political instability and a riot, Romania and Hungary faced relatively little public opposition to austerity.

The three countries were therefore able to tackle austerity with enough zeal to win back market confidence.

By contrast, the government of Greek Prime Minister George Papandreou faces a series of strikes by public and private sector unions, with opinion polls showing many Greeks disapprove of the decision to seek financial aid.

There are still doubts over whether the Greek government is willing to make painful spending cuts, particularly given the strong opposition to belt-tightening from the Greek public, said Nomura analyst Peter Attard Montalto.

“You can return to the markets…if you have policy credibility and you admit to your mistakes and you take painful actions. But people are still uncertain, given the fact that Greece is basically being forced to do this.”

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(Editing by Andrew Torchia)

Past EU/IMF bailouts show risks, pluses for Greece