Crédito y Caución expects Greece to rebound in 2021 with downside risks  

 The Mediterranean country will reach one of the highest levels of public debt in the world, yet manageable so far



The Greek economy has been badly affected by the pandemic. Greece, where tourism accounts for almost 27% of GDP, faces an economic contraction of more than 7% by 2020. Looking ahead to 2021, Crédito y Caución expects a rebound, but the downside risks remain high. Should the pandemic come to an end in 2021, the recovery in investments, private consumption and exports should lead to growth of around 7.5 per cent in 2021. Unemployment, at over 18 per cent, is expected to fall again. However, a bad evolution of the pandemic or a deterioration of the relationship with Turkey could harm economic performance, especially Tourism.

The international competitiveness of Greece remains hampered by issues like property rights, skills of workforce, lack of competition and low innovation capability. Other factors include high taxes, restrictive labour regulations and limited availability of both loans for SMEs, as well as venture capital for start-ups. The banking sector has become more resilient, but remains vulnerable to the recession caused by the coronavirus. The sector became profitable again in 2019, with rising real estate prices. However, this scenario is likely to be reversed with the pandemic. Banks have allowed deferment of principal payments on loans to households and businesses in a context where non-performing loans account for more than 35 per cent of the total.

To support the economy, the government has taken financial and fiscal measures amounting to some 14% of GDP, including loan guarantees, additional health expenditure, cash transfers to households, various forms of business support and reductions in VAT rates. Although partly financed by European Union funds, these additional expenditures will generate a fiscal deficit of 7% of GDP in 2020, which will increase public debt to 190% in 2020. This is one of the highest levels of public debt in the world, but manageable at the moment. Greece has large cash reserves, equivalent to 19% of GDP, which provide significant protection against possible liquidity crises. The monetary flexibility of the ECB, the share of fixed-rate debt exceeding 90% and the average maturity of 21 years are other mitigating factors for debt sustainability risk.