Greece’s latest promise to repay its creditors on time has reduced fears about an imminent default but while the government lives from hand to mouth, the Greek economy is slipping back toward recession, businesses and analysts say.
Slow progress in bailout negotiations between the Athens government and its foreign lenders, which were due to resume on Monday, is spreading uncertainty throughout the eurozone’s most embattled economy, which last year emerged from a six-year recession that wiped out over a quarter of its gross domestic product.
Greek Finance Minister Yanis Varoufakis said on Sunday in Washington that his government would meet “all obligations to all its creditors,” in an effort to end speculation–fueled partly by other Greek officials in the past week–that Athens might not repay a EUR460 million ($504 million) International Monetary Fund loan that is due this Thursday.
Freeing up money to repay the IMF and other creditors, while also prioritizing the payment of pensions and public-sector wages, is forcing Greece to delay other domestic spending to make ends meet. Among the victims are suppliers to the public sector and businesses that are owed tax rebates, which aren’t getting paid.
Business and consumer confidence is suffering from broader uncertainty about whether the government will agree to the unpopular economic overhauls demanded by Greece’s creditors–the rest of the euro currency bloc and the IMF.
Greece needs a deal to secure billions of euros in bailout aid to avoid defaulting on its debts by this summer and potentially tumbling out of the euro. But the overhauls that creditors want, including further pension cuts and tax hikes, in a country reeling from years of drastic austerity, could split or bring down the government of radical-left Prime Minister Alexis Tsipras, which was elected in January on an antiausterity ticket.
After growing modestly last year, Greece’s economy may well have fallen back into recession, analysts say. “The macro environment is likely to continue to deteriorate until the political uncertainty and the liquidity situation (of the government) are resolved,” economists at J.P. Morgan wrote in a research note, noting that confidence in manufacturing, services and construction fell in March to levels consistent with a shrinking economy.
Kyriakos Elmanoglou, whose family has owned a fabric retail store in central Athens since 1947, says sales in the first three months of this year were 35% lower than a year earlier. “The shop has been through many difficult phases over all these decades…but nothing can compare to what we are going through now,” said Mr. Elmanoglou, aged 65.
Renewed recession in Greece would be a blow to the morale of a country that has suffered a collapse of output and employment not seen in an advanced economy since the Great Depression. It could force the government to impose further spending cuts and tax hikes to avoid a renewed budget deficit, something Mr. Tsipras and his leftwing Syriza party have vowed to avoid.
The government forecasts that the economy will grow by 1.4% this year, but many economists say that is too optimistic. The economy’s fate depends heavily on how quickly Greece can agree with the eurozone and IMF on economic policies to unlock further bailout aid. Athens hopes to reach a deal by April 24. Officials from other eurozone governments say Mr. Tsipras’s government still has a long way to go in drawing up a program of economic overhauls that satisfies creditors, however.
To keep meeting debt payments, the government has scraped together all the cash reserves it could find around the public sector. Since February, it has taken over or borrowed at least EUR1.2 billion from entities, such as the central bank and the country’s job centers. About EUR650 million of reserves from other state bodies are left to tap, according to officials.
Much depends on how tax revenue performs. So far, the government has managed to keep outlays other than debt service below revenues and looks to have gained some breathing space last month. A EUR900 million shortfall in tax revenues in January and February “has been largely covered” by higher tax payments in March, according to a senior finance ministry official.
Officials in Germany, Greece’s most powerful creditor, believe Athens can continue to stay afloat until July, when it faces a EUR3.5 billion bond repayment to the European Central Bank that will definitely require new bailout funds to avoid default.
Among those feeling the fallout from the government’s cash shortage is Greece’s health-care sector. Many suppliers of medicines and other medical goods are facing payment delays of nearly a year, according to SEP, an association of medical suppliers. But in 2012, when Greece struggled through a similar cash drought, payment delays often reached 500 days, the association said.
Since December, when Greece’s latest bout of political uncertainly began, “every payment has frozen,” says SEP’s secretary-general, Pavlos Arnaoutis. Medical suppliers can cope with the current level of delayed payments and are continuing to supply the health-care system, he said, “because 2014 was a good year in terms of revenues. But if this situation continues, we are going to face big problems.”