Report praises new economic model for Greece

In its latest report on Greece, UK bank HSBC notes the change that has taken place in the country’s economic model, with heavier emphasis placed on exports and investments, calling it a major reform story.

The economy’s prospects are far better and more sustainable than in the past, HSBC’s report notes.

The report inevitably touches on the debt crisis, which led Greece to desperately seek help from the European Union ad the International Monetary Fund in 2010. In the simplest of terms, a very loose fiscal policy led to an explosion in domestic demand. When that demand started waning in 2008-2009, the cost of borrowing rose and the debt shot up. The result, barring significant outside support initially, was a serious fiscal tightening which led to a serious economic depression and saw debt rise as much as 200% of GDP. For a long time, HSBC notes, Greece found itself in a debt trap, with weak growth when it finally returned, making a comeback to creditworthiness difficult.

A country with its own currency would depreciate it and the resulting increase in exports would compensate for the drop in domestic demand, allowing the economy to grow. But, being a eurozone member and thus unable to depreciate its currency, Greece could only improve competitiveness by a sustained decline in wages, the report says.

At first, keeping wages low simply boosted the deflationary trends, with the drop in prices accompanied by a sustained shrinking of the size of the economy, more than 20%. And with the economy not producing, unemployment also shot up, exceeding 28% in 2013.

Finally, exports began accelerating and, while the balance of payments still remains negative, the gap has closed. HSBC economists predict that it will further shrink to levels achieved in the two years before Greece joined the euro, in 2001. Investment gains and direct foreign investment are at historical highs and faster growth will allow the debt to shrink faster. Plus, a deal struck with creditors makes debt maturity long and interest rates low. Here the report notes that the Greek economic model is no longer led by fiscal policy.