Greece's Troika's demands could slow recovery
Demands for further reform on Greece's government from its triumvirate of lenders could delay a recovery and keep bond yields elevated indefinitely, according to Capital Economics.
Greek government officials were due to meet with representatives from its 'Troika' committee of lenders namely the European Commission, the European Central Bank and the International Monetary Fund.
The meeting in Paris on Tuesday is to restart negotiations about the reforms Athens will have to implement for the final review of the country's bail-out program and how it can exit the bail-out.
The Greek Finance Ministry said the meeting was “to advance the review and examine the framework for the day after [the bailout ends]".
One of the key points of contention in the 2015 budget is next year’s fiscal deficit, which Athens maintains it is on track to eliminate but which the troika calculates will still be €2bn-€3bn.
If the Troika requires the Government to adopt further austerity measures in order to meet next year’s target, this would pose major risks for an economy that only exited its six-year recession earlier this year and remains vulnerable, argued Sarah Pemberton, European economist at London-based Capital Economics.
For example, the Troika is calling for a quicker time frame than Athens for a new plan for households to pay back the circa -€68bn of outstanding taxes.
"But with the recovery in household spending remaining weak, there is a risk that stricter repayment terms will damage consumption. What’s more, with the euro-zone continuing to struggle, there may well be a limit to the extent to which exports can continue to compensate for low domestic demand," Pemberton explained.
She said the Greek government's defiant stance on the budget was "understandable" in the context of domestic political pressure but its continued desire to push forward with plans in the face of resistance from the Troika is "likely to be a key reason why government bond yields remain elevated at around 8%".
After back-tracking from hopes of exiting its EU programme without any further financial assistance, she believes the Greek government now appears to be hoping to negotiate a precautionary credit line with Eurozone finance ministers at the December meeting.
"Overall, the Troika may well push back on the Government’s latest fiscal plans and call for more austerity than the Government has currently planned, with potential negative implications for growth.
"And with market nervousness over Greece’s plans remaining high, a dispute over the budget will keep bond yields elevated for some time to come."