Greece’s future is its past | 23rd February 2015

Why trade holds the key to debt renegotiation  |  A deal was done at the last minute: Greece’s €172bn debt bailout was extended for a further four months after a turbulent week of bluff and counterbluff. Even now, there are no formal agreements on the required reform process ahead and without these agreements the deal will not be ratified. It appears that the Greek government is keen to demonstrate its willingness to reform by focusing on tax evasion and civil service reform, but it is unlikely that this will be sufficient for either Germany or the ECB.

By letting its focus continue to be on austerity, debt renegotiation, and structural reform, Syriza and now the Greek government, seem intent on playing by the same rules as the Troika, the ECB and Germany. For an economy that has shrunk by 25% since the beginning of the financial crisis, this is extraordinary. Instead it should be looking at debt re-payment over the longer term. If an economy is growing, then its debt is affordable; if the debt is extended for four months, then growth should be made central to subsequent discussions.

At present the outlook does not look good for several reasons: first, Greece is a service economy yet, despite the improving external position represented by the declining euro, its service sector trade is set to decline sharply over the next three years and pick up only gradually into 2019 (Figure 1). Given Greece’s already weak domestic demand, the decline in service exports, which includes tourism, is worrying.




Figure 1  |  Outlook for Greek service sector trade to 2020
Source  |  DeltaMetrics 2015


Second, Greece’s goods trade to GDP ratio is 0.4. In other words, there is a fairly strong pull of trade on Greece’s GDP. Oil is a critical part of this: the correlation between Greece’s trade and the oil price is 0.80 – largely because of the importance of oil in Greece’s total trade structure. For example, Greece’s exports of refined oil are twice as high as the second-largest export sector: medicines.




Figure 2  |  Greece’s debt and the challenge of trade
Source  |  DeltaMetrics 2015


The importance of oil to Greece’s trade explains its resistance to the EU’s extension of sanctions against Russia in January and is the third reason why Greece’s situation more broadly looks vulnerable. Turkey is Greece’s largest trading partner and its import/export portfolio is dominated by oil, gas, cars and infrastructural products. Russia is a growing trade partner for Greece but Russia predominantly exports oil and commodities while Greece exports clothes and fresh or stoned fruit to Russia. Greece’s growth in exports since the financial crisis has been because of its role as an oil and infrastructure distributor with a heavy reliance on Turkey, its largest trading partner and, increasingly, Russia (Figure 3).




Figure 3  |  Greek imports from Turkey and Greece (% annual change) 2010-2016
Source  |  DeltaMetrics 2015


Imports from both countries have been volatile, but two things are clear: First, Greece has been attempting to switch its imports of oil from Turkey to Russia, evidenced by the steep increase in imports in 2010 from a small base. Second, and arguably more interestingly, imports from Turkey and Russia have been inverse to one another: when Russian imports have increased, Turkish imports have declined and vice versa. Even in the forecast period, from 2015 to 2016, Greece’s imports from Russia are falling at a slower rate than those from Turkey.

If Greece is to have a path to debt repayment then it must do two things: First it must seek to restore its greatness as a trading nation, both in services and goods, through reforms that focus on skills development, innovation, inward investment and port redevelopment. Supply side reforms alongside structural reform may make debt serviceable more quickly than just one in isolation since both are necessary and neither is alone sufficient.

But second, and in spite of history, Turkey may yet hold the key to Greece’s growth through trade and this is a bullet that should be bitten quickly. Europe’s geopolitical relationship with Russia is difficult at present to say the least and while this continues, it is unlikely that Greece will be able to restore its role as an energy and infrastructure distributor in the near future. Greece’s trade relationship with Turkey reflects mutual trade interests.

Market nervousness about the possibility of a “Grexit” heightened by the rhetoric of the past week may yet prove to be unfounded, however. The Greek public voted for Europe but against austerity. This is as much about politics as it is about economics. Greece, in trade and geopolitical terms, sits on an emerging fault-line between Russia and Europe. As sanctions build against Russia, Greece’s position is arguably more secure within Europe than it is, say, aligned with two of its major and more volatile trading partners, Turkey and Russia. And let’s not forget, the history defined by the Stability and Growth Pact and monetary union means Germany’s banks are exposed to the risks of Greece’s sovereign default and of a Grexit more than any other nations. “Necessity is the mother of invention”: let us hope that the Realpolitik of a Grexit is the driver for the resolution of the crisis.


Greece’s future is its past  |  Author  |  Rebecca Harding  |  CEO