Greece: the making of a turnaround story

Greece: the making of a turnaround story

The beginnings of an unlikely economic turnaround in Greece – and new opportunities for investors – have mostly gone under the radar

  • Greece was in an economic mess for a decade from the global financial crisis, having received the largest sovereign debt restructuring in history
  • The Mitsotakis government’s Greece 2.0 plan showed a new level of resolve and stability to match the EU’s financial commitment, and is already starting to show results
  • Although economic challenges undoubtedly remain, we expect to see further benefits of continued structural reforms as time goes on. We will watch developments with interest

The economic story of Greece seems to be taking a surprisingly positive turn: a return to respectable GDP growth, a promising downward trajectory in the level of public debt-to-GDP, and a series of upgrades to the country’s debt rating. But to understand what is impressive about that in 2023, we need to revisit a not-nearly-as-pretty story that began over a decade ago.

The long way down

The roots of Greece’s economic woes started long before its near-default in 2010. Accession to the eurozone in 2001, in the absence of a strong track record of fiscal discipline, meant that Greece – with its structural economic weaknesses – had a very narrow path to navigate to achieve success. For example, after joining the single currency all debts that were previously denominated in Greek drachmas were now denominated in euros. This meant the central bank couldn’t just print currency to repay loans. Greece’s only options to repay debt were to issue bonds or raise taxes. And when the global financial crisis hit in 2008, the fragilities of the Greek economy were laid bare.

In 2009, a perfect storm of sorts took hold. Unemployment soared and tax revenues plunged. Debt-to-GDP exceeded 120%1 – double the limit set for members of the eurozone. The newly elected government revealed that the previous government had significantly underreported the budget deficit. Greece was temporarily shut out of the capital markets. Borrowing costs skyrocketed. Unable to issue government bonds to pay off debt, it was forced to accept massive bailouts from the EU or risk defaulting on its loans.

Figure 1: Greece’s debt is on a downward path (gross debt-to-GDP, %)
Figure 1 Greece’s debt is on a downward path

Source: International Monetary Fund, World Economic Outlook Database, April 2023

An initial €110 billion bailout staved off default, but it soon proved inadequate. A second €130 billion and a 50% negotiated reduction in debt represented the largest sovereign debt restructuring in history. Subsequent tax hikes, layoffs and wage cuts began to work – in 2014, the government reported a structural surplus. But the high taxes, unemployment and austerity measures took a political toll. In 2015, snap elections were called and a newly established anti-austerity party took control. Promises to increase spending and renegotiate EU bailout terms spooked creditors, who fled the market. A liquidity crisis emerged and in 2015, unable to secure any debt relief, Greece finally defaulted.

The government gave in, agreed to initiate reforms and cut spending, and a third and final €86 billion EU bailout was secured. It had become clear that the combined €326 billion in bailout funds alone were not going to pull Greece out of its morass.

A commitment to reforms

A new level of resolve and stability was needed to match the EU’s financial commitment, and in 2019 a more conservative prime minister, Kyriakos Mitsotakis, was elected, running on a platform of comprehensive economic reforms.

At the core of these initiatives is the Greece 2.0 plan2, which was created in response to the EU pandemic recovery fund. As part of this framework, the Mitsotakis government has proposed 400 bills over four years to address reductions in individual, corporate and investment taxes, remake pension funding and bankruptcy frameworks, create incentives to attract foreign workers, boost infrastructure spending, streamline climate regulations and more.

Figure 2: Greece has made significant progress with fiscal adjustment (primary fiscal balance % of GDP)

Source: International Monetary Fund, World Economic Outlook Database, April 2023

The government’s nascent initiatives and actions have already started to produce results. Unemployment and inflation have fallen and disposable income is increasing. GDP has been strong (Figure 3), rising 8.4% and 5.9% respectively for 2021 and 20223. Reserves to ensure debt repayments have been strengthened, and debt servicing has been significantly streamlined. Greece is likely to regain its investment grade status soon.
Figure 3: the Greek economy rebounded from Covid and is expected to grow in line with the eurozone average (real GDP growth, %)

Source: International Monetary Fund, World Economic Outlook Database, April 2023

Despite this momentum, challenges remain. Although the economy is showing clear signs of a turnaround, the Greek government and its people face headwinds similar to other emerging economies in today’s uncertain economic environment. These include persistent deficits, retraining legacy workforces and ensuring wider participation in economic recovery.

Figure 4: unemployment in Greece has come down significantly but remains higher than the eurozone average (unemployment, %)

Source: International Monetary Fund, World Economic Outlook Database, April 2023

A promising outlook

Current growth drivers include strong domestic demand and a rise in exports for both goods and services. Tourism, a key sector in the economy, is back to 2019 levels, showing increases in volume and revenue. Over the next three to five years Greece will see meaningful inflows from the EU Resilience and Recovery Fund4. The country’s banking sector has been leading the way, with healthy balance sheets, favourable capital/equity ratios, improving non-performing ratios and ample liquidity to support growth. Greece also benefits from a very favourable debt structure. Despite the financial impacts of the pandemic, the duration of Greek debt is 20 years and its interest rate remains very low at 1.4%5.

Longer term we expect to see the benefits of continued structural reforms, including more tax cuts, increased investment, incentives for job creation and further wage hikes. Geography and renewed political stability will also continue to be factors: Microsoft cited both when they opened a data centre in Greece. Other firms investing in the country include Pfizer, Tesla, Volkswagen, Cisco, SAP, Amazon and eBay6.

A core government spending initiative is digitising the Greek state and economy – Greece was one of the first countries to auction off 5G and already has 60% coverage. Building energy infrastructure and upgrading current infrastructure are also priorities, with plans to create a framework for offshore wind farms and improve energy efficiency in new and existing buildings. And while foreign investment continues to slowly grow, €13 billion in loans exclusively to the private sector as part of Greece 2.0 is closing the investment gap. These loans will focus on green energy, digitalisation and boosting exports of goods and services, and provide support for research and innovation and mergers and acquisitions.

The way ahead

According to the Greek philosopher Plato: “If you do not take an interest in the affairs of your government then you are doomed to live under the rule of fools.” So perhaps the greatest measure of success for the government plan is the mandate of the Greek people, who have come to recognise the value of what the government has achieved and gave the current incarnation four more years to continue writing the story of Greece’s economic recovery. We will be following this next chapter with great interest.

3 October 2023
Dara White
Dara White
Global Head of Emerging Market Equities
Krishan Selva
Krishan Selva
Client Portfolio Manager
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Greece: the making of a turnaround story

1 OECD, Stat Web Browser


3 World Bank Open Data


5 13D Research & Strategy, December 2022


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