Greece Capital Shutterstock.jpg

Photo: Shutterstock

Greece’s government had rowed back on its optimistic growth forecasts for the current year as a result of a dispute over the country’s third €86bn bailout programme. The impasse led to a six-month delay in its progress, which it is thought will likely stymie growth.

The country cut its 2017 growth outlook from 2.7% to 1.8%, while preliminary data published today by its official statistics agency Elstat suggests the economy’s forward momentum is indeed ebbing.

The Greek economy shrunk by 0.1% in the first three months of this year, following on from a 1.2% contraction in the final quarter of 2016, marking two consecutive periods of negative growth – the technical definition of recession.

Since the first quarter of last year, the economy has seen a decline of 0.5%, where it had been predicted to expand slightly.

A small reminder that the #Syriza gov has wasted yet another 6-month period to play a political game that deepened #Greece's recession. https://t.co/0bcIOguXci

— The Greek Analyst (@GreekAnalyst) 15 May 2017

Six months of sensitive political wrangling has weighed on Greece’s nascent recovery, which had appeared to be gaining steam. Growth was on the rise, and the public finances were busting through targets set by the bailout agreement.

Now, Athen’s own economic forecast is more pessimistic than that of the European Commission. The European Union’s executive also cut its predictions for the country from 2.7% to 2.1% in 2017 and from 3.1% to 2.5% in 2018.

While the government and its European creditors finally struck a deal earlier this month, Greek lawmakers still need to pass the measures agreed during negotiations in order for the bailout to move forward.

This is expected to happen in the coming weeks, enabling the release of the next tranche of bailout funds. Greece’s government also hopes it will pave the way to regaining much-needed access to the bond markets and participating in the European Central Bank’s quantitative easing programme.

But Jennifer McKeown, chief European economist at analyst firm Capital Economics, said the figures from the first three months of 2017 suggest even Greece's updated economic forecasts are "far too optimistic", and could hold up bailout payments. 

Reaching an agreement on debt relief for the countries 180% of GDP debt mountain will now be more difficult, she explains. A debt relief deal is a key condition for the International Monetary Fund joining the bailout, and the German parliament has said it requires the fund's participation before it will sign off on the next loan payment. Public support for the bailout in Germany, Greece's biggest creditor, is waning, and the IMF's support is seen critical to boosting the bailout's credibility. 

Without the release of the next loan tranche, Greece will not be able to cover debt payments due in July. 

"It is still most probable that a deal will be fudged to release funds to Greece before the deadline of July’s [debt repayments], possibly with the European Stability Mechanism bailout fund filling any shortfall left by the IMF," said McKeown. 

"But the authorities will be cutting it fine again and the ultimate deal is still very unlikely to involve the significant debt write-off that would be needed to help secure Greece’s future in the euro-zone."