25 August 2018

First Greece, Now Turkey? Is Turkey entering a deep financial crisis just as Greece exits one?

By Carsten Hesse

One can somewhat compare the boom times and overheating of the economy between 2000 and 2008 in Greece with the 2010-2018 period in Turkey. The risk to watch is whether Greece reverses reforms to such an extent that markets take fright again. Roughly 10 years after the start of the great financial crisis, Greece is the fifth and last Eurozone country to leave its bailout program. In future, Greece will have to get by without new loans from its official lenders (i.e., the International Monetary Fund, European Stability Mechanism, European Commission and European Central Bank). Instead, it has to attract money exclusively from private sources. As Greece exits from its financial crisis and has achieved a measure of economic growth again, the Turkish government must feel uncomfortable. After all, there are important parallels in the economic policy pursued by both governments (Greece then, Turkey now):


Both Greece and Turkey had an unsustainable credit driven consumption and investment boom which led to a large twin deficit.

One can somewhat compare the boom times and overheating of the economy between 2000 and 2008 in Greece with the 2010-2018 period in Turkey.
Let’s look at some data:

1. Loan growth

From 2000 until 2008, Greece’s loan growth was on average 18.8% year-over-year. In Turkey loan growth was 22.5% year-over-year on average between 2010 and Q2 2018.

2. Investments as a % of GDP

Investments in Greece reached 25% of GDP on average between 2000 and 2008, compared to 29% of GDP in Turkey between 2010 and 2017.

3. Current account deficit as a % of GDP

This deficit was in Greece 8.8% on average between 2000 and 2008 and around 5.6% of GDP for Turkey between 2010 and 2017.

In Greece’s case, the great financial crisis and the subsequent need to correct Greece’s domestic excesses caused a mega-recession in Greece. The GDP decline of about 27% was much deeper than necessary due to too much focus on austerity (tax hikes) instead of pro-growth structural reforms.
Turkey, watch out

The parallels between Greece’s unsustainable boom until 2008 and Turkey’s economic excesses over the last years are undeniable.

However, the policy response to such a crisis matters greatly. Greece’s government lengthened its adjustment crisis when the left-wing Syriza government in early 2015 disregarded policy measures recommended by experts and instead opted for unorthodox economic policies spearheaded by the then-finance minister Yanis Varoufakis.

This set back the Greek recovery by some three years. The Greek experience should ring alarm bells in Ankara.

Reasons why Greece can finally succeed

Looking at the track-record of the other four Eurozone ex-bailout countries, namely Ireland, Spain, Cyprus and Portugal, Greece should have a good chance to enjoy healthy growth over the coming years.

Despite Greece’s painfully slow economic recovery, the country implemented important long-term changes which make it more dynamic. Greece has:

1. rebalanced its large fiscal and current account deficits,

2. implemented important labor market and pension reforms,

3. brought down its bond yields and interest payment expenses, and

4. secured more EU funds to support investments.

However, significant challenges remain ahead. Greece’s high public and private debt levels remain a key challenge in the absence of more dynamic growth.

Also, a still large stock of non-performing loans in the banking system, high tax rates, an expensive pension system, a large public sector, weak educational performance and emigration are adding to Greece’s long-term challenges.

The risk to watch is whether Greece reverses reforms to such an extent that markets take fright again.
EU wants Greece to succeed

What helps Greece is that, over the next several years, it will receive significantly more money from EU budgets to support investment growth. Meanwhile, official lenders helped Greece to build a large cash reserve which should be enough to refinance the country for roughly two years.

In combination with other debt relief measures, this should improve Greece’s credit rating. Greece will remain under tight surveillance by official lenders and receive benefits which are conditional on further reforms. This reduces the risk of Greek policies going too much astray again.

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