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Greece Politics March 2020

Greece: Authorities announce fiscal package to combat economic fallout from Covid-19 pandemic

Over the course of March, Greek authorities announced a series of policy measures to mitigate the severe economic impact of the coronavirus outbreak. On 19 March, after previously receiving the green light from creditors to suspend the 3.5% primary fiscal target for this year, Prime Minister Kyriakos Mitsotakis announced the government would mobilize a total of around EUR 10 billion in a combination of state resources and EU structural funds to help households and businesses cope with the unprecedented crisis imposed by Covid-19.

The measures, which have been unveiled in succession as time progressed, include a one-off EUR 800 payment to workers that have been laid off due to business closures and to those whose employers suffer large financial losses; temporary suspension of tax and social security obligations for affected businesses; a reduction of VAT on certain pharmaceutical products; and tax deferrals for workers and the self-employed. The government indicated that additional measures were also being contemplated. Meanwhile, in a major move that has come to provide key additional support, the ECB’s EUR 750 billion emergency asset purchase scheme unveiled on 18 March included Greek bonds for the first time since the country’s sovereign debt crisis. Having been locked out of previous ECB QE operations due to the country’s below-investment grade rating, the inclusion of around EUR 12 billion of Greek bonds are expected to ease fiscal pressure somewhat by lowering borrowing costs.

Nevertheless, the outlook has turned bleak. In particular, the vital tourism industry, which has become the engine of the economy and accounts for about a fifth of employment and output, is set to take a massive hit amid plunging bookings, travel restrictions and business closures. Additionally, with economic activity screeching to a halt, this in turn could exacerbate fragilities in the banking system which is already burdened by the highest non-performing loan ratio in the Eurozone.

Commenting on the economy’s outlook and long-term fiscal sustainability, analysts at Scope Ratings noted:

“While the inclusion of Greek government bonds in the European Central Bank’s Pandemic Emergency Purchase Programme is credit-positive, the success of government measures in major economies to slow the COVID-19 pandemic will set the stage for the country’s ratings trajectory in 2020. Amid an uncertain outlook, Greece’s economic policy challenges include the reduction of the large stock of non-performing loans (NPLs) and the stepping up of privatisations and reforms, which would support the resilience of Greece’s economic recovery and long-term public debt sustainability”.

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