Greece returns to recession after bailout battle dragged on growth

Jasper Jolly
Follow Jasper
The latest bailout deal has been greeted with protests and strikes (Source: Getty)

Greece re-entered recession in the first quarter of the year as the economy shrank in the face of wrangling over a bailout deal for the beleaguered country.

Greece’s GDP fell by 0.5 per cent year-on-year in the first three months of 2017, according to early estimates of growth by government statisticians. That represented a significantly worse performance than the small expansion predicted by most economists.

The return to recession, technically defined as two consecutive quarters of contraction, came after growth in the Greek economy was held back by the political fall-out from negotiations over the latest tranche of its €86bn (£73bn) bailout from creditors.

Read more: Greece agrees bailout deal in return for more austerity

The International Monetary Fund (IMF) said last week that it needed more time to agree a deal on debt relief for Greece, one of the conditions of the organisation’s participation in the bailout.

The Greek government needs the bailout to make payments on bonds that mature this summer. However, the programme was thrown into doubt in February when splits were revealed within the IMF.

The IMF suggested the Greek government’s debt to GDP ratio was unsustainable and that austerity measures were holding back growth. Government debt currently stands at around 179 per cent of GDP.

The IMF’s suggestion that Greece should be granted debt relief by other creditors was rebuffed in the face of strong opposition from Germany, amongst other Eurozone countries.

Read more: Greek bond yields jump on IMF board battle

However, at the start of this month the Greek government secured a deal with creditors in return for further reforms to its economy, including more cuts to pensions and higher taxes.

The deal was broadly welcomed by investors, who bought Greece’s government debt at a rate not seen since 2014. The yield, which moves inversely to price, on a 10-year Greek government bond maturing in 2025 has fallen steeply in recent months, reaching a low of 5.65 per cent, according to Tradeweb.

Bond prices, which move inversely to yields, have been driven upwards by the renewed confidence in the bailout deal from Greece’s creditors, and the consequent lower likelihood of the government defaulting.

However, the prospects for a return to growth at the pace seen before the debt crisis first flared up in 2011 seem distant, with unemployment still at 23.3 per cent and youth unemployment far higher, at 48 per cent.

Related articles