German think tank ruins the party: markets may be exuberant but ΄Greece is becoming ever more impoverished΄

Greece’s recent return to borrowing on the international debt markets raising 3 billion euros through a 5-year bond offering with an interest rate of 4.95% is no cause for celebration according to the CEP study which was released today by Deutsche Welle (link in Greek).

The think tank, which has developed its own ‘Default-Index’, maintains that the solvency of states depends less upon the height of deficits and the public debt and more from the overall stability of the economy. Analyzing the state of the real economy in Greece which remains moribund, the researchers claim that Greece is far from out of the woods.

“The situation of the real economy and the fiscal situation does not justify the fact that the Greek state succeeded in offering its bonds with an interest rate below 5%,” the CEP writes adding that it sees no reason for improvement in Greece’s creditworthiness in the foreseeable future.

“Greece is becoming ever more impoverished,” according to the researchers who note that between 2011 and 2013 the reduction in investments amounted to 10.7% of GDP. At the same time the consumption index remains above 100% of the available income, reaching 119% in 2013. The CEP maintains that the only way for Greece to restore its ability to borrow is through a ‘drastic reduction in the consumption index,’ but that this cannot currently be achieved.

As such the optimism on show both from the government and in financial circles is not justified. “The opposite,” according to CEP. “The behaviour of investors will lead to a lessening of the pressures for reform as well as a reduction in drive for reform on the part of the Greeks, with the result being that the recovery will be deferred to the distant future.”

What Greece really needs, according to the researchers, is economic consolidation through growth but recent developments have made this an even more distant prospect, prolonging the financial hardship.

In short the problems of the real economy in Greece are affected little by the developments and investor exuberance in the sovereign debt markets.