Economic recovery in doubt as Greece takes EU helm
By Costis Stambolis
The coalition government of Greece does not lose an opportunity to point out that its Troika-backed austerity programme is working, having achieved a primary surplus in its current account of almost one billion euros for 2013, the first such surplus in 12 years. According to ministers, this positive development is synonymous to a ‘’success story’’ and marks a turnaround to the country’s free downfall following six years of continuous recession during which time the economy has contracted substantially with a 27% reduction of its GDP and a phenomenal rise in unemployment, up to 28%, with more than 1.3 mln people currently out of work. In addition, this better-than-expected robust primary surplus of last year is strengthening Athens’ position in negotiations with its lenders.
The government’s prognosis that 2014 will be a year of economic recovery is largely based on assumptions of a greater tourist inflow, the eurozone’s return to anemic growth and anticipated foreign direct investments in major infrastructure projects. However, several economists familiar with Greece’s problematic finances and antiquated public administration system express serious doubts of the likelyhood of a speedy recovery citing the heavy burden the country is facing from the servicing of its huge debt, which currently exceeds EUR 320 bln and corresponds to 170% of its GDP, including the management of its EUR 240 bln bailout programme. With recession running at a rate of -4.2% of GDP, with thousands of shops shut all over the country, tens of businesses going bankrupt daily and a mass exodus of professionals seeking employment abroad, the prospects for a sustained recovery look more than slim. According to the latest statistics, 110,000 enterprises have permanently gone out of business over the last four years, the result of austerity measures to fix government finances and restructure the economy. Evidently, the reforms have come at a huge economic and social cost.
Yet, Prime Minister Antonis Samaras talks about “a symbol of hope” as Greece formally assumed the helm of the rotating European Union presidency on January 1. With pomp and circumstance, ministers early in the new year received European commissioners who flew in for the occasion with Greek flags waving alongside the EU’s starred blue and yellow along the capital’s avenues. But as political commentators observe, Greece’s presidency, a largely administrative six month affair for which the EU’s 28 members take turns, will inevitably be overshadowed by the country’s failing economy. Consequently, Greece's role as administrator of EU legislative affairs for the next few months will by necessity be limited. Its effective term—cut short by EP elections in May—will largely focus on striking a deal with the European Parliament to advance the euro zone's banking union.
TROIKA VISITS LESS FREQUENT
Samaras has repeatedly said that he wishes the EU presidency to mark Greece's economic recovery and a return to international markets. Although the return to Athens of international bailout inspectors — the much unloved "troika" from the European Commission, the ECB and the IMF - may have been delayed for the time being, the team is bound to reappear following the next Eurozone meeting at the end of January. The troika’s presence may become less frequent in the months ahead, as public finances are slowly being put in order, but the economy will remain under close scrutiny for several years ahead as the country’s economic woes are far from over. To start with, the government’s accounts cannot balance over the next two years as some 11.0 bln euros in financing will still be required, according to Finance Minister Yiannis Stournaras. That won’t necessarily translate in a new bail-out as had been previously anticipated, notes Stournaras, with efforts concentrated in achieving better terms for serving the huge debt.
Some hope that Athens will soon be able to tap longer-term debt markets taking advantage of a positive climate that saw Ireland—the first euro-zone bailout graduate—triumphantly return to the markets two weeks ago. It is true that yields on Greece's 10-year bonds have fallen below 8%, and in mid January they reached their lowest point since February 2010, when the country last borrowed from the international money markets. At the same time, Greek banks, which have suffered along with the economy, are getting ready for a dynamic comeback if one is to believe recent statements by their senior management. They are still waiting for an assessment from BlackRock of their balance sheets, which was due last month. Depending on the outcome, they could be forced to raise additional capital in the market before tapping the leftovers of a government bank-recapitalisation fund which still holds some 10 bln euros. Meanwhile, Greek banks, which have effectively stopped lending to businesses or home owners for more than three years, are not likely to return any soon to full scale commercial activity thus undermining further the chances for a sustained economic recovery.
Bankers point out that Greece needs to reconstruct its post-default sovereign debt market, building its depth and liquidity at various bond maturities. The easiest way would be to issue fresh debt although market conditions could deteriorate later this year if the May EP elections strengthen euroskeptic parties across the continent. Paul Thomsen, the IMF’s mission chief for Greece, in a recent newspaper interview expressed optimism by saying that latest international interest in Greek debt highlighted an improvement in sentiment.
LIKE GIVING OUZO TO AN ALCOHOLIC
“Once a virtuous cycle gets under way, confidence can return quite fast,” he observed, although he added that sticking firmly to the country’s reform programme was essential. However, he did not advocate a return to international capital markets. Such a move, note financial circles in Athens, could in fact weaken Greece’s case for further financial support or help with the management of its debt mountain, either through extensions in maturities or lower interest rates.
Yet, the biggest danger ahead is of diverting Athens from implementing much needed essential reforms. Notwithstanding progress on the budget, the IMF points out Greece has implemented only a third of agreed structural reforms. In terms of functioning as an advanced European economy, Greece is still far behind Ireland and Portugal. For many eurozone policy makers, allowing Greece to borrow again would be like giving an alcoholic a bottle of ouzo. There is also the risk of a bond offer going wrong, undermining confidence in other eurozone markets as well.
The agonisingly slow pace of reforms is indicative of the poor perception of present day economic and social realities by the governing political elite which is still hooked for its survival on a client type economy. A clear lack of progress in opening up closed professions, the modernisation and simplification of the tax system, or the scaling down of the bloated public sector and the colossal failure of the privatisation programme – with less than 2.5 bln raised over the last three years out of a target of 15 bln – is indicative of the disappointing prospects for a return to economic growth.
The ruling coalition’s complacency, when it comes to implementing much needed reforms, is only shared by the main opposition SYRIZA whose constantly incoherent chorus and cacophony and absolute negation to any government decision or initiative is indicative of a strong anti-government sentiment by a growing segment of the population. This gives rise to several doomsday scenarios according to which SYRIZA’s widely anticipated win in the forthcoming EP elections will lead to the toppling of the Samaras government in soon-to-follow national elections. With SYRIZA in power, it will only be a matter of months before Greece drops out of the euro as its extreme left agenda advocates large scale nationalisations, the complete abandonment of a restrictive wages and incomes policy, rapid expansion of the state sector and further taxation of the battered private sector enterprises. Although it is unclear at this stage whether SYRIZA’s net lead in the polls will translate into a comfortable ride to power, the present polarisation only helps fuel a climate of political uncertainty which clearly undermines business confidence and thus prevents economic recovery.
Costis Stambolis is a Financial Mirror correspondent based in Athens. email@example.com
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