Does return to markets signal end of Greek crisis? The perils of ignoring macro-economic fundamentals

Agora Contributor: Jens Bastian
Photo by Harry van Versendaal
Photo by Harry van Versendaal

Politics today is the art of shaping a narrative, with the overriding preference being for one that is in harmony with markets and investors. This narrative is currently being formulated in real time in Greece. It is centred on the much anticipated return of the Greek sovereign to international bond markets. Even the best public relations agency could not have done a better job of creating the “market return” narrative that the coalition government of Prime Minister Antonis Samaras has done over the past weeks.

Wherever Greek bankers have appeared on international road shows in the US and UK for corporate bond placements or advertising capital increases during March, they took the city by storm. News of unprecedented investors’ interest in these issuances and heavy oversubscription were greeted with enthusiasm back home in Athens. Moreover, the success stories of Piraeus Bank and Alpha Bank prepared the field for the Greek sovereign to jump on the rolling bandwagon and proclaim that the crisis is over because the country and some corporates are again being admitted into the international investment community.

However, financial investors’ interest in such assets is less prominent from continental Europe. Equally, this stampede stands in sharp contrast to private investors’ willingness to commit resources to the Greek real economy, e.g. in terms of their participation in high profile privatisation projects. The single largest foreign investor in Greece since 2011 is a public institution, namely the European Investment Bank, the financing arm of the European Commission.

For those of us who have lived through the crisis years since 2009, it is quite amazing to observe how quickly investor sentiment towards Greece has changed. Since the start of the year Greece has moved from pariah to the toast of global financial investors. Furthermore, it is rather revealing to observe that many members of the international investment community appear to have suspended their critical faculties, preferring to ignore numerous macro-economic fundamentals of the country and various challenges that Greece continues to face. Instead, much of their interest is reminiscent of a herd instinct, driven by investors rotating out of emerging markets and starting to pile into higher yielding periphery assets in Europe.

The recent popularity of peripheral bonds with global investors goes hand in hand with the efforts to talk up confidence in the Greek economic recovery narrative. But to what degree is that confidence warranted? Do certain macro-economic indicators back up such optimism in terms of the real economy outlook? Let’s look at three key factors.

  • If the presumed economic recovery is to be sustainable over time it will need to manifest itself in the export sector. However, the facts do not suggest that an export-led recovery is emerging in Greece. Rather, the opposite is the case. In 2013 exports registered an annual decline of 0.2 percent. When oil products are excluded the drop was even larger, reaching 2.2 percent.

  • Aggregate demand is frequently cited as an early indicator of an economic turnaround taking place. But again, if we look at the data originating from the Hellenic Statistical Agency (ELSTAT), turnover of Greece’s retail trade index fell by 4.3 per cent in January and volume eased by 1.9 percent.

  • A third indicator for an economic recovery would be credit creation by banks for the real economy, in particular SMEs in dire need of working capital. For more than three years the credit contraction in the Greek economy has been deepening, with lending volumes to private households and corporates reaching -4 percent in February 2014.

Foreign investors have a choice in front of them when returning to Greece: They can dismiss such dormant risks at their peril and continue to follow a bandwagon whose path is still ill-defined. Alternatively, they can turn to two recent reports by the international credit rating agencies Moody’s and Standard & Poor’s. Both agencies did not give a thumb’s up to the Greek sovereign and decided that an upgrade of the country’s credit rating was premature and not yet based on fundamentals.

The Greek authorities dismissed the absence of an upgrade, which they had strongly expected, as a nuisance and irrelevance. But both reports make for interesting reading and should better inform those who are not prepared to ignore the realities of the political economy of Greece.

If there is a case for limited optimism to be made about the country, it should be based on the observation that we are seeing an economic stabilisation at a very low point of departure. But it is early days to call the crisis over in Greece. It is not yet time for the cry of “mission accomplished.” Of huge importance for the country’s economic performance will not be how it fares in financial market but how many jobs with a respectable income can be created in the private sector.

Furthermore, the country’s outlook will be shaped by citizens’ and corporates’ capacity to increase their disposable income and working capital in order to meet mounting tax and social security obligations. The "silent crisis" that has no name and hardly a voice manifests itself in an ever-increasing incapacity of citizens and corporates to meet their payment obligations towards tax authorities, banks, schools, social security funds and public utilities for water, electricity or heating oil.

The narrative which the government is seeking to shape about a successful return to markets has one major fault line. Not only is this return in my view premature, it is also overly expensive. If the Greek sovereign is looking for best offers and has the objective of fiscal rectitude in mind, then the placement of a five-year, 2.5-billion-euro bond at a possible yield above five percent is rather highly priced.

If the criteria of low yields, long maturities and reliability of the credit provider are taken seriously by the Greek debt management agency and finance ministry, then Greece currently and in the foreseeable future has no better investor than its European partners. More specifically, the loans which Greece has received from the EFSF and ESM have an average maturity of 30 years. The average yield is currently set at 1.5 percent. The loan arrangement also includes a ten-year interest rate moratorium and the first repayment obligations only fall due in 2040.

These are exceptional financing conditions for the Greek sovereign. It’s an offer that’s hard to refuse. But it’s also an offer that does not appear anymore to fit into the emerging narrative in Greece.

*Jens Bastian is an independent economic consultant and investment analyst for southeast Europe. From 2011 to 2013 he was a member of the European Commission Task Force for Greece in Athens. He is a regular contributor to The Agora section of Macropolis. Follow Jens on Twitter: @Jens_Bastian

2 Comment(s)

  • Posted by: Tsigantes

    "Politics today is the art of shaping a narrative"....and Kostas Karamanlis, ex-ND P.M remarked this week that the media propaganda for return to markets was unprecedented in Greece.

    As a post-Baltakos diversion, the return-to-markets "triumph" - crowned by a visit from Angela (a mutual boost to her votes at home, and Samaras' here) - is a cynical ND campaign gesture at the expense of Greek taxpayers, who are now additionally burdened by the 4.95% interest payments 10 months before it was necessary. A real pre-election 'gift'.

    On top of the bond interest payments, while paying back Greece's unpayable debt (which they did not create), the Greek taxpayer has also been newly assigned by the government to pay for (article 2 Multibill) re-financing the banks before the stress tests. Without bank shares in return: a gift to Greek bankers.

    Meanwhile the markets are at the peak of a subprime bubble in which Greece's disguised eurobonds under English law look good. You were supposed to argue Mr. Bastien that taking advantage while the going is good has a perverse logic, and the result will help finance the coming bond payout!

    Finally you mention that "Of huge importance for the country’s economic performance will not be how it fares in financial market but how many jobs with a respectable income can be created in the private sector." - true. But our Creditor 'partners' put this 'respectable income' at c. 300€ per month which is 1/4 of EU poverty level and will lift NO boats.

    Should ND and the EPP win the EU election, I bekieve we will be facing far worse conditions and 'conditionality' (such sick euphimisms) than anything we have seen yet.

  • Posted by: H.Trickler

    >"it is rather revealing to observe that many members of the international investment community appear to have suspended their critical faculties, preferring to ignore numerous macro-economic fundamentals of the country and various challenges that Greece continues to face."

    So it is, so it has always been, and so it will be forever ;)

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