Structural considerations for a prosperous Greece
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Voting for brinkmanship while the real economy needs solutions
Athens’ addiction to partisanship and political drama was yet again on full display during the last days of 2014. The election of the country’s president by parliament through an open roll call may appear unusual for observers from outside Greece. But the outdated electoral procedure through the assembly makes for lively political theatre in a climate of ferocious unreasonableness.
The ink on the official results of the third – failed – ballot for the presidential election by parliament had hardly dried when MPs from the governing coalition and the opposition parties immediately switched into pre-election modus operandi. With general elections scheduled to take place on 25 January, there is now no time to waste for the different party operators in a highly charged political environment in Greece.
It remains to be seen if the early elections, which the largest opposition party SYRIZA wanted at all cost and which the governing coalition did not mind avoiding, will yield the political solutions that either camp is banking on. One cannot exclude at present that Greece could face in the first quarter of the New Year a déjà vu-like situation as occurred in mid-2012 when only back-to-back general elections proved decisive.
Irrespective of potential outcomes and future scenarios, two victims of this sustained political uncertainty are already visible: for one, the reputational costs of this saga for the country and, secondly, the consequences of this impasse for the real economy and its outlook in 2015.
Once the fog of political brinkmanship will have cleared – and it could take a while for that to happen in Greece – picking up the pieces and switching into repair mode will be a challenging task for whatever governing arrangement emerges. There are numerous unresolved issues that await urgent clarification and sustainable solutions from the forthcoming political authorities in Athens.
As Greek government bond yields have continued to rise since September of this year, servicing these sovereign obligations and financing the issuance of new debt will become ever more difficult, if not impossible, in the course of 2015.
But the focus should not rest exclusively on Greece’s sovereign debt avalanche. Corporate bond yields of Greek businesses are rising sharply in tandem with those of the sovereign. This makes corporate refinancing options more expensive and restricts access to financing resources on secondary debt markets for Greek enterprises at a time when liquidity shortages are growing in the real economy.
The overhang of private sector debt is equally a cause for immediate concern in Greece. The combination of non-performing loans accumulated by private households and businesses while tax arrears to the state are rising on a monthly basis make for an explosive cocktail for any budgetary outlook and the balance sheets of domestic banks. Since market access for the Greek sovereign became increasingly unreliable in the second half of 2014, it now looks literally impossible in the first quarter of 2015; possibly even longer. Such weak standalone creditworthiness will quickly create funding gaps for the Greek state. The default option to subsequently increase T-bill issuance in order to finance ongoing government expenditure will only further drain the real economy from available liquidity by domestic banks.
It is indicative of the emerging risk architecture in Greece that the finance minister, Gikas Hardouvelis, recently had to publicly reassure account holders that their deposits are safe and guaranteed. While Greek banks are now well capitalised, the nine-month results of the four systemic institutions underlined how fragile their asset quality continues to be.
In September of this year, the tailwind provided by lower funding costs finished for the Greek sovereign and corporate debt issuance. The credit crunch in the Greek real economy is not only the result of rising interest rates for medium-term business loans. The corporate environment is also characterised by a lack of creditworthy debtors, in particular among small and medium-sized businesses (SMEs).
It is frustrating to witness in real time how political partisanship and single mindedness in Athens cloud any attempt to formulate a narrative that links Greece with
positive developments emerging in the domestic economy. Who remembers that only a week ago the newly established Institution for Growth in Greece (IfG) signed the first credit agreements with four SMEs in Greece? This special purpose-funding vehicle is an example of sustainable financial innovation for the real economy.
By the same token, two of the four largest Greek banks have just announced contractual agreements with foreign institutions concerning their distressed loan portfolio management. Piraeus Bank, in cooperation with the US fund KKR, and Alpha Bank, working together with the Spanish Aktua Soluciones Financieras, are both seeking to improve corporate debt workout solutions. The implementation of such portfolio management instruments is long overdue in Greece.
Whatever the political outcome of electoral developments in the coming months, those who will then be in charge have their work cut out and time will be a scarce commodity available to them. They will not be granted a grace period to settle in. The international creditors in the troika await the conclusion of the fifth review of the macro economic adjustment programme.
Moreover, the recently agreed technical extension of the European part of the programme by two months to the end February 2015 may now have to be revised. January will be entirely consumed by the unpredictable nature of Greek politics. What follows afterwards is anybody’s guess at present.
*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
This article was published in last week's electronic newsletter, which subscribers can receive via e-mail or mobile app. The apps can be downloaded for free at the App Store and Google Play.