As next year looks set to bring multiple challenges in global markets, it is important for Greece to convince international investors that the fiscal risk has diminished and to normalize its credit system, UBS Wealth Management Global Chief Economist Paul Donovan tells Kathimerini.
Donovan also notes that the government’s pledge of handouts is not a positive message to investors, though it is not surprising in an environment where political stability has come under increasing pressure.
It has been four months since Greece emerged from its last bailout program, but it still has not managed to tap the markets through a new bond issue. What, in your view, is the reason for this inability to return to the markets?
Greece is showing a primary surplus and this reduces the element of urgency in tapping the markets. Recently, due to the situation with Italy, the bond markets – especially in Europe – are highly volatile, so tapping the market may not make so much sense. We find ourselves in an environment where interest rates are growing internationally, liquidity in the global markets has decreased and the political uncertainty in Italy has reminded international investors of the political risk in Europe.
In the case of Greece, which is looking for international funds, this has played an important role, so the reaction to Greek bonds has been stronger in comparison with other bonds in the eurozone. However, Italy is not alone responsible for the Greek state’s inability to tap the markets, as Greece’s low credit rating is also playing a significant part in attracting investors to Greek bonds.
Greece is in pre-election moder and the Greek government is pursuing a policy of handouts instead of one aimed at attracting investments. How do investors perceive this?
Handout talk is not a phenomenon exclusive to Greece. Pressures around political activity have increased, as we have also seen in the case of French President Emmanuel Macron. This policy is not surprising for investors, particularly in Greece’s case. The markets will certainly not have a positive reaction to such declarations, because they are looking for policies that will attract capital. Still, if they judge that these policies are not upsetting the country’s fiscal prospects, they are likely to tolerate them to an extent, as they acknowledge that a degree of political stability is desirable.
In the long-term, what are your forecasts about Greece’s prospects for 2019?
The eurozone economy is slowing down and in this environment Greece’s growth will remain at a relatively steady rate of 2 percent in the next 12 months. This is because the economy is coming out of a period of deep streamlining, domestic demand has stabilized and export growth is expected to continue. Even so, bank credit remains next to zero and in the absence of a smooth banking system the country is not expected to enjoy normal trends in investments and growth.
One major challenge for Greece is developments in Turkey. In our view Turkey will go into recession in 2019 and this will also affect Greece due to the trade relations between the two countries.
How will changes in European Central Bank policy affect the yields of Greek bonds?
Greece did not participate in QE, so supply and demand for Greek bonds will not really change after it ends. If German yields change due to the rise in ECB rates, this will not necessarily mean that the Greek ones will go up too. That will depend on how the investors weigh the Greek risk. If they see the Greek risk decreasing, then the spread will go down.
Therefore, what will be important for Greece in this new environment is how it presents itself to the international community. Whether it will be able to persuade international investors that the country’s fiscal risk has been reduced and that growth will continue in the medium-term.
Many argue that what Greece needs is an investment shock. How could this take place in today’s environment, ahead of a general election too?
There is a question in international economy over what “investment” means exactly. Why are investments at a low level internationally, in an environment of such low interest rates? Part of the problem is that it is hard to count the investments in an economy with many structural reforms. And the more an economy is orientated toward the service sector, as is the case with Greece, the harder it is to assess the investments. Following the significant reduction of labor costs which has somewhat improved competitiveness, and based on the trend in international trade that could assist Greece, the country does have prospects – if it makes the most of them.
Nevertheless, Greece’s biggest drawback is that a great number of young people have left the country due to the crisis, and this is a worrying trend as far as investments are concerned. If you persuade young people that there is a future in their own country, then they will employ their skills to the benefit of the Greek economy. More business-friendly policies as well as a reduction to tax rates would also help in that direction.