The lack of investment is the biggest disappointment of the Greek economy, Themis Themistocleous, Head Chief Investment Office Europe at UBS Wealth Management, notes in an interview with Kathimerini, explaining why the Greek economy is trapped at low growth rates. He talks about what the outcome of the European elections means for investors while he stresses that the Greek government's pre-election handouts are going to be fiercely resisted by the European creditors and explains why UBS is worried about Greece and Greek bonds.
EU elections where not a major theme for the markets in the past, but this time is different. What are the risks investors need to consider when investing in Europe now?
The question is that after the rise of the populist parties in EU elections, how much they can influence legislation within Europe. I think the risk is a bit less because although they definitely get more seats, they don’t have a majority to drive legislation. Also, by design, a lot of these populist parties tend to be nationalist parties as well, so to create coalitions is going to be a lot more difficult. In most cases they push their national interests so it is a bit more difficult to go across Europe. So in terms of how much they can dominate and drive legislation I think it is going to be difficult. What they can do is to frustrate the passing of the legislation they don’t like, so there might be a little more difficulty when the European Parliament tries to pass legislation. That is the one aspect, but there is another aspect as well: How these elections are going to be read in the domestic markets, e.g. In Italy, and this is what we need to consider. And that can be important for the specific countries. It is not uniform for all the economies.
Is there a recession risk in Europe?
We issued a report on the Future of Europe recently, to respond to our clients’ questions. Every time there is a weakness in the economy, everyone is asking “is Europe going to recession and what happens if it does, will it break up, will it survive”? We said OK, could there be a recession? If yes, when could it happen and how deep could it be. If we look at he development of the eurozone economy I would say that it is most probably in mid-cycle. So if there is a recession it is unlikely it is going to be caused by Europe. The trigger could be if the US goes recession, if China has a sharp slowdown or a combination of factors (China slowdown, escalation of trade war and if the US government decides to impose tariffs on cars etc). When could it happen? Probability of it happening in 12 or 18 months is low. So if a recession comes in the early 2020s and in a shallow recession environment the ECB still has ammunition – look at BoJ: interest rates can go down more negative, they can be more aggressive into purchasing bonds, equities, restart QE. If we have a deep recession, as in 2007-2008 even then for purely an economic point of view, we think Europe and eurozone can survive. The most difficult question to answer is the political aspect. If you look at European crises, the politics was the element that became a lot more difficult and risky. In any case, Europe – and this is our base case – will do what it did previously and try to support the countries.
In this lower growth environment, Greece's growth is projected by the European Commision to stand at 2.2 percent this year. Still, for a country that exited the bailout era, forecasts for the growth of the Greek economy in 2019 and in the coming years run at very modest levels. Ireland and Cyprus, for example, saw their growth in the year after the exit from the program, run at very high levels of 4 percent. Why the Greek economy cannot fly high, in your opinion?
Yes, if you look at how low the starting point is you would expect a lot faster growth from Greece coming out of the recession. There are differences compared to Ireland and Cyprus. One of them is that they are more flexible economies. They introduced more reforms – even from the starting point they where more flexible. And following the crisis they introduced even more reforms relative to Greece. Although I have to note that when I talk to investors from outside Greece, they tend to underestimate how much Greece has done in terms of reforms, they say that it has to do more. Clearly the economy is not flexible enough. The other thing is that investments are the biggest disappointment when you look at the Greek economy. There just has not been enough foreign capital coming to Greece, even local capital. So there haven’t been enough investments. Is it because of lack of confidence or lack of incentives? I do know for example that Cyprus was really aggressive in trying to attract foreign capital and its has been quite successful in that. That helped the economy grow more than 4 percent last year. I think that this is the one area Greece can change if it wants to successfully change investors perception and encourage foreign capital to come to the country. This would make quite a big difference in the growth rate. Also, when I talk to investors one other thing they complain about is that there were a number of projects in Greece that were on the go but seem to be progressing very slowly. You need some success story to build from it. If there is track record that is established, more investors would come.
The recent government handouts have created tensions with the creditors, and both analysts and credit agencies have expressed concerns. Are these measures in the right direction, are they enhancing growth and what could the implications be?
The last part of the question is very important. Because anybody can grow with spending money. Borrow and spend. Unfortunately at some stage you have to pay back what you borrowed. And I think the creditors would resist fiercely the undershooting of the primary surplus targets. So I think that Greece will find it very difficult to move away from the agreed targets. The governments always say that if they spend more, growth will be higher. But it doesn’t always work. It is a lot easier if you convince foreign investors to come and bring their capital rather than the government trying to spend more. All of those measures aid growth but the problem with Greece is that it has such a high level of debt that it is very difficult to convince people that it is going to grow its way out of debt. Greece needs to bring down its debt. You can’t afford to go to another recession with this level of debt, you are going to again face problems. That is why in the longer term we are still worried about Greece and we have mentioned in our report that Greece may require continued support to remain in the eurozone.
So is the road to investment grade status for Greece long?
I think it is fairly long. It has to go three or four notches up to reach investment grade and it will take some time for this. Maybe it can go one notch up in the short term, which is very likely, but to reach the investment grade status it will be a long process.
What are the short-term challenges Greece is facing?
Number one is to try to attract investment, that would make a huge difference. Consumer spending is not too bad and there are parts of the economy that are doing well, tourism for example, but I think the big change could be if they enhance investment. I think that if Greece attracts a little bit more investment it can grow next year by 2.9 percent. It can make a huge difference.
The other thing is that Greece is also a part of the global economy. So we shouldn’t forget that the end of last year/beginning of this year the global economy went through a soft patch, and now with the trade war it is possible that we are going to have another slowdown in the global economy. Europe is a big exporter. So Greece won't be immune to global or European weakness.
A third challenge is the high level of Greek banks’ nonperforming loans. Every time there is a crisis or turmoil in the markets, everyone asks the question whether Greek banks will need more capital. So for the economy to be healthy and grow, you need availability of credit. And this is constrained by the mountain of NPLs. It is multiyear process to bring down NPLs to a low level and you hope that another crisis does not happen because if it does the NPLs will go up again. Ireland addressed that issue with the creation of a bad bank, Cyprus still has some issues but some of the banks are healthier. Greece is still facing that challenge.