By Dimitris Kontogiannis
Greece is likely to take the first step to access international markets this spring for the first time since April 2010, taking advantage of the favorable conditions for risk and the expected passage of a key reform bill in Parliament. Signs are mounting that the economy will exit the six-year recession in the second or third quarter of this year and growth may even surprise on the upside, but it is still too early to call the game over. The markets may be complacent about Greek political risk but that does not mean it should be underestimated.
Sharp exchanges between the government and other political parties and strikes by professional groups adversely affected by the liberalization of markets and the deregulation of professions dominated the political scene ahead of yesterday’s vote in Parliament for a key reform bill. However, that has not stopped international investors from buying Greek stocks and bonds, driving the benchmark 10-year treasury yield down to 6.6 percent. The strong appetite was clearly demonstrated by Piraeus Bank’s six times oversubscribed unsecured senior bond issue, the foreign interest in the share capital increases of Alpha Bank and Piraeus via the book-building process and major foreign funds’ reported interest in covering Eurobank’s capital needs.
Therefore, it would not be a surprise if Greece taps the market for a net amount of 1.5 to 2.5 billion euros of five-year bonds in the not-too-distant future for the first time since the spring of 2010. The gross five-year bond issue may exceed 4 billion euros since the country may also exchange new five-year bonds with longer-dated securities to make the new issue more liquid. It is interesting but also indicative of the changing landscape that Greece may not have to use the money to fill the 2014 financing gap estimated at around 4.5 billion euros since it can do so via other available means. So the five-year issue will simply help Greece build its yield curve by providing a market-determined interest rate in the five-year tenor and increase its cash reserves.
Undoubtedly, this is a positive development since it shows the country is regaining investor confidence, making it possible to gradually stand on its own feet. It is natural for the coalition government to try to take advantage politically but it is more important that the economy starts growing again and the country exits direct financial assistance. It is noted, following the completion of the current, fifth review by the troika and the expected disbursements, Greece will be a step away from exiting the EU’s program financed by EFSF/ESM money, most likely by the end of the year. On the other hand, the IMF program is projected to last longer, ending in the first quarter of 2016, assuming the country does not find other ways to replace the remaining IMF funding from other sources.
Readers are reminded the EFSF/ESM was going to disburse 144.6 billion euros to Greece and the IMF 26.6 billion euros through its Extended Fund Facility (EFF) to fund the second bailout program starting in 2012. The EU had disbursed 52.9 billion euros in bilateral loans by the end of 2011 and the IMF 19.6 billion via its Stand-By Arrangement (SBA) to finance Greece’s first bailout program devised in May 2010.
Assuming the EU disburses 8.3 billion euros in one or more tranches, starting in May, following the formal completion of the fifth review by the troika, Greece will have about 2.7 billion euros left to receive from the EFSF/ESM mechanism. The combination of market access, the country’s prospective exit from the troika reviews and the expected debt relief from the EU to be specified later in the year is powerful. This is more so if one takes into account the signs of economic recovery ahead and the improved sentiment. However, in our view, it cannot counterbalance the economic and social pain accumulated after a long period of depression.
With unemployment above 27 percent, another segment of the work force underemployed and more than half a million employees in the private sector estimated to be paid with a delay, ranging from one month to more than a year, the situation is not good. This is more so if one takes into account the pay cuts and the jump in income and property taxes over the last few years. In addition, the vote in the elections for the European Parliament is usually loose, favoring smaller parties. Given the high level of public discontent, the incumbent parties are at a disadvantage and therefore surprises at the ballot in May should not be ruled out.
The markets appear to be downplaying the political risk at this stage. This rests on two assumptions. First, the difference at the ballot between the leftist SYRIZA party and conservative New Democracy will be small and PASOK’s performance under the Olive Tree initiative will be decent, so the current government will stay in power till the presidential elections in the spring of 2015. Second, even if SYRIZA does very well in May and comes to power at some point later this year or in spring 2015, it will have no option but to follow broadly the same economic policy. Moreover, all reforms will have been implemented by then and public finances will be in better shape.
Although both assumptions may turn out to be correct, history teaches us that one should not underestimate the ability of the country’s political elite to negatively surprise. Although Premier Antonis Samaras and a few other politicians side with reason, others could react in unpredictable ways, especially when coming under pressure from entrenched interests and other social strata.