How long will honeymoon last?

The Greek financial markets welcomed the appointment of Nikos Christodoulakis to the post of Economy and Finance Minister last week, hoping he will manage to breathe life into the country’s structural reforms process. But the improvement in market sentiment may prove short-lived if Christodoulakis fails to deliver fast in an unfriendly domestic and international economic environment. The general index of the Athens bourse closed last week with a 1.06-percent gain and added to that another 0.77 percent yesterday while the yield spread of the 10-year Greek government bond over the German government bond, known as bund, narrowed two basis points to 43 basis points (1 percentage point = 100 basis points). Even so, the Athens Stock Exchange has continued to underperform the major European bourses in the last six weeks and trades 5.8 percent below its pre-September 11 level although the market consensus wants the country’s GDP to grow much faster than the average eurozone rate this year and next. This comes on top of two more years of economic out-performance vis-a-vis the eurozone in 1999 and 2000, when the Greek economy grew by 3.4 percent and 4.1 percent respectively. It is obvious that market participants are not satisfied with high economic growth, perhaps because they think it will not be sustainable in the long run when the positive impact from the lowest interest rates in a generation and the large inflows from the Third Community Support Framework will not be around to boost growth. They seem to seek some assurances that high growth rates will be sustained over the long term, and the only way to make these assurances credible is for the government to back them up with deeds. The socialist government has sought so far to keep the economy rolling, thanks partly to the momentum created by Greece’s entry into the eurozone, and keep economic reforms to a minimum in order to minimize the ensuing political cost. But the Athens bourse’s poor performance has deprived the government of a close ally since part-flotations of state-owned corporations, a key in the government’s gradualist approach in the structural reforms process in last few years, do not seem to work without the mutual funds and other entities belonging to state-controlled banks committing a good deal of money at a time when liquidity is scarce. Consequently, the government has no option but to bite the bullet and adopt the so-called Turkey approach, which calls for fast, painful economic decisions to convince investors in Greece and abroad that it is worth putting their money into Greek stocks. It will be much easier with bond investors, who are more sophisticated and participate in a more efficient market. With plenty of money sitting in repos and other money market instruments, it is clear that market participants want to see macroeconomic policy become more pro-active and structural reforms be implemented before they put some of their cash to work so as to reinvigorate the sluggish Athens bourse and breathe new life into the real economy. They are looking for a catalyst. But this much-needed catalyst, which has to do with overhauling the social security system, privatizing state-owned companies and reforming the country’s public administration, comes at a very high political cost as entrenched interests, many associated with the ruling socialist party PASOK, are known to oppose these structural reforms. With municipal elections just a year away and general national elections scheduled for spring 2004, one wonders whether Christodoulakis and his team is bold enough to tackle the existing problems and ignore the high political cost in the short run while knowing they will not be able to fully reap the economic benefits of the reforms by election time. Undoubtedly, the main goal of these structural reforms is to boost the competitiveness of the Greek economy and produce higher rates of economic growth in the long run. Newly appointed economic chief Christodoulakis understands that. What is not known is whether he has the ability to weather the social storm that bold structural reforms will bring about. The odds are surely against him as he runs against election time. But it should not be forgotten that the final outcome will be shaped not just by his decisions but also by those taken by others at the corporate level as well as exogenous factors, such as the world economy. Everything may change except one thing, and that is attaining real convergence.