Greece isn’t turning the corner
Judging from the markets and English-speaking news media this week, Greece’s damaged economy has finally turned the corner. I doubt it.
The Financial Times and Wall Street Journal ran prominent pieces about bullish investors ploughing back into Greek markets. On May 15, the Greek government’s borrowing costs on 10-year bonds fell by one percentage point, to the lowest level in three years.
Against this euphoria, the Greek statistics agency Elstat says the Greek economy contracted 5.3 percent in the first quarter of 2013 compared with a year earlier. This is the 19th consecutive quarter in which it has shrunk.
There will be a recovery some day, so is this it? Certainly, there have been positive signs. Early last week, the euro area’s finance ministers agreed to release 7.5 billion euros ($9.6 billion) of bailout funds to Greece — 4.2 billion euros at the weekend, and the remaining 3.3 billion euros in June, provided that Greece first completes a number of measures.
The following day, Fitch Ratings upgraded Greece to B- from CCC. That is still six levels below investment grade, yet the improvement inspired one of the biggest sovereign-bond market rallies we have seen in Greece since the beginning of the crisis. Prime Minister Antonis Samaras even said Greece plans to re-enter the bond markets in the first half of next year.
There has also been a flurry of recent investment activity in Greece. After years of procrastination, the government on May 1 accepted a tender to privatize Opap SA, the gambling company that is the country’s most profitable state-owned enterprise. You have to try pretty hard to read this as a success story, though. Opap is the jewel in Greece’s crown, yet the government received only two bids for a 33 percent stake in the company, and the final price of 652 million euros was at the low end of expectations. The state’s natural-gas company, Depa SA, is the next big privatization expected.
There has also been some investor interest in Greek banks and corporations. According to the Financial Times, a group of hedge funds has agreed to participate in the recapitalization of Alpha Bank SA in June. Two Greek companies — refrigerator-parts maker Frigoglass SA and refinery company Hellenic Petroleum SA — succeeded in issuing corporate bonds with yields of about 8 percent in recent weeks. While these yields are high, Greek companies were completely shut out of the bond markets in 2012.
Another glimmer of hope is that the price of Greek gross-domestic-product warrants has increased significantly. These were issued as a sweetener to private-sector bondholders who participated in the restructuring of privately held Greek sovereign debt in March 2012. They pay out in a number of years, if Greece reaches certain GDP-growth targets. A year ago, they were priced at about 0.2 euro cent. Last week, they broke through the 1 euro-cent mark, a price increase that indicates investors are betting Greece is on a path to sustainable growth.
This is all hard to square with some of Greece’s economic fundamentals. According to Elstat, Greece’s economy is now smaller than it was in 2005, having shrunk a cumulative 28 percent since mid-2008. The European Commission forecasts a further contraction of 4.2 percent in 2013, which will be difficult to achieve given that the decline in the first quarter was so much larger.
The nature of economic activity in Greece also suggests that the European Commission’s growth target is a pipe dream. Although hedge funds have been active in buying Greek sovereign debt and made a killing doing so, the number of investments in the private sector can be counted on one hand. In addition to corporate-debt sales — amounting to $2 billion so far this year, according to the consulting firm Dealogic — Third Point LLC announced a 60 million-euro investment in Greece’s Energean Oil & Gas SA last week. These are very small numbers, insufficient to stimulate growth across the economy.
Furthermore, any lending to big companies in Greece isn’t being matched by loans to small companies or households. Borrowing costs for small- and medium-sized enterprises in Greece remain far higher than for those in the other peripheral countries, let alone in Germany or France. According to the Greek central bank, credit to the private sector continued to contract in March, the latest month for which there are data.
While Greek banks will be recapitalized soon, they face a long road before they have healthy balance sheets and are willing and able to lend. Furthermore, the business operating environment in Greece remains unattractive because of high levels of red tape, an unstable regulatory environment, an opaque legal system, and a slow and often corrupt judiciary.
These grim prospects for economic growth are accompanied by extreme social strain (unemployment reached a record 27 percent in February). Greek journalist Nick Malkoutzis quantified this strife in a recent article. There are, he wrote, “1.3 million Greeks that are out of work, some 400,000 families that have nobody earning an income, about 300,000 workers whose employers have not paid them for months, hundreds of thousands who have work but are finding it difficult to make ends meet and numerous young people who see their future away from Greece.” The political situation is precarious as a result, with the governing coalition holding together through a survival instinct.
The delicate economic, social and political balance that Greece has maintained over the past six months could be tested later this year, when the government must deliver a 2014 budget and a medium-term economic program.
According to a report released last week by the European Commission, Greece is on track to reach its fiscal targets in 2013-14, but it will probably need to raise an additional 8 billion euros to achieve those for 2015-16. If the “troika” — the European Central Bank, the European Commission and the International Monetary Fund — demands that the Greek government implement yet more austerity to fill the gap, this could prove too much for Greece.
It is undeniable that there are signs of hope coming out of Greece today, where there were none six months ago. There is always the chance that Greece can fake it until it makes it, capitalizing on these small pieces of good news to instil confidence in investors and households, until a real recovery takes hold. Undermining the confidence fairies, however, are economic fundamentals that indicate the recent euphoria is a bit overdone.
[Bloomberg]
