Greece’s annual budget scrap risks derailing rally

Greece’s debt inspectors return to Athens this month to resume what’s become an annual ritual in Europe’s debt crisis: haggling over budget numbers.

Prime Minister Antonis Samaras’s government presented its draft budget on Oct. 7, forecasting a 2014 surplus before interest costs of 1.6 percent of gross domestic product. The troika, as the officials from the European Commission, European Central Bank and International Monetary Fund are known, says the government must find another 2 billion euros ($2.7 billion) in savings for the sums to add up.

“This is a potentially serious issue,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The Greek economy and the political situation are too fragile to burden them with additional austerity now. I hope the troika will accept this and trust the longer-term structural reforms to yield the extra revenues over time.”

Greece is in its sixth year of a recession that has destroyed about a quarter of its economic output and sent the unemployment rate soaring to almost 28 percent, the highest in the euro area. The budget forecasts the economy will return to growth next year as gross domestic product expands 0.6 percent.

Greece’s 10-year yield has dropped to 8.39 percent from an average in the past year of more than 11.5 percent, close to the post-restructuring low of 8.13 percent reached on May 22. Bond gains are mirrored by a 24 percent gain in the Athens Stock Exchange this year, almost double the 12.5 percent rise in Europe’s Stoxx 600 index.

Puzzle Tussle

Plugging the fiscal gap is the first of three puzzles Greece and its creditors must solve, which will test the durability of a Greek bond rally that has driven borrowing costs near to the lowest levels since the country carried out the world’s biggest sovereign debt restructuring last year. They also need to close financing gaps through 2016 in the nation’s 240 billion-euro program, then find a way to make Greece’s debt sustainable in the ensuing years.

“The market seems to be discounting some positive developments on Greece,” said Dimitris Giannoulis, co-founder of ResearchGreece, an independent research provider based in Cyprus. “There are positive signs, yes, but Greece is definitely not out of the woods yet, as we have seen in the developments over the last few days with various pronouncements on Greece’s fiscal and funding gap in 2014.”

Fragile Coalition

Setbacks in a state-asset sales program and a spat after Samaras shut down state broadcaster ERT sent bond yields climbing from their May low. The ERT decision prompted one of Samaras’s partners to quit the coalition, leaving his government with a majority of just five in the country’s 300-seat parliament, which must approve the budget by year-end.

Samaras’s New Democracy party is tied in opinion polls with the main opposition Syriza party, which opposes the terms of Greece’s bailout. A Marc SA survey of voters between Oct. 1 and Oct. 7 gave New Democracy 22.7 percent support and Syriza 22.5 percent of voter preferences.

The prime minister has staked his credibility with Greek voters on avoiding so-called horizontal measures, across-the- board tax increases and cuts to wages and pensions that marked earlier phases of the country’s four-year debt crisis. Instead, Samaras and Finance Minister Yannis Stournaras say budget targets will be met through structural reforms such as improving tax administration and closing government agencies.

“We have said it time and again: there will be no new measures,” Samaras said in a speech to party supporters on Oct. 11. “Nor will horizontal measures be requested of Greece.”

Quarterly Debate

The troika is expected in Athens before the end of the month to resume its quarterly review of Greece’s performance in meeting its bailout terms. The review was paused on Sept. 29 to “allow completion of technical work,” according to a statement.

Last year, the government spent months locked in negotiations with the troika over 13.5 billion euros of tax rises and spending cuts before parliament approved the 2013 budget in November. A year earlier, then Prime Minister George Papandreou’s Pasok government unravelled when he called a referendum on the bailout, leaving former central bank governor Lucas Papademos to shepherd the budget through parliament at the head of an interim government including Samaras, who had previously opposed austerity measures.

“The Greek economy is gradually starting to emerge from depression following the massive fiscal hit,” said Berenberg’s Schmieding. “New fiscal tightening would put that at risk.”

‘Success Story’

Euro-area finance ministers meeting in Luxembourg on Oct. 14 said Ireland, which in 2010 followed Greece in needing a rescue, may soon be ready to able to rely on markets for financing without follow-up aid. ECB Executive Board Member Joerg Asmussen, who hailed Ireland’s “success story,” said in Luxembourg that Greece had a “significant fiscal gap” for 2014.

That claim was contested by Stournaras, and the two men also differed in their estimates of how much money needs to be found to fund the country’s bailout next year, with Asmussen saying as much as 6 billion euros is needed, compared to an IMF estimate in July of 4.4 billion euros. Dutch Finance Minister Jeroen Dijsselbloem said a way to fill that hole will be discussed in December, and a final decision may come in January.

The bright news for Samaras is that the country is on course to achieve a small primary budget surplus in 2013, a year ahead of schedule. If the European Union’s statistics office confirms this, an agreement reached last year will qualify Greece for additional help from the euro area and IMF to reduce a debt burden that’s forecast to peak at 176 percent of GDP this year, climbing to 124 percent by 2020.

“They’ve got debt sustainability on a knife-edge, they’ve got financing on a knife-edge, and they need to have it on a knife-edge in order to get Greece to do anything,” said Gabriel Sterne, an economist at Exotix Ltd. in London. “That’s how Europe plays it.”


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