Reforms assure investors that the economy is turning around

Greek Finance Minister Giorgos Alogoskoufis should be one of the happiest government officials at this juncture. Tax revenues grew well above the 2006 budget target in January, Eurostat approved in principle Greece’s request to use the proceeds from the securitization of delinquent taxes to reduce the budget deficit, the stock market recorded a fresh multi-year high last week and some of the labor reforms sought by the government appear to be advanced by the country’s six largest banks. It is the kind of macroeconomic and microeconomic environment investors love to see where they place their money and it shows. Hundreds of hedge funds and other foreign investment companies have flocked to the Athens Stock Exchange and private equity funds scan Greek companies for potential leveraged buyout and venture capital deals, facilitating the government’s plans to float state-controlled companies or outright sell its equity stake in others. Filling the state coffers with cash available for public debt reduction may be what government officials have mostly in mind. However, it is the upbeat sentiment, the sense that economic reforms are being pursued at last that makes more foreign investors eager to buy into the Greek growth story and which makes one hopeful that the seeds of a long-term economic expansion are being plowed.       Undoubtedly, the whole situation is not ideal. Some of the country’s structural problems such as its ailing social security system have not been addressed so far. Civil servants complain that a 3.0 percent increase in their admittedly low base salary, even if it turns out to be higher, around 4.1 percent, when seniority and promotions are taken into account, is not enough to compensate against inflation running above 3.0 percent annually. And labor unions are up in arms as the country’s largest banks want to set wages by each negotiating with its union and not OTOE, the umbrella organization representing most bank employees. And the umbrella labor organization (GSEE) appears to disagree with the industrialists on important issues, such as tackling unemployment via lower wages and non-wage costs in certain hard-hit areas or sectors, therefore increasing the risk of labor action. Unions weaker But few appear to worry about the impact of extended strikes on the economy, since it is clear that the power of trade unions in the private sector has diminished while the gradual introduction of open-ended employment contracts for new employees in state-controlled enterprises undermines their authority in the long run. Instead they focus on other developments which hold the promise of brightening the mid- to long-term outlook of the Greek economy. All of them, regardless of political affiliation in Greece and country of origin abroad, appear to share a more optimistic outlook. Pivotal roles have played not so much by the government’s privatization agenda of 1.6 billion euros this year but legislation making the labor market more flexible. One gets this feeling when talking to Greek businessmen and even cautious foreign analysts, although the latter appear more willing to wait for concrete results before expressing an opinion. The businessmen, some of whom had expressed great disappointment with the government’s economic policies not so long ago, admit that legislation introducing major changes in the public sector and other laws creating a more flexible framework for working hours and overtime costs can make the difference down the road. A similar stance, starting from another point of view, has been adopted by fund managers at hedge funds and private equity funds, combing Europe for investment opportunities. Although they all look at the merits of each individual company separately and the stock market’s overall momentum in the case of hedge funds, labor market and other reforms have not escaped their attention. «There is a lot of cash around but there appear to be fewer opportunities around. Greece is one of them,» says the managing director of a well-known investment company in London, who has made its presence felt lately in a listed Greek firm. Of course, cash flows and the lure of Greek firms with a great deal of exposure in the Balkans and elsewhere in emerging markets have played their role in attracting private equity funds here. But none of these would have happened if the home market, accounting for 50 percent or more of the turnover, was thought to stagnate in the next three to five years or so. The sense that «something [in the reform front] is finally moving» appears to be shared by investment bankers and analysts of Greek equities. Already relatively tight spreads over German bonds, the benchmark in the eurozone, and the prospect of rising euro interest rates by the ECB (European Central Bank) in the months ahead have not helped make this felt in the fixed-income market where Greek government bonds trade.  Of course, Greece’s securing of some 20 billion euros from EU funds over the 2007-2013 period has also made things look better because, like before, it provides an absorber of international economic shocks in the years ahead. If the economy depends to a large extent on consumer and business confidence, then the 20-billion-euro intake is definitely a big plus. This combination of increased confidence in the government’s efforts to bring the budget deficit below 3.0 percent of GDP in 2006, strong growth and, most importantly, the sense that crucial reforms have been legislated and are now being implemented has started to inject some optimism and confidence in important actors of the Greek economy and markets that things are finally moving in the right direction. Despite the fact that some important issues have not being touched yet, such as reform of the social security system, and that optimism about concrete results from public-private partnerships remains unfounded, as indicated by the experience of other countries, there are clearly more reasons now for people to be more optimistic about the course of the Greek economy in the medium term than a few months ago.

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