The government and the country’s international creditors have reached an agreement on the second list of 13 milestones that will lead to the disbursement of the sub-tranche of 1 billion euros by the end of the year. In addition, specific steps toward the privatization of state assets were announced recently, the economy has shown greater resilience and the bailout fiscal target looks set to be met and could even be surpassed. Even so, capital market participants have taken either a negative stance or a wait-and-see attitude toward Greek assets. This development hides a message and should not be underestimated.
Greece has been out of the markets since the summer of 2014, but most analysts agree that a return would be the best proof that the country is out of the emergency room, the rehabilitation center, and back to normality. Unfortunately, the attitude of the investment community toward Greece, as captured in the behavior of bonds and the Athens bourse, so far does not point to something like that, even in the medium term, in a phased manner. Instead, it reveals a good deal of disbelief in the success of the new bailout program and this has to be confronted with deeds before it spreads further.
Let’s start with the benchmark index of Athens stock exchange, which recorded a weekly loss of 4.8 percent to close at 578.30 points on Friday, falling to a new multi-year low of 557.63 points on December 9. This happened despite a rebound by the banking sector which had suffered a sell-off in the previous weeks. Undoubtedly, there are some technicalities related to changes in the weight of some bank shares in the rebalancing of some benchmark MSCI stock market indices. However, the dismal performance of the Athens bourse is mainly related to the market’s perception about developments in the country.
One can take a look at the bond market, which may be a thin one but it is dominated by professionals. The yield of the two-year bond, which is more sensitive to economic and political developments, exceeded 9 percent on December 9 before falling to 8.74 percent on Friday. The yield of the 10-year bond eased to 8.54 percent from 8.7 percent early last week. It should be noted that yields had fallen sharply up until the last week of November during the period local banks were seeking private capital. Some market participants claim that rally was underpinned by bond purchases from some Greek banks for trading in a bid to improve sentiment and the chances of success of bank recapitalization. So, it was normal to see the return of the yields to higher levels once the private placements with foreign and local private investors were over.
However, the yields continued to climb further into December. Dealers attributed part of the move to the rise in bond yields in the eurozone, following the market’s disappointment over ECB policy. However, eurozone yields have de-escalated much more than the Greek yields in the last few days. In addition, the shape of the yield curve seems to be flat and slightly inverted. An inverted yield curve points to higher chances of bankruptcy.
By talking to analysts and others, one understands that concerns about the political situation are mainly behind the surge in Greek yields. Many market participants are concerned the government may not be able to pass important legislation related to the overhaul of the pension system, the taxation of farmers and others to complete the first review of the third bailout program in the next few months. In other words, they are concerned about the cohesion of the ruling coalition although some ministers and others have hinted a few deputies from other political parties may come to help if necessary. The SYRIZA-Independent Greeks (ANEL) coalition has 153 deputies in the 300-seat Parliament.
Some market participants seem to doubt the government’s commitment to structural reforms even though it has managed to pass important legislation such as the two lists with the milestones. The fact they are not convinced may be due to the legacy of the two ruling parties and several statements against reforms made in the past. Also, the government’s preoccupation with raising revenues via more taxes and social contributions to plug holes and meet fiscal targets does not help either. When they are asked what has to be done for the government to win their trust, two things stand out. First, speeding up privatizations, and second, the implementation of the restructuring of the pension system without increasing social contributions or other taxes.
For their part, government officials and top bankers hope market sentiment will change for the better if the first review is completed. They think the review will open the way for an upgrade of Greece’s credit ratings and make it possible for the ECB to accept Greek securities as collateral again. The beginning of talks over prospective debt relief after the review will add more fuel to the fire, causing a rally in bonds and stocks, according to them. The rally could also be underpinned by the economy’s return to growth in the second half of 2016 and the attainment of fiscal targets, rendering Greece’s return to the markets possible even at some point in 2016, they hope. The inclusion of Greek bonds in the ECB’s bond purchase program (QE) could also provide a big boost to this extent.
The markets continue to doubt the government’s will and resolve to push through key structural reforms such as pensions and speed up privatizations. Maintaining political stability while countering these concerns with deeds will be key to the virtuous cycle policymakers and top bankers have in mind.
[Kathimerini English Edition]