Greece awakens from coma but recovery likely to be anemic

Greek business is awakening from a coma; the long-forgotten sound of drills and hammers can be heard on Athens construction sites again while customers queue calmly at banks to deposit cash rather than to withdraw it in panic.

Nevertheless, the government’s declaration that an economic recovery is underway seems premature, with the hard numbers signalling stagnation rather than the robust growth needed to meet ambitious debt targets and reduce towering unemployment.

“True, the phones have started ringing again but nobody is placing orders yet,” said furniture maker Nikos Papadopoulos.

Optimism is undoubtedly growing that Greece can pull out of an economic nosedive that has spawned its very own vocabulary.

No longer is the talk of “Grexit”, a chaotic default on a mountainous debt and forced departure from the euro. Now Prime Minister Antonis Samaras speaks of a “Greekovery”, highlighting lower yields on government debt and unexpected praise from foreign lenders for his budget policies.

But the change is more apparent in the mood than in the fundamentals of an economy grinding through its sixth year of recession, with unemployment hovering near 27 percent and nearly two out of three young Greeks without work.

Improving economic sentiment, lower bond yields and a stock market rebound reflect more relief that Greece has escaped default rather than any prospect of a lasting recovery in an economy still shrinking at over 5 percent year-on-year.

Greece’s European Union and International Monetary Fund lenders, used to issuing reform ultimatums, are now praising Athens for meeting its deficit targets but the measures used to hit those goals may come at the price of future growth.

For all of Samaras’s talk of a “success story”, all the signs suggest that twice-bailed out Greece will need further debt relief before it can stand on its own feet.

“I would be very careful with talk about a success story,” said Christoph Weil, a Frankfurt-based economist at Commerzbank. “It’s normal that the economy will bottom out at some point but for sustainable recovery, Greece needs to really implement reforms and get further debt relief.”

Economic sentiment figures released last month jumped to a five-year high but remain well below levels that would suggest a recovery.

“The great pessimism is easing but optimism has not taken its place yet,” said economist Angelos Tsakanikas, whose IOBE research institute compiles the sentiment data.

The current level of economic sentiment is consistent with stagnant GDP, Berenberg Bank said in a research note last week.

The bailout’s current forecast for anemic GDP growth of 0.6 percent in 2014 is realistic, economists say. But this is far from the 3 percent annual growth rate the country is supposed to achieve in 2015-2021 to make its debt affordable.

Greek debt is expected to stand at over 175 percent of gross domestic product by the end of this year, well below the more manageable 124 percent level it is required to hit by 2020.

Meeting this target relies not only on cutting the budget deficit, but also repaying debt with money raised from selling state enterprises. Here, things are not going well.

Greece failed on Monday to attract any binding bids for natural gas company DEPA, making it unlikely it will meet privatisation targets under the EU/IMF bailout.

Athens has a binding goal to raise 1.8 billion euros from asset sales by the end of September. Last month it sold a 33 percent stake in betting firm OPAP to a Greek-Czech investment fund, but the overall price of 712 million euros was below the firm’s market value.

All signs point to a further write down of Greek debt. Private creditors had to accept a major cut in the value of their bonds last year and in December, euro zone finance ministers said “additional measures” might be needed.

As Greece’s debt is now largely bailout loans, this would probably mean writing off much of what is owed to fellow euro zone governments. This would be deeply unpopular with voters in Germany, the biggest contributor to the bailouts, and Berlin is unlikely to soften its objections before elections in September.

Running in place

Exports, investment and tourism, which are supposed to drive Greece’s recovery, have shown no clear sign of improvement yet, despite a series of reforms imposed by the international lenders to cut wages and make businesses more competitive.

Tourism receipts dropped by an annual 3.7 percent in the first quarter, disappointing expectations of a bumper holiday season. Exports of non-oil goods are volatile and dropped 6.5 percent year-on-year in March, according to central bank data.

Companies complain that tax increases imposed by the government to meet the budget targets are discouraging investment and eroding exporters’ competitive position.

Take one of Greece’s biggest metals and energy groups, Mytilineos, which says two thirds of costs savings it has achieved were wiped out by the higher taxes.

“We have imposed the most ambitious cost-cutting programme in the global alumina and aluminium industry with notable success, but four new taxes in the production process have reversed the biggest part of these gains,” chief executive Evangelos Mytilineos told Reuters.

Economic growth has been hampered by Greece’s cash-strapped banks cutting back on business loans or charging up to 10 percent annual interest on them, making it hard for companies to raise funds for investment or exports.

Hopes the banks will soon resume lending after their bailout -funded recapitalisation this summer may be misplaced, as they usually wait for the economy to grow before extending loans. “Recapitalisation is just the starting point to restore bank credit … The road to achieve this will be long and success can’t be taken for granted,” the central bank said in a report.

Less than meets the eye

Determined this year to achieve a primary budget surplus – which excludes its huge debt repayments – so that it can qualify for debt relief, Athens has outperformed on its budget goals and reported a January-May deficit that was a quarter of the targeted gap.

But this comes partly at the cost of future growth. Two thirds of the extra savings came from curbing public investment spending and tax refunds, finance ministry data show.

Gross tax receipts, by contrast, ran 562 million euros below target, reflecting the depth of the recession and persistent failure to crack down on tax evasion.

There is also less to the Greek bond rally than meets the eye. Yields on benchmark 10-year bonds dropped to 9 percent from 41 percent last year but remain above their 7-percent level of early 2010, when Athens was shut out of bond markets.

“The rally can be easily reversed because the bond market is illiquid,” said an economist who declined to be named.

Investors have not yet fully priced out the risk of default. Ten-year bond yields have crept back above those on longer-dated paper, belying Samaras’s assertion that a brief normalisation of the yield curve last month showed “the markets have spoken”.

Premature “Greekovery” talk could encourage complacency and slow the drive for reforms the country still needs to fix its economy, such as breaking cartels and vested interests.

“The government is becoming arrogant. They think recovery is bigger than it really is,” said political analyst John Loulis, who said he was still pessimistic about the economy.

“The good scenario is the economy just limping along for years,” he said. “In its current shape, it can’t generate the growth rates Greece needs to bring its debt level down.” [Reuters]