Greek rebound is astonishing

By Hugo Dixon
April 8, 2014

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent.

Two of the country’s big four banks – Piraeus and Alpha – have raised 3 billion euros of equity between them in recent weeks to reinforce their balance sheets after a stress test orchestrated by the central bank. Eurobank, another big lender, is planning to follow suit with a 3 billion euro issue later this month.

The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

Athens’ debt is still almost 180 percent of GDP. But it is not nearly as burdensome as the headline figure suggests because the bulk of the debt is owed to other euro zone governments as a result of its two bailouts. Not only do these loans pay a low interest rate of a little over 2 percent, Athens doesn’t need to start repaying them until 2022 and then has another 20 years to complete the job.

It is unsurprising then that investors look like they will be willing to buy five-year Greek bonds. They will, after all, get their money back before Athens has to pay its public-sector creditors. What’s more, the yield, which is likely to be something over 5 percent, is more attractive than that offered by hard-currency bonds elsewhere.

Meanwhile, Greece has the opportunity to improve the deal it has with its euro zone creditors. They promised to look again at the loans once Athens achieved a primary surplus. Discussions are expected to start next month.

A good outcome for Greece would be to see an increase of the term of the loan from 30 to 50 years, a freezing of the interest rate at its current low level, and an extension of the period during which it doesn’t have to repay the debt by another five years. The warming of Greece’s relationship with Germany – whose chancellor, Angela Merkel, will visit Athens on April 11 – suggests there’s a reasonable chance it could be rewarded for good behaviour.

The reopening of the markets to Greece also means it probably no longer faces a funding gap, which the last official projections by its creditors put at 15 billion euros over the next two years.

The improvement in its fiscal position has cut that figure. Even more important, the government has several ways to fill the gap without borrowing more from its euro partners. Not only can it issue bonds; the two big banks that have raised equity have used some of it to repay 1.6-1.7 billion euros in preference capital injected by the government.

Investor interest in Greek banks offers two further sources of funding. First, the government could and should rapidly privatise its stakes in the four big banks. It may not get back all the 26.3 billion euros it invested but its stakes have a current market value of 24.5 billion euros meaning it should recoup a large chunk. It has recently passed legislation allowing it to sell the shares at a discount, if necessary.

Second, Greece’s bank bailout fund still has 11 billion euros in its coffers. Given lenders’ ability to access the market, the bulk of this won’t be needed. Athens should wait until October when the results of the Europe-wide stress tests are published to check that there aren’t any surprises. But after that, most of the cash could be released either to fund the state or, more likely, to repay its creditors.

The bailout fund should keep some cash back to finance a bad bank on the lines of the Spanish and Irish models. Although Greece’s banks have been recapitalised, they are still weighed down by non-performing loans. If these were hived off into a separate entity, the banks would be free to concentrate on lending to healthy parts of the economy and finance growth.

This is not to suggest Greece is out of the woods. A quarter of the workforce is still unemployed. To bring this down to acceptable levels, the government will have to continue with its reform agenda and the economy will need to grow for many years.

The biggest risk is politics. Only last week the government was shaken when a video was released of the prime minister’s chief of staff talking to the spokesman of the far-right Golden Dawn party. The aide, who has since resigned, said two government ministers had told a judge to arrest the Golden Dawn’s leadership. The ministers have denied this. It doesn’t look like the government will fall. But if it does, a government led by Syriza, the radical left opposition, would be less investor friendly.

That said, the imminent bond issue is an important milestone in Greece’s recovery.

11 comments

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Yes, it’s great for the bankers and the wealthy that took so much, that greece is once again a debtor nation and will remain so for the next several decades. Iceland took a better path, and is far better off for the foreseeable future. This does not disagree with the author here. You just have to see what they think is good. Subjugation of greece and the greek people is good for those that own the debt and their representatives in the press. Thus, the “Greek rebound is astounding”, who knew slaves could be so lucrative.

The discussion ends on the standard right/left political manipulation attempt. You are either right or left, and right is good and left is bad (the radical left), but in reality neither is real and neither consists of any genuine actors. Both are simply set up and staged events for the purpose of deeper extraction of profit and wealth by the few who have no god and no ideology except money and greed. This includes the leaders of all religions who have a special job of keeping the believers ignorant of reality and susceptible to manipulation.

Posted by brotherkenny4 | Report as abusive

What to hell are you writing about? Greece is utter moral and social engineering failure.

http://www.vice.com/read/four-years-of-g reek-austerity-in-fourty-pictures

Posted by satori23 | Report as abusive

Hugo, I fear your last few lines a bit superficial. There has been no real track record of reform by any government since the first bailout. Youth unemployment may be a permanent feature in Greece for a very long time. Politics is indeed a risk, but the specter of Syriza trying to form a government is hardly the most fearful outcome to the next national election. If you are worried about an “investor friendly” government you had better hope Golden Dawn does not fare well or, even worse, that partisan fighting does not break out in the street. You might see my book “Still at Aulis: Essays on Crisis and Revolution in Greece and the Eurozone,” for further analysis.

Posted by dawusber | Report as abusive

God almighty, what kind of rebound is this?First, the bond issuance pending, looks like a move to distract attention from the recent revelations about the alleged manipulation of justice by the secretary of the Greek govt, and I argue this, because only after the scandal came public, the govt suddenly “rushed” to the markets..Second, our (Greek) public debt is entirely unsustainable, it is one of the largest debts by proportion to the GDP in the world, while there is a lasting five-year recession..Third, it is also growing, not only due to the recession, but because Greece continues to borrow still ever more! Fourth, the trumpeted supposed primary surplus of the Greek budget comes not only through extensive over-taxation, but also through the govt delaying to pay obligations to suppliers, providers, contractors etc.It’s entirely an accounting feature, not real primary surplus. And if you count the payments to finance the public debt, our country still has a good old Deficit. The exact numbers are public and can be accessed by anyone. So, we have a deficit, one of the largest and growing public debts in the world, a recession and a divestiture climate, and yet you call us an astonishing rebound. Excuse me, but if you had lived in Greece during these last years, you would get the opposite feeling. A feeling of free-fall.

With regard, Leonidas Filikozis
Journalist, Chania, Crete, Greece.

Posted by leo77777 | Report as abusive

Sorry to say so, but you really don’t have any idea what is the real situation in Greece. It is trully a nightmare. Don’t swallow everything that is propagated by the Greek government. It is based on fake data

Posted by Paplawyer | Report as abusive

Huzzah!
Greece can take on more debt!
Green shoots! Grecovery! All is well!
Well 27 percent unemployment or whatever, who cares? The bankers and international speculators are happy, and that, as we know, is what counts.
This Dixon guy is the among the sorriest apologists of the international fraudster banksters writing today, and that is saying something.
Finance is supposed to serve economies, not the other way around, but one would never know that with hacks like this guy doing the rentiers’ cheerleading for them.

Posted by troutcor | Report as abusive

You gotta suspect that polyannish talk like this is covering something up.

Maybe that Golden Dawn has a chance of bringing down a regime, and starting the Greek people down the path of taking their country back.

Posted by SmartThinking | Report as abusive

The most ridiculous article that was ever – and probably ever will be – written about the Greek crisis. And that’s saying a lot, given the competition.

Posted by ThomasFazi | Report as abusive

This bond auction speaks volumes as to the greed of international investors and their insect like memories. Greece CANNOT compete with the Euro as it’s currency. It will be a matter of time before it must go back to it’s own currency. How can this country have the same currency as Germany and a stronger currency than the USA? It defies all economic premises.

Posted by Cyclops1968 | Report as abusive

When Greece joined the Euro around the year 2000 they had not only faked statistics. If they would have reported the real figures they would have never joined the Euro.
Now a lot of people are unemployed. A lot of people have left their country. It seems nearly all the politicians they can vote for, are politically corrupt.
They have nearly not made reforms. What they have done is selling gouvernment property like infrastructure whats makes life for the Greek people even more expensive in the future.
The reform controllers (Klaus Regling and others) from the EU say there were changes in Greece. Mainly its a lie because they want to keep their jobs who makes them important.
As long the Greek people have not sent their Gouvernment away (a kind of revolution is necessary) this country will keep corruption and there will be no progress. Not only nearly all the Greek people suffers. Whole Europe suffers because no-one is going against the corrupt Elite.

Posted by klausz | Report as abusive

When Greece joined the Euro around the year 2000 they had not only faked statistics. If they would have reported the real figures they would have never joined the Euro.
Now a lot of people are unemployed. A lot of people have left their country. It seems nearly all the politicians they can vote for, are politically corrupt.
They have nearly not made reforms. What they have done is selling gouvernment property like infrastructure whats makes life for the Greek people even more expensive in the future.
The reform controller from the EU say there were changes in Greece. Mainly its a lie because they want to keep their jobs who makes them important.
As long the Greek people have not sent their Gouvernment away (a kind of revolution is necessary) this country will keep corruption and there will be no progress.

Posted by klausz | Report as abusive