Greece: A reality check

Petros Giannakouris/Associated Press

And like that… poof, the crisis is gone. More bailout loans approved by the Eurogroup, a sovereign rating upgrade from Fitch, economic sentiment at the highest it’s been for the last 40 months, the Athens Stock Exchange becoming the best-performing stock market in the European Union and Greek bond yields dropping below 9 percent for the first time since 2010 have helped give the impression Greece has overcome the worst of its problems and that recovery is within touching distance.

This is certainly the story that the government will, understandably, run with. The three parties in the coalition have taken on considerable political cost in sticking with the EU-IMF fiscal adjustment program and their only hope of survival is to convince a large enough section of the Greek population that the chosen path leads from economic catastrophe to stability and then prosperity.

In Athens, there is also a belief, which seems to be shared by decision makers in Brussels, Berlin and elsewhere, that a change in mood alone will make a significant contribution toward overcoming the crisis. This rising tide to lift Greece’s boat will not only make the program more acceptable to the public, it will also make investors more buoyant, the thinking goes.

There is something to be said for the idea of generating confidence. For much of last year, Greece was in the doghouse: a tanking economy, a protesting public and an unstable political system had made it the eurozone’s outcast. In contrast, Portugal was talked up as a model pupil applying the consolidation program with vigor and which would make a quick return to the markets.

Only last week Portugal did indeed issue its first government bonds since the crisis began but in doing so only underlined that there is a question of perception or interpretation that needs to be addressed. Portugal’s decision to tap the markets for 3 billion euros must be tempered by the fact that the country is mired in a deepening recession and by the wider investment trends in the sovereign debt market. Also, it is worth noting that at the same time Portugal was being praised as a model pupil by many in the eurozone, its advocates were granting the country an extra year to meet its deficit target.

German Chancellor Angela Merkel visited Lisbon last November, a few weeks after Portugal received an extension, amid crumbling political consensus and growing social unrest. Without a hint of irony, she declared that the Portuguese program was “being fulfilled in an excellent way.” Nothing could have made it clearer that perceptions were being used as the yardstick to measure success rather than any quantifiable indicators.

Many commentators have pinpointed Merkel’s visit to Athens a month earlier as the moment that Greece put the worst of the crisis behind it. Certainly, her visit carried symbolism and strengthened the impression that the eurozone and the recently formed coalition had a sound basis for cooperation. The government used the meeting, as well as others Prime Minister Antonis Samaras had around that time with several more European leaders, to drive home the message that a rehabilitated Greece was being allowed back into the fold. While Portugal proved that there are merits to this strategy in terms of easing the pressure from eurozone partners, convincing the international media to follow a particular narrative and beguiling markets, ultimately it is an exercise in managing impressions. This strategy can only get a country so far. There is a point at which reality kicks in and actual needs cannot be met by perceived gains.

Greece may soon find itself at this point, when no amount of good will, positive press and market confidence will make up for the fact that the real economy is spluttering toward a standstill after 19 consecutive quarters of contraction.

To start talking about a “success story” now would be to insult the feelings and intelligence of 1.3 million Greeks that are out of work, some 400,000 families that have nobody earning an income, about 300,000 workers whose employers have not paid them for months, hundreds of thousands who have work but are finding it difficult to make ends meet and numerous young people who see their future away from Greece.

Improving economic sentiment means little to those who fear stepping out of their front doors for fear of being mauled by neo-Nazis. The disbursal of another bailout loan to Greece does not register with the 800,000 or so long-term unemployed who have lost access to benefits and free healthcare. Even in its note accompanying this week’s upgrade, Fitch warned of taking a cautious approach to the prospects of a Greek recovery, the possibility of “renewed political and social instability” and that public debt sustainability is “still far from assured.” It should not be forgotten that Greece’s upgrade to B- comes almost a year to the day Fitch downgraded Greek sovereign debt to CCC. Being back where we were about a year ago, amid paralyzing political uncertainty, is hardly something to shout about from the rooftops.

Even when one examines the “twin rebalancing” (fiscal and current account) Greece has achieved, there is much to be wary of. The primary fiscal adjustment of almost 10 percent since the crisis began is a notable achievement that has come at a huge cost: A number of public services, such as health, have been ravaged, while the incessant rise in taxes has flattened domestic demand and put terrible pressure on even the healthiest of businesses. The current account deficit has shrunk by about 7 percent during the same period – also an important step toward making the economy healthier. But on closer examination, it’s clear to see that this reduction has been achieved largely on the back of a substantial fall in imports rather than a significant rise in exports.

Finally, how can one speak of success when only a couple of weeks ago, the International Monetary Fund underlined that the burden in Greece is not being shared equally? “The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension,” the IMF mission said in its report. For all the advances that there have been in tax collection (and there have been some notable ones), this statement should make the country’s politicians hang their heads in shame.

That’s why it’s vital that Greece does not lose itself in the rapture of the markets and the obsession of altering perceptions at the expense of confronting real problems. We should understand, for instance that while the market interest in Greece is an indication that the country may be “bottoming out,” it is also driven by investors looking for handsome returns at a time when yields around the world are mostly low. The talk of funds betting on Greece and bulls charging in tells a story of its own. A few weeks ago, this hunt for yields contributed to Rwanda issuing bonds with a return of just under 7 percent.

There is a long way to go from this type of foreign capital coming into Greece to the kind of investment that will create jobs and sustainable prospects for growth. Greece has yet to see this kind of investment in any significant amounts. The privatization process has finally got under way but the sale of a share in state gambling monopoly OPAP hardly proved a marquee event.

Of course, there is a clear upside to the renewed market confidence in Greece as it allows Greek firms to tap investors for funds. Hellenic Petroleum and Frigoglass have recently issued corporate bonds worth 750 million euros, for example. Again, though, this should be balanced against the fact that smaller businesses in Greece are paying an interest rate of around 7 percent if they are among the select few able to borrow from the country’s semi-comatose banking system. In contrast, similar firms in Germany borrow at half that rate. It should also be kept in mind that the coupon for Frigoglass was 8.25 percent for a five-year issue, while ELPE’s rate was 8 percent for a four-year bond.

Immersing ourselves in vainglory is as dangerous as wallowing in gloom and self-pity. Somehow a balance has to be struck between acknowledging the progress that has been made and the work there is still to do. It is right to recognize the failings that have been shed but it is also vital not to ignore the people that have been left behind. No matter what positive signs have emerged over the past few days, Greece’s future remains finely balanced. Tipping it in favor of recovery will not be achieved just through altering perceptions, reality needs to change as well.

Nick Malkoutzis

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