I have written three columns this past year on the topic of Greece and have vacillated between optimism, pessimism, and despair ‑ and am now back to cautious optimism for a variety of reasons: Mr. Tsipras, after winning a referendum he likely hoped to lose, proved to be more of an adult than both his supporters and his detractors expected. He eased out his combative finance minister, Yannis Varoufakis, and replaced him with Euclid Tsakalatos, a thoughtful and soft-spoken technocrat with impeccable credentials; he capitulated to eurozone demands to continue austerity policies with a worse deal than the one he originally rejected; he reshuffled his cabinet to rid his government of hard line leftists; and he got Greece-weary Europeans to agree to a third bailout.
As soon as the first disbursement from the initial tranche of the bailout was received, Tsipras faced down the rebellious critics in his own party by resigning and calling a snap election. The election, which was expected to be close, turned into a decisive victory for his Syriza party, which trounced the center-right New Democracy party headed by Vangelis Meimarakis by over seven percentage points.
Greek 10-year yields have been rallying since the middle of June (see exhibit 1 below) and are now just over 8%, and even short-duration debt has rallied smartly. The Greek government 10-year private sector involvement (PSI) bond maturing in February 2025 has risen to 80 from its April lows in the mid-forties and more than quintupled from its low of 12 in May 2012. The Greek 40-year inflation-linked bonds have done even better: they have almost tripled in price. Unfortunately, the Greek stock market has not done as well; it continued to slide into mid-August before finally rallying 23%, and it still trades at an earnings multiple of 19, even though it is down over 85% from its peak in December 2007. And credit default swap (CDS) spreads have also become much lower – even though it is still cheaper to buy protection on war-ravaged Ukraine than it is on eurozone-supported Greece. Moody’s Investors Service has confirmed Greece’s government bond rating at Caa3, but has changed the outlook to stable.
Exhibit 1: The evolution of the price of the Greek government 2/2025 bond
Source: Bloomberg, as of 25 September 2015.
According to an International Monetary Fund paper published a year ago, the Greek fiscal balance has swung by an extraordinary 17% of GDP. By way of comparison, in a sample of 91 adjustment episodes from 1945 to 2012, half of them involved a change to the fiscal balance of over 5%, while a quarter involved a change to the fiscal balance of over 7.4%. Seen in this context, the adjustment Greece has made is extraordinary.
The Greek economy has started to grow again ‑ it grew 0.8% in the second quarter, but this appears to have been driven by families moving forward the purchase of capital goods before the shutdown of the banking sector. Unemployment, which peaked at over 26%, has started to slowly fall. Bank deposits appeared to have stabilised after declining for a year. That said, an Asset Quality Review of the books of Greek banks has begun, and auditors have been less than kind with their assessments. It is expected that a number of Greek banks will have to raise significant amounts of capital in order to satisfy their regulators, as nonperforming loans represent almost 40% of the loan portfolio of most Greek banks. Distressed investors and turnaround firms have started looking for bargains. Tourism, long a backbone of the economy, has grown to 18% of the economy and is predicted to grow further. Reforms have started ‑ some Greek islands, for example, will start to lose their tax privileges this week. The topic of debt relief, long taboo among creditors, has made a tentative appearance in the lexicon and is now discussed in the same breath as pension reform.
The rebalancing has begun. Long may it run.
The photograph above shows the former Greek finance minister, Yannis Varoufakis, with his successor, Euclid Tsakalatos