This chart tells a remarkable story. Just two years ago, Greece was on the ropes. The yield on the Greek government’s 10-year debt hit a punishing and unsustainable 30 percent. Today the yield is less than 7 percent—a sign that investors are increasingly confident of the nation’s ability to pay its debts. Rarely has a country repaired its image with creditors so quickly. The world’s attention has moved on since the Greek debt crisis (a lot has happened since), but it’s worth stopping for a moment to look at what went right, as well as the huge challenges that remain.
In a nutshell, what went right is that the troika of foreign official lenders gave the Greek government inexpensive loans so that it never had to borrow at those exorbitant open-market rates. And the Greek government was surprisingly successful at cutting spending, which was essential to regaining investors’ confidence. The Hellenic Republic managed to achieve “primary” balance—that’s when revenue exceeds spending, excluding debt service—a year ahead of schedule. Now it’s hoping to be able to resume borrowing in the private market before this May’s European Parliament elections.
The Greek people have been unexpectedly stoic, bearing up under an economic downturn that is nothing short of a depression without violent upheavals. Greeks had to go from living beyond their means to abrupt and extreme belt-tightening. The so-called internal devaluation, necessary to regain competitiveness, has resulted in a huge decline in the standard of living and a 27 percent unemployment rate. Caritas, a Catholic charity, said this week that welfare cuts in Greece and other struggling European nations are hitting children particularly hard, warning of “an unfair Europe.”
This week—one in which Greeks marked their annual Independence Day—banks managed to sell billions of dollars’ worth of shares to foreign investors, thus strengthening their capital and ability to make new loans. The government is able to spend again on essential projects. Bloomberg reports that Greece in the next few weeks will begin tenders for a €750 million ($1.04 billion) airport project on the island of Crete and a €400 million highway between Corinth and Patras, and it aims to complete a high-speed rail network by the end of 2017. It’s also attempting to build a network of wireless hotspots that will provide free national Internet access by the end of this year. Tourism is beginning to recover, and the European Union has projected that the economy will return to growth, albeit less than 1 percent, this year.
Still, Greece continues to face enormous challenges. The main one is that belt-tightening isn’t enough. Greece must also remove subsidies and barriers that protect politically entrenched interests while costing the general public and inhibiting growth. That has proven a more difficult task than belt-tightening. The Wall Street Journal recently cited a report by the Organization for Economic Cooperation & Development, or OECD, pointing to “more than 500 restrictions—governing everything from the shelf life of fresh milk to the sale of vitamins by pharmacies” that cost businesses and consumers €5 billion a year.
The Bank of Greece, the central bank, stated in February that the OECD report said structural reforms must be “deeper and speedier.” If not, the report said, “The anticipated recovery will prove hesitant and fragile, undermining the country’s growth prospects.”
So it’s not all good news out of Greece. But there’s no question that the country is better off now than when its bond yields were at 30 percent.