Greek Crisis Legacy Tests Samaras Bid to End Market Exile
Antonis Samaras’s mission to end Greece’s exile from bond markets faces a reality check this week as data show how deeply the economy remains mired in deflation with the worst jobless rate in the euro area.
Fresh from his success last week in securing the release of bailout aid, the Greek prime minister’s ambition to tap investors is chafing against the legacy of his country’s debt crisis. Statistics due April 10 will show unemployment above 27 percent and consumer prices falling from a year earlier for a 13th month, according to Bloomberg surveys of economists.
Growing confidence among officials on the prospect of selling debt has risen as bond yields have fallen to a four-year low. Their optimism rests on the premise of persuading investors that Greece will shake off a six-year recession that remains a parable for European Central Bank policy makers focusing on the dangers of deflation for the region as a whole.
“There are still a number of open questions regarding Greece, particularly with regards to the sustainability of debt,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “If you have a very large unemployment rate, you need to support it with social welfare measures if you want to avoid social unrest, which is obviously going to weigh on the budget.”
Unemployment probably stayed at 27.5 percent in January, according to the median of eight economist estimates in a Bloomberg survey. Consumer prices probably fell 1.1 percent in March from a year earlier, according to another survey of nine economists.
As Greek 10-year yields dropped last week, Finance Minister Yannis Stournaras suggested that the government will sell bonds in the first half of this year. The country’s financing situation has already benefited from a budget surplus before interest costs of almost 3 billion euros ($4.1 billion), which the government expects the European Union’s statistics agency to confirm this month.
“Everything indicates that this inaugural bond issue of the Greek state will have a positive reception from international investors, underscoring their confidence in economic recovery,” Piraeus Bank SA Chairman Michalis Sallas said in an interview in Athens last week.
The yield on Greek 10-year bonds dropped to as low as 6.12 percent today, the lowest since March 2010 and down from as much as 44.21 percent in 2012. Greek securities have returned 31 percent this year, the best performance among the 34 sovereign debt markets tracked by the Bloomberg World Bond Indexes.
The European Commission forecasts that Greece’s gross domestic product will expand 0.6 percent this year before accelerating 2.9 percent in 2015. The country has lost about a quarter of its economic output in the recession that started in 2008, which has meant that public debt as a proportion of GDP has remained at about 175 percent even after Greece carried out the biggest sovereign restructuring in history two years ago.
“Risk appetite is buoyant, partly on support from the ECB and partly in the hoped for pickup in U.S. growth,” said Ciaran O’Hagan, head of European rates strategy at Societe General SA in Paris. “The jury is very much out on longer term fiscal and economic issues.”
German Finance Minister Wolfgang Schaeuble said it’s possible there will be a third bailout of Greece, Kathimerini reported yesterday. By contrast, European Stability Mechanism Chief Executive Officer Klaus Regling said that such a rescue may not be needed, To Vima also reported yesterday.
Year of Transition
The predicament of countries such as Greece remains a focal point of European officials. ECB President Mario Draghi said last week that while he deflation risks in the euro area haven’t increased, his “biggest fear is actually to some extent a reality and that is the protracted stagnation, longer than we have in our baseline scenario.”
The Greek statistical authority will also release industrial production data for February this week, which may show a 0.7 percent rise, according to the median estimate of six economists surveyed by Bloomberg. It comes after the purchasing managers’ index of Greek manufacturing in the first two months of the year suggested expansion. The trend was reversed in March with a reading below 50, the level distinguishing contraction.
“This is still the year of transition,” said Holger Schmieding, chief economist at Berenberg Bank in London. “It will take probably until the middle of the year until we see sustained and significant employment growth.”
Local and European parliament elections next month will provide Samaras with a test of how much patience Greeks have left after four years of austerity measures. A poll published yesterday saw the main opposition Syriza party on 21.5 percent support, ahead of Samaras’s New Democracy party on 20.8 percent.
“From the moment that indices start to improve until the moment that people feel it in their pocket there is a time lag,” Finance Minister Stournaras said in a March 31 Bloomberg Television interview. “This is an important lag where the argument has to be presented clearly to the people.”