Self help

Greece Steps Out of the Naughty Corner

A benchmark bond sale would prove the country's rehabilitation is on track.
Photographer: Chris Ratcliffe/Bloomberg

As the global elite gathers in Davos for the World Economic Forum, the European Union has been applauded for its political and economic progress in the past year. And nowhere is the bloc's newfound cohesion more evident than in Greece.

Leader of the Pack

Greece's benchmark stock index has outperformed its peers in the past three months

Source: Bloomberg

Note: Performance is measured by total return, including reinvested dividends

The country has been the main beneficiary of European Central Bank President Mario Draghi's 2012 pledge to do "whatever it takes" to save the common-currency project -- even if the nation's debt doesn't qualify for the central bank's bond-buying program.

Draghi's leadership at a critical juncture in the euro's history paved the way for the current economic boom, which is helping to lift Greece out of the doldrums. Meantime, the U.K.'s surprise June 2016 vote to leave the European Union seems to have galvanized the bloc's leaders into circling their political wagons to defend against further damaging departures.

So a combination of -- albeit at times grudging -- domestic reform and a broader European economic recovery means  Greece is finally on the verge of normalization.

It's no longer flirting with exiting (or being ejected from) the euro. Economists have upgraded their growth forecasts for this year to 2.2 percent, equal to what they anticipate for the euro zone as a whole. And the rate of unemployment is predicted to drop below 20 percent by mid-year -- still ruinously high, but below its average of 23 percent this decade.

The nation hasn't exactly emerged unscathed from its near-death experience. Debt stands at more than 181 percent of gross domestic-product, according to European Commission forecasts, double the figure for the euro zone as a whole.

Its state asset sales program, meantime, has faltered. As my Bloomberg News colleague Nikos Chrysoloras points out, by August the Commission expects the government to raise 3 billion euros less from privatizations than its initial target.  

Coming Up Short

Greece's privatization program has raised less than expected

Source: European Commission

And Greek banks are still burdened by non-performing loans, which account for about 45 percent of their total loan books. The government has introduced an electronic auction system to speed up the sale of distressed debt, a step Draghi described this week as "welcome." The country's lenders, though, have "exceptionally weak asset quality," Fitch Ratings said on Tuesday. That leaves their capital adequacy vulnerable in stress tests they'll have to undergo later this year.

Nevertheless, investors have rewarded Greece's efforts to mend its economy by slashing the yields on its bonds. Two-year debt, for example, yields about 1.1 percent, almost a full percentage point lower than the U.S. government currently pays.

Out of the Woods?

The decline in Greek government borrowing costs in the past year is precipitous

Source: Bloomberg

All of which bodes well for the new bond sale Greece is hoping to launch as soon as next month.

Spain garnered orders worth more than 43 billion euros for the 10 billion euros of bonds it sold this week. Based on current market levels, Greece would offer a yield pick-up to Spain of about 2.3 percentage points, something that could prove irresistible to money managers.

Greece last tapped the market in July after a three-year hiatus, raising 3 billion euros in a five-year issue. A benchmark 10-year sale would send a strong signal that, eight years after first needing a bailout, the country's rehabilitation is on track.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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