Fis­cal fig­ures are hostage to pol­i­tics

The real threat to the coun­try’s re­bound will come from the ef­fect of po­lit­i­cal de­vel­op­ments on the econ­omy

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS The Greek sto­ryis based on a sim­ple as­sump­tion: An eco­nomic turn­around, fol­lowed by strong real GDP growth rates in the next few years, fis­cal dis­ci­pline, more re­forms and a debt re­lief agree­ment with the Euro­pean Union. This as­sump­tion is clearly un­der­mined by the in­creased po­lit­i­cal risk, threat­en­ing to un­ravel the in­vest­ment case and lead to new aus­ter­ity mea­sures to close a big­ger than es­ti­mated fis­cal gap. This is a recipe for po­lit­i­cal havoc with un­fore­seen con­se­quences if it goes unchecked.

Greece met the fis­cal tar­get in 2012 and sur­passed it last year after the gen­eral gov­ern­ment recorded a pri­mary sur­plus com­pared to a flat out­come fore­seen by the pro­gram. More­over, some an­a­lysts ar­gue that rev­enues could ex­ceed pri­mary ex­pen­di­tures by more than the pro­gram tar­get, set at 1.5 per­cent of gross do­mes­tic prod­uct, this year. This is by far the big­gest ever fis­cal adjustment by an ad­vanced econ­omy in mod­ern times, as Greece went from a pri­mary deficit of more than 10 per­cent of GDP in 2009 to a pri­mary sur­plus in just four years. How­ever, it all came at a very high eco­nomic and so­cial cost.

In ad­di­tion to en­cour­ag­ing fis­cal fig­ures, provisional data for eco­nomic ac­tiv­ity con­firmed the re­ces­sion was slow­ing down. Real GDP con­tracted by just 0.3 per­cent year-on-year in the sec­ond quar­ter on its way to hav­ing its first pos­i­tive read­ing in the July-Septem­ber pe­riod since the sec­ond quar­ter in 2008.

The re­cently re­leased turnover in­dex in re­tail trade in­creased by 4.5 per­cent year-on-year in Au­gust, with vol­ume record­ing an even big­ger rise at con­stant prices. This, along with the good tourism sea­son, jus­tify op­ti­mism that the econ­omy has turned around from the third quar­ter.

The com­bi­na­tion of fur­ther progress in fis­cal con­sol­i­da­tion, the ten­ta­tive signs of an eco­nomic re­bound and a few re­forms have helped con­vince a num­ber of for­eign in­vestors to buy into bonds and stocks.

Of course, other fac­tors have played a role such as the pro­file of the Greek pub­lic debt with the low in­ter­est rates and the long ma­tu­ri­ties, and the risk-on trade in­ter­na­tion­ally. All of th­ese shaped the Greek in­vest­ment story, which at­tracted hedge funds and tra­di­tional in­sti­tu­tional in­vestors, and boosted eco­nomic and business sen­ti­ment in the first eight months of this year.

But this story is threat­ened by po­lit­i­cal un­cer­tainty and the prospect of early elec­tions as the left­ist SYRIZA party en­joys a clear lead in opin­ion polls. The mar­kets have re­acted in a neg­a­tive way, driv­ing the yield-to-ma­tu­rity of the 10-year Greek bond yield above 8 per­cent and the 5-year bond above 7 per­cent as of last Mon­day. By do­ing so, they have made it im­pos­si­ble for Greece to seek a clean exit from the EU/In­ter­na­tional Mon­e­tary Fund pro­gram and even raised doubts about whether a pre­cau­tion­ary credit line, the so-called dirty exit, would work.

At this point the risk-mit­i­gat­ing sce­nario, that is, the pre­cau­tion­ary credit line, seems to be the gov- ern­ment’s best card for the post­pro­gram pe­riod but things have the po­ten­tial to take a turn for the worse. The gov­ern­ment partly has it­self to blame for this de­vel­op­ment, although mar­ket con­cerns about the so-called “SYRIZA risk” have been the driv­ing force be­hind the re­cent sell-off.

By talk­ing a lot about an early exit from the pro­gram but not de­liv­er­ing on pri­va­ti­za­tions and some key struc­tural re­forms, the gov­ern­ment has cor­nered it­self by alien­at­ing its clos­est ally, the mar­kets. The de­te­ri­o­rat­ing cli­mate in the eu­ro­zone and the re­turn of the risk-off trade com­pounded the prob­lem.

Look­ing ahead, the po­lit­i­cal sit­u­a­tion could get more com­pli­cated if the gov­ern­ment and the troika do not agree on the re­form agenda and the rep­re­sen­ta­tives of the lenders put off their visit to Athens again. This could ac­cel­er­ate po­lit­i­cal de­vel­op­ments by up- set­ting the coali­tion gov­ern­ment’s plan to close the cur­rent pro­gram re­view and fo­cus on the day after the com­ple­tion of the stream­lin­ing pro­gram, and on debt re­lief talks that are seen as an in­stru­ment in the quest to gather the min­i­mum 180 votes in the Par­lia­ment to elect a new pres­i­dent in Fe­bru­ary.

Although most com­men­ta­tors are fo­cus­ing on po­lit­i­cal de­vel­op­ments, the real threat will come from the ef­fect of pol­i­tics on the econ­omy. Pro­tracted po­lit­i­cal un­cer­tainty will cer­tainly have an ad­verse im­pact on eco­nomic ac­tiv­ity and this may be­come ap­par­ent as soon as the fourth quar­ter of 2014, af­fect­ing the real GDP growth rate for the en­tire year. Most es­ti­mates put eco­nomic growth be­tween 0.4 and 0.6 per­cent in 2014. In ad­di­tion, it could lead an­a­lysts to down­grade the GDP growth fore­cast for 2015, un­rav­el­ing the Greek in­vest­ment case and caus­ing a mas­sive sell-off.

The slower-than-pro­jected growth rate could also give rise to a big­ger fis­cal gap which would in turn lead to new aus­ter­ity mea­sures to meet the pri­mary sur­plus tar­get of 3 per­cent of GDP, caus­ing po­lit­i­cal havoc. Un­der th­ese cir­cum­stances, Greece would need fresh fund­ing from the Euro­pean Union and a new adjustment pro­gram.

The sce­nario de­scribed above may not be the base­line but it should not be ruled out. Even if the troika comes to Athens and the re­view is con­cluded, it will be in the mind of mar­ket par­tic­i­pants. This is more so if the gov­ern­ment con­tin­ues to give the im­pres­sion that it wants to avoid re­forms en­tail­ing po­lit­i­cal cost, SYRIZA’s rhetoric in­creases in­vestors’ con­cerns and po­lit­i­cal un­cer­tainty reigns. The po­ten­tial for a big mess should not be un­der­es­ti­mated.

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