Mar­kets keep gov­ern­ment in check

Po­lit­i­cal ini­tia­tives to ac­com­mo­date spe­cific groups may threaten eco­nomic re­cov­ery in com­ing year

Kathimerini English - - Focus - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS The good news is the Greek econ­omy ad­vanced for the first time since 2008 in the two pre­vi­ous quarters. The bad news is it con­tin­ues to be hostage to po­lit­i­cal risk, as the mar­kets show by con­tin­u­ing to take a neg­a­tive view of Greek bonds and stocks. In ad­di­tion, the coali­tion gov­ern­ment does not seem sat­is­fied with the Eurogroup’s of­fer of a pre­cau­tion­ary credit line (ECCL) from the Euro­pean Sta­bil­ity Mech­a­nism (ESM), as­sum­ing the re­view of the eco­nomic pro­gram is com­pleted, if it is not ac­com­pa­nied by debt re­lief mea­sures and a more limited role for the IMF. The po­lit­i­cal puz­zle will be re­solved at some point next year but in the mean­time may leave deep scars on the econ­omy for quite some time to come.

On Fri­day, the Hel­lenic Sta­tis­ti­cal Au­thor­ity (ELSTAT) re­vised its real GDP es­ti­mate up­ward for the sec­ond quar­ter of this year, show­ing the econ­omy ad­vanced, and re­leased its flash GDP es­ti­mate of 1.7 per­cent year-on-year growth for the July-Septem­ber pe­riod, con­firm­ing mar­ket ex­pec­ta­tions. The main stock in­dex at the Athens bourse re­sponded by record­ing mild gains of 0.81 per­cent on the news, trim­ming its losses to a bit above 20 per­cent in the last three months.

On the other hand, the bench­mark 10-year bond saw its yield rise to 8.08 per­cent while the 5-year bond yield eased to 7.2 per­cent. It is clear the mar­kets have dis­counted some news and taken a wai­t­and-see at­ti­tude in view of po­lit­i­cal de­vel­op­ments in the next few months. Another way to in­ter­pret their stance is to say the mar­kets are warn­ing all in­volved, es­pe­cially the Greeks but the EU as well, there is the po­ten­tial for a big mess.

As days go by and ne­go­ti­a­tions be­tween the gov­ern­ment and the troika drag on, the like­li­hood both sides may not be able to reach an agree­ment, con­clud­ing the last re­view of the cur­rent adjustment pro­gram be­fore De­cem­ber 8, when the fi­nance min­is­ters of the eu­ro­zone meet again, rises. Although the gov­ern­ment’s par­tial re­treat on the is­sue of up to 100 in­stall­ments for past over­due taxes and so­cial con­tri­bu­tions has helped, the two sides con­tinue to be apart on many is­sues. Pun­dits say the 19 points-is­sues cited re­cently in a leaked email from the troika to Athens have been stand­ing there for the last few months with none or lit­tle progress.

The Ger­man side and oth­ers have made it clear Greece will have to con­clude the on­go­ing re­view be­fore get­ting the Eurogroup to agree to the ECCL pre­cau­tion­ary line. How­ever, some in the mar­ket doubt whether the gov­ern­ment would like to pass leg­is­la­tion in Par­lia­ment con­tain­ing un­pop­u­lar mea­sures, and face a po­lit­i­cal back­lash just for get­ting this pre­cau­tion­ary credit line. They add the EU should make it eas­ier for Prime Min­is­ter An­to­nis Sa­ma­ras by agree­ing to a set of debt re­lief mea­sures and a new, limited role for the IMF in the new regime as well.

This way Sa­ma­ras can ap­pear be­fore Par­lia­ment next year with a pack­age and seek the 180 votes needed to elect a new pres­i­dent and avoid early gen­eral elec­tions with the left­ist SYRIZA en­joy­ing a clear lead in opin­ion polls. If the gov­ern­ment does not get a car­rot, they ar­gue, it will have lit­tle in­cen­tive to seek the com­ple­tion of the re­view and the pas­sage of rel­e­vant leg­is­la­tion through Par­lia­ment. If this turns out to be the case, there will be no ac­cord with the troika and Sa­ma­ras may al­ter­na­tively seek a sim­i­lar deal from eu­ro­zone lead­ers at the EU Sum­mit on De­cem­ber 18. This ver­bal deal could be his main card in go­ing to Par­lia­ment and seek­ing the min­i­mum 180 votes early next year, they ar­gue.

Whether th­ese po­lit­i­cal sce­nar­ios turn out to be true re­mains to be seen. In the mean­time, the signs from the eco­nomic front are mixed, with tourism do­ing well but in­dus­trial pro­duc­tion down. Also, the state’s ar­rears to third-party sup­pli­ers and other cred­i­tors are on the rise, sig­nal­ing liq­uid­ity con­di­tions may get tougher ahead for the pri­vate sec­tor. More­over, the gov­ern­ment ap­pears to be pre­par­ing for the pos­si­bil­ity of early elec­tions by fa­vor­ing some pop­u­lous in­ter­est groups.

While the gov­ern­ment wants the re­main­ing pen­sion re­forms in the cur­rent eco­nomic adjustment pro­gram to be im­ple­mented after the pres­i­den­tial elec­tion next year, to avoid the po­lit­i­cal cost of tak­ing painful mea­sures now, it is also tak­ing steps which could make things worse. For ex­am­ple, the La­bor Min­istry is go­ing to sub­mit a draft law in Par­lia­ment in the next few days ex­tend­ing a num­ber of priv­i­leges to mil­i­tary and se­cu­rity forces, civil ser­vants and some bank em­ploy­ees from Jan­uary 1, 2015 with re­gard to re­tire­ment. It is es­ti­mated Greece is pay­ing more than 2 bil­lion euros in pen­sions ev­ery year to re­tirees in their 50s. It is doubt­ful whether this leg­isla­tive ini­tia­tive and oth­ers will bring in more votes for the rul­ing par­ties, but it is cer­tain they will worsen the fi­nan­cial sit­u­a­tion of the so­cial se­cu­rity sys­tem and ul­ti­mately shift the bur­den to the younger gen­er­a­tions.

So the econ­omy may in­deed come out of its dol­drums, and this is en­cour­ag­ing. But mar­ket par­tic­i­pants are right to be wor­ried about po­lit­i­cal un­cer­tainty, thus keep­ing bond yields at highly pro­hib­i­tive lev­els for Greece to bor­row from the mar­kets. Leg­isla­tive ini­tia­tives, such as those of the La­bor Min­istry, may make po­lit­i­cal sense but do not make eco­nomic sense and cer­tainly jus­tify mar­ket cau­tion about the medium-term im­pli­ca­tions of the on­go­ing po­lit­i­cal saga.

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