Key pe­riod for fis­cal con­sol­i­da­tion

Mar­kets ap­pear to doubt whether the gov­ern­ment will be able to see through the nec­es­sary re­forms agreed

Kathimerini English - - Front Page -

ANAL­Y­SIS Par­lia­ment has passed the first om­nibus bill to un­lock the next dis­burse­ment of bailout loans and is likely to do the same with a sec­ond list of re­forms in the next few weeks. At the same time, the re­cap­i­tal­iza­tion of Greek banks is en­ter­ing the fi­nal stretch and there are signs the re­ces­sion may be shal­lower this year com­pared to ear­lier pre­dic­tions. How­ever, the mar­kets seem to be tak­ing a dif­fer­ent view of the sit­u­a­tion with bonds ral­ly­ing and stocks lan­guish­ing. Their stance points to the chal­lenges Greece faces ahead.

As ex­pected, the rul­ing coali­tion of SYRIZA and In­de­pen­dent Greeks on Fri­day passed the first set of prior ac­tions set out in the third mem­o­ran­dum of un­der­stand­ing (MoU) ahead of the dis­burse­ment of a 2bil­lion-euro loan. Their deputies will have to as­sume the po­lit­i­cal cost of painful mea­sures that have brought down three gov­ern­ments since 2010. They will be tested again in the com­ing weeks as the gov­ern­ment will have to ta­ble a sec­ond, much more po­lit­i­cally sen­si­tive list of re­forms in Par­lia­ment to help re­lease an ad­di­tional tranche of 1 bil­lion eu­ros in bailout funds and pave the way for the com­ple­tion of the first re­view of the pro­gram. Many of the MPs will come un­der pres­sure from their con­stituen­cies, i.e. farm­ers, but it is our be­lief that the gov­ern­ment will be able to pass the sec­ond bill as well.

In the mean­time, an in­creas­ing num­ber of an­a­lysts are re­vis­ing their pre­dic­tions about the coun­try’s eco­nomic per­for­mance this year. They seem to agree that the econ­omy has shown greater re­silience com­pared to what they ex­pected af­ter the im­po­si­tion of cap­i­tal con­trols. They there­fore see a smaller de­cline in eco­nomic out­put in the third quar­ter which, added to the recorded ad­vance in the first half of 2015, leads to a down­wardly re­vised re­ces­sion of 1.2 to 1.8 per­cent for the year. The new fig­ures com­pare fa­vor­ably with the 2.3 per­cent de­cline fore­cast in the new eco­nomic pro­gram but mis­er­ably with the 2.9 per­cent rise cited in the 2015 draft bud­get a year ago.

Al­though signs of a smaller-thanpre­dicted re­ces­sion are wel­come, the pic­ture emerg­ing from avail­able fig­ures about pub­lic fi­nances is still hazy. Rev­enues ex­ceed ex­pen­di­tures ex­clud­ing in­ter­est on pub­lic debt in the first eight months of the year, ac­cord­ing to gen­eral gov­ern­ment data re­leased by the Fi­nance Min­istry. The pri­mary sur­plus stood at 2.6 bil­lion eu­ros from 2.4 bil­lion in the Jan­uary-Au­gust pe­riod in 2014. It is well known that this is due to the un­der­shoot­ing of state ex­pen­di­tures in or­der to more than off­set lower rev­enues.

How­ever, a good deal of rev­enues that had to be col­lected dur­ing this pe­riod, i.e. ENFIA (the Sin­gle Prop­erty Tax) have been pushed back. There­fore, it is not clear what will hap­pen with the rev­enues at the end of the day. The fact that house­holds and cor­po­ra­tions will have to pay a lot in taxes in a rel­a­tively shorter pe­riod of time makes things more com­pli­cated. Nev­er­the­less, one can make a sim­ple cal­cu­la­tion by ad­just­ing for the ad­di­tional 2.1 bil­lion eu­ros in state ar­rears to the pri­vate sec­tor ac­cu­mu­lated dur­ing Jan­uaryAu­gust. It is noted that state ar­rears came to 5.1 bil­lion eu­ros at end-Au­gust from 3 bil­lion at end-2014. If one makes the ad­just­ment, the pri­mary sur­plus of the gen­eral gov­ern­ment falls to about 500 mil­lion eu­ros. This is not bad if one takes into ac­count that the third bailout pro­gram tar­gets a pri­mary deficit equal to 0.25 per­cent of the GDP in 2015 or about 450 mil­lion eu­ros. So, Greece ap­pears to have some room to manuever and per­haps do bet­ter than the tar­get.

Bond mar­kets ap­pear to have taken no­tice. They have also been en­cour­aged by signs of po­lit­i­cal sta­bil­ity and the gov­ern­ment’s will­ing­ness to con­form with the MoU re­quire­ments, in­clud­ing the pass­ing of key bills and the re­cap­i­tal­iza­tion of the bank­ing sec­tor. There­fore, it is no sur­prise that they have driven the 10-year bond yield down to 7.86 per­cent, a level last seen in early Fe­bru­ary 2014. The yield has col­lapsed from the high of 19.44 per­cent recorded on July 9 and has eased con­sid­er­ably from 8.50 per­cent just prior to the gen­eral elec­tions on Septem­ber 20. In ad­di­tion, the sen­si­tive two-year bond yield dropped to 8.92 per­cent on Fri­day from 11.39 per­cent just be­fore the elec­tions and 57.7 per­cent on July 9.

In other words, the bond mar­kets have taken a more san­guine view of Greek pub­lic fi­nances, per­haps helped by the ECB’s on­go­ing bond buy­ing pro­gram (QE).

On the other hand, in­vestors on the Athens stock mar­ket ap­pear to have taken a much more cau­tious view. The gen­eral stock in­dex is down 21 per­cent in the last 12 months and about 9 per­cent in the last six months. It eased about 1 per­cent in the last month or so. Un­doubt­edly, the sharp losses of bank shares ahead of the re­cap­i­tal­iza­tion have weighed heav­ily. Nev­er­the­less, the stance of mar­ket par­tic­i­pants to­wards the Athens bourse does not ex­ude the op­ti­mism of the bond mar­ket. This may re­flect the mar­ket’s doubts about Greece’s eco­nomic prospects since stock prices dis­count fu­ture earn­ings which are more dif­fi­cult to re­al­ize in a slug­gish econ­omy.

All in all, the bond and the stock mar­kets seem to be tak­ing a dif­fer­ent view on Greece. The bond mar­ket dis­counts fis­cal con­sol­i­da­tion while the stock mar­ket ap­pears to pre­dict slow eco­nomic growth rates ahead. The two stances are not in­com­pat­i­ble up to a point. How­ever, the fis­cal side will feel the pinch if the econ­omy does not grow or does so slowly in the medium-term.

The stance of mar­ket par­tic­i­pants to­wards the Athens bourse does not ex­ude the op­ti­mism of the bond mar­ket. This may re­flect the mar­ket’s doubts about Greece’s eco­nomic prospects.

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