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2014-04-15 06:49:15
The prodigal son
A bond issue is a milestone but there is still a long way to go
Apr 12th 2014
THE journey has been an epic one, but Greece has reached, if not the
destination, at least a waymark. The last time that its government raised
long-term funds was in March 2010, just weeks before the markets lost
confidence in Greece altogether, forcing its first bail-out. This week the
Greek government returned to the markets, raising 3 billion ($4.1 billion) in
five-year bonds at a yield of just under 5% in a heavily oversubscribed issue.
The amount might be small and the yield high compared with borrowing costs in
other rescued countries, such as Portugal, whose five-year notes were trading
at around 2.6%. But the notion of any bond issue at all still prompts
eye-rubbing, given the depth of the Greek crisis. Six consecutive years of
recession have seen the economy shrink by a quarter, prompting social and
political turmoil that at its worst seemed quite likely to push Greece out of
the euro zone. For most of the past four years a return to the markets on any
terms seemed inconceivable, a view underscored by vaulting bond yields (see
chart).
Over this period Greece has been wholly reliant on help from euro-zone
governments and the IMF to meet its financing needs. In May 2010 it received
its first three-year bail-out, of 110 billion. The aim then was that it should
start tapping the markets again as early as 2012. Instead within less than two
years Greece required a second and even bigger bail-out, raising the total
amount of funding from euro-zone lenders and the IMF to 246 billion by 2016,
equivalent to 135% of last year s GDP.
The scale of the rescue effort was made necessary by the delay in recognising
that Greece was bust and needed a debt restructuring; much of the early
official lending was used to repay private creditors as the bonds they held
matured. In early 2012 Greece did carry out such a restructuring, wiping out
over 100 billion of government debt. Despite this relief, the crisis
intensified. In two nail-bitingly close elections held in the summer of 2012,
the country came close to a catastrophic Grexit from the single currency.
If Greece has come a long way from those dark days, it is still far from being
able to support itself financially. Like the rest of southern Europe it has
gained as investors take a more favourable view of the euro zone and also
anticipate possible quantitative easing by the European Central Bank. Yet
though Greek ten-year bonds fell this week to below 6%, that is still much too
high to be affordable for a country forecast by the IMF to grow by only 0.6% in
2014 and experiencing deflation (with prices falling by 1% in the past year).
Greece remains in the dock compared with Ireland and Portugal, the second and
third countries to require bail-outs, whose ten-year yields are less than 3%
and 4% respectively.
Indeed, Greece would be quite unable to access the markets but for the massive
support it continues to receive from the rest of the euro area. Despite the
default, public debt, at 175% of GDP this year, is much higher than before the
first bail-out. That burden is made bearable only through concessions by the
European lenders who now hold most of the debt. Their loans are at ultra-low
interest rates. They have been extended to such an extent that the average
maturity of Greek debt is extraordinarily high, at 17.5 years. European
countries like Germany have in effect restructured their lending to Greece
without having to admit this awkward fact to voters by formally forgiving some
of it.
Even more help will be necessary. The IMF continues to insist that euro-zone
governments will have to make further concessions if Greek public debt is to be
put on a sustainable trajectory. The fund believes that relief worth 4% of GDP
is needed in the next year or so if the objective of debt of 124% of GDP by
2020 is to be achieved, with more to come if this is to be yanked down below
110% by 2022.
Even with extra help the targets are heroic. Greece has only just managed, in
2013, to achieve a surplus on its primary budget (ie, excluding interest
payments), of 1.5% of GDP. That was higher than expected and is a massive
improvement on the dire position in 2009 when there was a deficit of 10.5%. But
if the debt goals for 2020 and beyond are to be met that surplus must rise to
4.5% of GDP by 2016 and be sustained at 4% in the 2020s.
That is not wholly infeasible: Belgium managed to run an average primary
surplus of 4.3% of GDP between 1987 and 2008. But it is a tall order for a
country that has spent over half the time since it became independent in 1830
in default. More than this week s foray into the markets, what matters is
whether Greece has really changed its ways. That seems far from clear. The
latest slug of bail-out money has taken ages to be approved because the regular
programme review by the IMF and European authorities got bogged down in
ill-tempered negotiations as the government resisted more reforms.
Yet adopting those reforms and sustaining previous efforts are essential. The
IMF has estimated that reforms could boost GDP by 4% over five years and by 10%
in the long term. The reform fatigue in Athens may be understandable but it
betrays a reluctance to accept that the country was the architect of its
misfortune. Greece entered the crisis as a dysfunctional state with an impaired
economy. It is hard to imagine the country sustaining a decade or more of
self-denial if left to its own devices. The grumpy political mood in Greece
suggests that it has not fully got the message about how much more has to be
done.