Is Greece thought to be flirting with loss of fiscal grip?
by Antonis D. Papagiannidis
As Greek sovereign paper edges closer to a yield of 3% – more importantly: as the spreads of 10-year Greek bonds over the German Bunds have overtaken 200 bps – a measure of nervousness is discernible in those bearing the burden of economic policymaking in Athens. It had almost become a mantra that hard-earned credibility in the markets was a bonus Greece would now use, especially when out of the enhanced surveillance routine, so as to precipitate its pace over the last mile to get back the much-hoped-for investment grade from the rating agencies.
After all, the country – that is, its population – had undergone a punishing stabilization process for the better part of a decade. Fiscal probity was supposed to have been successfully reclaimed by Greek authorities who were traditionally under suspicion of laxism, thus allowing for accommodative fiscal and monetary policy that got Greece out the woods of the pandemic crisis – with no renewed malaise on part of its European partners.
The very latest (February 2022) E.U. Enhanced Surveillance Report had nice things to say for Greek achievements of public fiscal management, for the clearance of arrears – even the property tax (ENFIA) reform got a pat on the back, notwithstanding the fact that it caters mainly to the better-off.
Even the IMF, having seen the last of its bail-out credit to Greece repaid earlier than initially expected, had encouraging words in its Art. IV Consultation Mission Concluding Statement (end-March 2022). Recommendations to maintain an accommodative fiscal stance with the goal of reaching primary surplus in 2023 (“propriety given the negative output gap, as the handover from public support to private activity remains incomplete”) were only toned-down by calls that “support measures for high energy prices should be temporary and targeted at vulnerable groups”; still, the sting was there: “while allowing a gradual pass-through of higher prices to consumers”. But overall the fact that the IMF would be ready to pen in a statement like “the fiscal adjustment should be gradual and growth-friendly” was music to Greek policy-makers’ ears.
So, how come that the markets reserve for Greek paper such unkindness as shown by recent spreads? The fiscal assistance extended to households and businesses under the current inflation/energy cost crisis seems quite restrained, if compared to the ca.43 billion euros of support extended over the two coronavirus pandemic years; to compare, the Supplementary Budget recently introduced to Parliament is of “just” 2.6 billion (the O.6 part has to do with co-funding investment). Could it be the proverbial strew that breaks the camel’s back? Even so, the over-conscientious assurances on part of Greek Prime Minister K. Mitsotakis that spending of domestic funds would be an option only if no “European” solution is found for support during the energy crisis (a solution of the sort mobilized under the Next Generation EU programme for the shock of the pandemic) should have calmed the markets – the very markets that the Greek Government ardently believes in.
So, where is the missing part of the puzzle? What makes Greece once more sit on the “problem pupil” bench? It might well be that steady exhortations of the current Government that the popular vote (expected in one year’s time, at the latest) should reaffirm the Government’s own grip on power lest political chaos occurs, have been taken at face value. Mitsotakis has recently changed tack saying that stability and not a one-party government is of the essence, implying that a(suitable) coalition in power might be OK. But markets – and rating agencies – are like these huge ULCCs, that are quite slow to change course. So, hopes for Greece getting back its investment grade (and yields once more palatable for its ULCC-sized foreign debt) may well have to wait not only for the exit from EU enhanced surveillance in summer 2022, but also for the outcome of the next Greek elections. Plus – plus! – for the formation of a Government with enough of credibility to the markets, who will serve as the latter-day Troika for Greece. Not nice.