Out of Enhanced and into Post-Programme Surveillance – with a 300bps over Bunds for Greek paper

by Antonis D. Papagiannidis

It is not difficult to see why the need for a positive narrative over the Greek economy and its way ahead is especially high in this turn of time. Just out of the protracted 2020-mid 2021 crisis of the pandemic and its after-effects that followed close on the heels of the 2010-18 public debt-induced depression, Greece watches the inflation upswell and looming energy shortages with a measure of angst. Plus, an election is on the cards – and who takes the election road with no positive news to celebrate?

So, it is politically understandable to see the mid-2022 Government gloat over the decision of the EU Commission, supported at Eurogroup level, that the Enhanced Surveillance regime for Greece be ended; a regime the country operated under ever since it exited its protracted period of rescue-cum-reforms in the hands of its European partners/creditors. The problem is that self-congratulatory remarks like “A historic day for Greece” (Chr. Staikouras, Greek Minister of Finance), “We are no more the black sheep of Europe” (K. Mitsotakis, Greek P.M.), “This is an important step forward for  Greece” (P. Gentiloni, E.U. Commissioner for Economy) would sound more convincing if exiting the Enhanced Surveillance regime had not been clearly prescribed for mid-2022 by the very Eurogroup decision that terminated the last Adjustment Programme for Greece, back in the summer of 2019. If Greece had missed its step under Enhanced Surveillance, then it would have been a case of utter failure – both for the country and for those watching over it.

Furthermore, exiting the Enhanced Surveillance routine means that Greece will now operate – just like Ireland, Cyprus or Portugal – under Post-Programme Surveillance – which means, especially under the current crisis situation where needs to provide support are accumulating, that no fiscal largesse can be dispensed without a positive nod from Brussels. So, political exultation in a pre-electoral mood is not recommended.

Last but not least, celebratory temptations should be reined in if for no other reason because the ECB moves to quench inflation and the subsequent market nervousness compared to EU surveillance, be it enhanced or post-programme, the surveillance at the hands of the markets is far more  robust and unyielding have brought – these very days – the yields of 10-year Greek paper to a really uncomfortable level of 4.7%, with the spread over German bunds close to 300 bps. Frankfurt is trying once more a replay of Mario Draghi’s “whatever it takes” by activating the emergency reinvestment under PEPP and mulling over new emergency schemes since Italy’s (“too big to fail”) own sovereign paper has also crossed the 4% line.

So, it may be time for a modest flurry of celebrations for the passing away of the Enhanced Surveillance era for Greece. But much plodding on awaits both Greek policy-makers and Greeks (“policy-takers”, as one might say).